As filed with the Securities and Exchange Commission on September 4, 2018
Registration No. 333-226913
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Qutoutiao Inc.
(Exact name of Registrant as specified in its charter)
Cayman Islands | 7370 | Not Applicable | ||
(State or Other Jurisdiction of
Incorporation or Organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification Number) |
11/F, Block 3, XingChuang Technology Center
Shen Jiang Road 5005,
Pudong New Area, Shanghai, 200120
Peoples Republic of China
+86-21-6858-3790
(Address and Telephone Number of Registrants Principal Executive Offices)
Cogency Global Inc.
10E. 40th Street, 10th Floor
New York, NY10016, United States
+1-212-947-7200
(Name, address and telephone number of agent for service)
Copies to:
Chris K.H. Lin, Esq. Daniel Fertig, Esq. Simpson Thacher & Bartlett LLP 35th Floor, ICBC Tower 3 Garden Road Central, Hong Kong +852-2514-7600 |
Dan Ouyang, Esq. Wilson Sonsini Goodrich & Rosati Suite 1509, 15F, Jardine House 1 Connaught Place, Central Hong Kong +852-3972-4955
Jie Zhu, Esq. Wilson Sonsini Goodrich & Rosati Professional Corporation Unit 03-04, 38F, Jin Mao Tower 88 Century Boulevard Pudong New Area, Shanghai 200121 Peoples Republic of China +86-21-6165-1700 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
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 7(a)(2)(B) of the Securities 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.
CALCULATION OF REGISTRATION FEE
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||||||||
Title of Each Class of Securities to be Registered (1) |
Amount to be
Registered (2)(3) |
Proposed Maximum
Offering Price per Share (3) |
Proposed Maximum
Aggregate Offering Price (2)(3) |
Amount of
Registration Fee (4 ) |
||||
Class A ordinary shares, par value US$0.0001 per share |
4,600,000 | US$36.00 | US$165,600,000 | US$20,617 | ||||
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(1) |
American depositary shares, or ADSs, issuable upon deposit of the Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333- ). Every four ADSs represent one Class A ordinary share. |
(2) |
Includes (a) Class A ordinary shares represented by ADSs that may be purchased by the underwriters pursuant to their over-allotment option and (b) all Class A ordinary shares represented by ADSs initially offered and sold outside the United States that may be resold from time to time in the United States either as part of the distribution or within 40 days after the later of the effective date of this registration statement and the date the securities are first bona fide offered to the public. |
(3) |
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. |
(4) |
Previously paid. |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the United States Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated September 4, 2018.
16,000,000 American Depositary Shares
Qutoutiao Inc.
Representing 4,000,000 Class A Ordinary Shares
This is an initial public offering of shares of American depositary shares, or ADSs, representing Class A ordinary shares of Qutoutiao Inc.
We are offering 16,000,000 ADSs to be sold in this offering. Every four ADSs represent one Class A ordinary share, US$0.0001 par value per share. We anticipate the initial public offering price per ADS will be between US$7.00 and US$9.00.
Prior to this offering, there has been no public market for the ADSs or our shares. We will apply to list the ADSs on the NASDAQ Global Market, under the symbol QTT.
An affiliate of JD.com, Inc. has indicated an interest in purchasing up to US$40 million of the ADSs representing Class A ordinary shares in this offering at the initial public offering price and on the same terms as the other ADSs being offered. We and the underwriters are currently under no obligation to sell ADSs to such affiliate of JD.com, Inc.
We are an emerging growth company under applicable United States federal securities laws and are eligible for reduced public company reporting requirements.
See Risk Factors on page 17 to read about factors you should consider before buying the ADSs.
Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Per ADS | Total | |||||||
Initial public offering price |
US$ | US$ | ||||||
Underwriting discounts and commissions (1) |
US$ | US$ | ||||||
Proceeds, before expenses, to us |
US$ | US$ |
(1) |
For additional information on underwriting compensation, see Underwriting. |
To the extent that the underwriters sell more than 16,000,000 ADSs in this offering, the underwriters have a 30-day option to purchase up to an aggregate of 2,400,000 additional ADSs from us at the initial public offering price less the underwriting discounts and commissions.
Upon the completion of this offering, 38,733,222 Class A ordinary shares and 34,248,442 Class B ordinary shares will be issued and outstanding. Each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to ten (10) votes and will be convertible into one Class A ordinary share. We will be a controlled company as defined under the Nasdaq Stock Market Rules because Mr. Eric Siliang Tan, our co-founder and executive chairman, will hold a majority of the aggregate voting power of our company upon the completion of this offering.
The underwriters expect to deliver the ADSs against payment in New York, New York on , 2018.
(in alphabetical order)
Citigroup |
Deutsche Bank Securities |
China Merchants Securities (HK) | UBS Investment Bank |
KeyBanc Capital Markets
Prospectus dated , 2018
1 | ||||
12 | ||||
17 | ||||
Special Note Regarding Forward-Looking Statements and Industry Data |
66 | |||
67 | ||||
68 | ||||
69 | ||||
71 | ||||
74 | ||||
75 | ||||
77 | ||||
83 | ||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
88 | |||
120 | ||||
125 | ||||
137 | ||||
151 | ||||
163 | ||||
167 | ||||
169 | ||||
180 | ||||
188 | ||||
191 | ||||
198 | ||||
209 | ||||
210 | ||||
211 | ||||
212 | ||||
F-1 |
No dealer, salesperson or other person is authorized to give any information or to represent as to anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell, and we are seeking offers to buy, only the ADSs offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of the ADSs.
i
Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where other action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any free writing prospectus filed with the United States Securities and Exchange Commission, or SEC, must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.
Until , 2018 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
ii
This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our ADSs. You should carefully read the entire prospectus, including Risk Factors and the financial statements, before making an investment decision. This prospectus contains information from an industry report commissioned by us and prepared by Analysys International, an independent market research firm, to provide information regarding our industry and our market position in China. We refer to this report, which is dated as of August 30, 2018, as the Analysys Report.
Our Mission
Bring fun and value to users through content.
Overview
We are the No. 2 mobile content aggregator in China in terms of MAUs and average DAUs in July 2018, according to the Analysys Report. Our flagship mobile application, Qutoutiao , meaning fun headlines in Chinese, aggregates articles and short videos from professional media and freelancers and presents customized feeds to users. These feeds are optimized in real time based on each users profile, behavior and social relationships through our proprietary AI-powered content recommendation engine. Since its launch in June 2016, Qutoutiao has rapidly gained popularity, reaching MAUs of approximately 62.0 million, average DAUs of approximately 21.1 million and average daily time spent per DAU of approximately 55.4 minutes in August 2018.
We believe we represent a new generation of technology-driven content platforms. Historically, users are accustomed to consume content passively as media dictate content curation with little or no personalization. However, as the volume and diversity of content available on the Internet grow exponentially, users demand, at scale, content personalization, which is only achievable through technology. We believe our technology brings relevant information and entertainment to users, stimulates users desire to read, and ultimately improves the knowledge exchange in society.
Since our inception, we have strategically targeted users from tier-3 and below cities in China because of the enormous opportunities in this underserved market. As of the end of 2017, tier-3 and below cities had a population of 1,027 million each owning 0.5 mobile device on average (compared to a population of 363 million each owning 1.3 mobile devices on average in tier-1 and 2 cities), suggesting significant potential for further mobile penetration, according to the Analysys Report. Mobile users in tier-3 and below cities tend to have a slower pace of life and spend more time on the Internet given limited offline entertainment venues. Moreover, they often enjoy fast increasing disposable income and lower financial pressures thanks to lower housing prices. These factors contribute to a significant need for mobile entertainment content while also create strong monetization potential. Users from tier-3 and below cities tend to have different interests and preferences than users from tier-1 and tier-2 cities. Qutoutiao s light entertainment-oriented and easily digestible content is designed to resonate with such users and provides us with a significant advantage to capture this underserved market.
Our rapid growth since the launch of Qutoutiao is in large part due to our innovative user account system and gamified user loyalty program. We believe we are a pioneer in the mobile content industry in applying such a loyalty program. Registered users can earn loyalty points by referring new users to register on Qutoutiao , by consuming content or by engaging on Qutoutiao . Although loyalty points only translate into trivial monetary amounts, we believe they foster users loyalty and emotional connection to Qutoutiao as compared to other
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platforms. The loyalty programs create a strong viral effect, which we believe enables us to enjoy lower user acquisition cost compared to acquiring users through other means. The gamified loyalty point system not only helps us keep users more engaged and enhance user stickiness, but also enables us to track users long-term behavior and optimize content recommendation, as almost all of our DAUs are logged-on users.
Covering a broad range of topics, Qutoutiao is focused on humor, stories and other light entertainment content that delight and inspire. Our content is generally sourced from professional media under a licensing arrangement or uploaded by the more than 230,000 freelancers registered on our platform. In June 2018, there were approximately 5.9 million pieces of content added to Qutoutiao , out of which approximately 2.9 million were videos. We also introduced a separate mobile application in May 2017 that allows users to create and upload videos. In addition to articles and short videos, we plan to diversify our content offerings into literature, casual games, live streaming, animations and comics, creating a comprehensive light entertainment content ecosystem.
We currently generate revenue primarily by providing advertising services. We plan to explore additional monetization opportunities as we grow our user base and introduce additional content formats, such as literature, casual games and live streaming.
Our net revenues have increased rapidly from RMB58.0 million (US$8.8 million) in 2016 to RMB517.1 million (US$78.1 million) in 2017, and further from RMB107.3 million (US$16.2 million) in the six months ended June 30, 2017 to RMB717.8 million (US$108.5 million) in the same period in 2018. As we focused on growing our user base and enhancing our services, we have incurred net losses of RMB10.9 million (US$1.6 million) in 2016, RMB94.8 million (US$14.3 million) in 2017, RMB28.7 million (US$4.3 million) in the six months ended June 30, 2017 and RMB514.4 million (US$77.7 million) in the same period in 2018. Adjusted net losses, which represented net losses before share-based compensation expenses, were RMB10.5 million (US$1.6 million) in 2016, RMB91.4 million (US$13.8 million) in 2017, RMB28.3 million (US$4.3 million) in the six months ended June 30, 2017 and RMB329.1 million (US$49.7 million) in the same period in 2018. Share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018.
Our Strengths
We believe our success to date is largely attributable to the following key competitive strengths:
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leading mobile content aggregator; |
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social-based user loyalty programs promoting effective user acquisition; |
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powerful account system driving high user engagement; |
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differentiated and extensive content offerings; |
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intelligent content delivery supported by artificial intelligence and data capabilities; and |
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visionary and experienced management team with track record of success. |
Our Strategies
Our long-term vision is to create a leading global online content ecosystem. To achieve this vision, we plan to pursue the following growth strategies:
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expand our user base; |
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enrich our content offerings; |
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strengthen social features and promote user generated content; |
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invest in technology and innovation; |
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enhance monetization capabilities; and |
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selectively pursue acquisition and investment opportunities. |
Our Challenges
Our business and successful execution of our strategies are subject to certain challenges, risks and uncertainties including:
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our limited operating history; |
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our ability to acquire users, retain existing users and maintain high user engagement; |
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our ability to increase the strength of our brand; |
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the attractiveness of our mobile applications to users, including any new content formats and other products and services that we may introduce in the future; |
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our ability to compete effectively in the industry we operate; |
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our ability to continue to monetize, including through our advertising solutions and other products and services that we will introduce in the future; |
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the fact that we have not completed the registration for Qutoutiao , the name of our flagship mobile application, due to an objection filed by one of our competitors on the purported ground that Qutoutiao is similar to a trademark registered by such competitor; and |
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whether content providers continue to contribute content to our platform. |
In addition, we face risks and uncertainties related to our corporate structure and regulatory environment in China, including:
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regulatory risks related to the mobile content feed industry in China; |
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risks associated with our control over our consolidated variable interest entity, or consolidated VIE, in China, which is based on contractual arrangements rather than equity ownership; and |
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changes in the political and economic policies of the PRC government. |
We also face other risks and uncertainties that may materially affect our business, financial conditions, results of operations and prospects. You should consider the risks discussed in Risk Factors and elsewhere in this prospectus before investing in our ADSs.
Recent Developments
On August 27, 2018, we entered into various agreements with Shanghai Dongfang Newspaper Co., Ltd. and its subsidiaries, or collectively The Paper or .
The Paper is a leading online news service in China known for its original, authoritative and high-quality content. The Paper is a subsidiary of Shanghai United Media Group, which was established on October 28, 2013 through the merger of Shanghais two largest newspaper groups and is a wholly state-owned enterprise under the supervision of the Shanghai State-Owned Assets Supervision and Administration Commission.
3
Pursuant to a share purchase agreement, we agreed to issue 1,480,123 Series C2 preferred shares to The Paper for the consideration of US$55,102,061. The consideration will be satisfied by a combination of cash and certain business and strategic cooperation between The Paper and us. The share purchase agreement also provides that The Paper will have the right to designate one director to our board of directors. In connection to the share purchase agreement, we entered into a strategic cooperation framework agreement with The Paper on the same date, pursuant to which the parties agree to cooperate in various areas of online news and content business, including content sourcing and management, marketing, traffic, data and technology. In addition, Shanghai Jifen, our consolidated VIE, has agreed to issue equity interests representing 1% of its enlarged share capital to The Paper at a nominal price. Following the equity issuance, The Paper will assist Shanghai Jifen to enhance the quality and compliance of content on its platforms such as Qutoutiao through secondment of relevant personnel and other relevant measures.
The transactions with The Paper are subject to regulatory approvals from relevant PRC government authorities and we currently expect the transactions to close in the next 12 months. To the extent the closing of the share purchase is after the completion of this offering, the same number of Class A ordinary shares will be issued to The Paper in lieu of Series C2 preferred shares. Upon the issuance of Series C2 preferred shares or the Class A ordinary shares, as the case may be, The Paper will own approximately 2.1% of our total issued and outstanding share capital as of the date of this prospectus prior to the completion of this offering or 2.0% upon the completion of this offering (assuming the underwriters do not exercise their option to purchase additional ADSs).
We believe the investment from, and our cooperation with, The Paper will improve the overall quality of content on our platform, enhance our content compliance and strengthen our brand image. We believe that in an environment where compliance becomes increasingly important, this will bring important competitive advantages for us.
Net Revenues for the Month Ended July 31, 2018
For the month ended July 31, 2018, we estimate that our net revenues will range from RMB260.0 million (US$39.3 million) to RMB270.0 million (US$40.8 million) driven by growth in DAUs and our continued ability to monetize.
The financial data presented above is preliminary, based upon our estimates and is subject to revision based upon our financial closing procedures. Our actual results may be materially different from our estimate. In addition, these estimated results are not necessarily indicative of our results for the three months ended September 30, 2018, the fiscal year 2018 or any future period.
The preliminary financial data included in this prospectus has been prepared by, and is the responsibility of the management. PricewaterhouseCoopers Zhong Tian LLP has not audited, reviewed, compiled, or applied agreed-upon procedures with respect to the preliminary financial data. Accordingly, PricewaterhouseCoopers Zhong Tian LLP does not express an opinion or any other form of assurance with respect thereto.
Our History and Corporate Structure
We launched our flagship mobile application, Qutoutiao , in June 2016. We primarily operate our business through our consolidated VIE, Shanghai Jifen, and its subsidiaries. To facilitate financing offshores, we incorporated Qtech Ltd. in July 2017. Through a series of transactions, Qtech Ltd. then became our ultimate holding company. On July 5, 2018, Qtech Ltd. was renamed to Qutoutiao Inc.
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The following diagram illustrates our corporate structure with our principal subsidiaries and consolidated VIE and its subsidiaries as of the date of this prospectus. Except as otherwise specified, equity interests depicted in this diagram are held as to 100%. The relationships between Shanghai Quyun Internet Technology Co., Ltd., or Shanghai Quyun, Shanghai Jifen Culture Communications Co., Ltd., or Shanghai Jifen, and its shareholders as illustrated in this diagram are governed by contractual arrangements and do not constitute equity ownership.
In connection with the share purchase agreement entered into with The Paper, Shanghai Jifen has agreed to issue equity interests representing 1% of its enlarged share capital to The Paper. As such, on August 27, 2018, Shanghai Jifen, together with its existing shareholders, entered into an agreement with The Paper pursuant to which Shanghai Jifen will increase its registered capital and The Paper will, at a nominal price, subscribe for the newly issued equity interests representing 1% of Shanghai Jifens enlarged share capital. We believe Shanghai Quyun, our wholly-owned PRC subsidiary, still controls and is the primary beneficiary of Shanghai Jifen as it continues to have a controlling financial interest in Shanghai Jifen pursuant to ASC 810-10-25-38A after the issuance of such 1% equity interests.
(1) |
Mr. Eric Siliang Tan, Mr. Lei Li, Tianjin Shanshi Technology L.P. and Shanghai Xihu Cultural Transmission Co., Ltd. held 45%, 15%, 20% and 20% equity interest in Shanghai Jifen, respectively. |
Both Tianjin Shanshi Technology L.P. and Shanghai Xihu Cultural Transmission Co., Ltd. are controlled by Mr. Eric Siliang Tan.
Upon the completion of The Papers subscription of the newly issued equity interests in Shanghai Jifen, Mr. Eric Siliang Tan, Mr. Lei Li, Tianjin Shanshi Technology L.P. and Shanghai Xihu Cultural Transmission Co., Ltd. will hold 44.55%, 14.85%, 19.80% and 19.80% equity interest in Shanghai Jifen, respectively.
(2) |
We acquired Shanghai Dianguan in February 2018. |
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(3) |
Include Anhui Zhangduan Internet Technology Co., Ltd., Beijing Qukandian Internet Technology Co., Ltd., Shanghai Xike Information Technology Service Co., Ltd., Shanghai Tuile Information Technology Service Co., Ltd. and Tianjin Quwen Internet Technology Co., Ltd. |
In April 2018, we entered into a share purchase agreement to purchase 100% equity interests of an audio/video content platform for a total cash consideration of RMB70.0 million (US$10.6 million). As of June 30, 2018, we have paid RMB43.0 million (US$6.5 million). We currently expect to complete the transaction by the end of 2018.
Our Corporate Information
Our principal executive offices are located at 11/F, Block 3, XingChuang Technology Center, Shen Jiang Road 5005, Pudong New Area, Shanghai, 200120, Peoples Republic of China. Our telephone number at this address is +86-21-6858-3790. Our registered office in the Cayman Islands is located at the offices of Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above.
Our main website is www.qutoutiao.net , and the information contained on this website is not a part of this prospectus. Our agent for service of process in the United States is Cogency Global Inc., located at 10 E. 40th Street, 10th Floor, New York, N.Y. 10016, United States.
Implications of Being an Emerging Growth Company
As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an emerging growth company pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, related to the assessment of the effectiveness of the emerging growth companys internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to opt out of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a large accelerated filer under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.
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Conventions That Apply to This Prospectus
Unless we indicate otherwise, references in this prospectus to:
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installed users are to the aggregate number of unique mobile devices that have downloaded and launched our relevant mobile application at least once; |
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ADSs are to American depositary shares, with every four ADSs representing one Class A ordinary share, and ADRs are to American depositary receipts that evidence ADSs; |
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CAGR are to compound annual growth rate; |
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CPC are to cost-per-click as basis for charging our advertising services; |
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CPM are to cost-per-thousand-impressions as basis for charging our advertising services; |
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China and the PRC are to the Peoples Republic of China, excluding, for the purposes of this prospectus only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region; |
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DAUs are to the number of unique mobile devices that accessed our relevant mobile application on a given day. Average DAUs for a particular period is the average of the DAUs on each day during that period; |
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MAUs are to the number of unique mobile devices that accessed our relevant mobile application in a given month; |
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registered users are to users that have registered accounts on our relevant mobile application; |
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RMB or Renminbi are to the legal currency of China; |
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tier-3 and below cities are to cities in China that are not tier-1 and tier-2 cities; |
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tier-1 and tier-2 cities refer to (i) tier-1 cities in China, which are Beijing, Shanghai, Guangzhou and Shenzhen and (ii) tier-2 cities in China, which are Hangzhou, Nanjing, Jinan, Chongqing, Qingdao, Dalian, Ningbo, Xiamen, Tianjin, Chengdu, Wuhan, Harbin, Shenyang, Xian, Changchun, Changsha, Fuzhou, Zhengzhou, Shijiazhuang, Suzhou, Foshan, Dongguan, Wuxi, Yantai, Taiyuan, Hefei, Kunming, Nanchang, Nanning, Tangshan, Wenzhou and Zibo; |
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US$, U.S. dollars, or dollars are to the legal currency of the United States; and |
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we, us, our company and our are to Qutoutiao Inc., its consolidated VIE and their respective subsidiaries, as the context requires. |
Unless specifically indicated otherwise or unless the context otherwise requires, all references to our ordinary shares exclude (i) ordinary shares issuable upon the exercise of outstanding options with respect to our ordinary shares under our share incentive plan and (ii) assumes that the underwriters will not exercise their over-allotment option to purchase additional ADSs.
This prospectus contains translations between Renminbi and U.S. dollars solely for the convenience of the reader. The translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.6171 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on June 29, 2018. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus 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. On August 24, 2018, the noon buying rate for Renminbi was RMB6.8030 to US$1.00.
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Unless the context indicates otherwise, all share and per share data in this prospectus have given effect to a share split in September 2017 in which each one of the previously issued ordinary shares was split into 10,000 ordinary shares.
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The Offering
Offering Price per ADS |
We currently estimate that the initial public offering price will be between US$7.00 and US$9.00 per ADS. |
ADSs Offered by Us |
16,000,000 ADSs (or 18,400,000 ADSs if the underwriters exercise in full the over-allotment option). |
ADSs Outstanding Immediately After This Offering |
16,000,000 ADSs (or 18,400,000 ADSs if the underwriters exercise in full the over-allotment option). |
Ordinary Shares Outstanding Immediately After This Offering |
38,733,222 Class A ordinary shares and 34,248,442 Class B ordinary shares (or 39,333,222 Class A ordinary shares and 34,248,442 Class B ordinary shares if the underwriters exercise in full the over-allotment option). |
The ADSs |
Every four ADSs represent one Class A ordinary share, par value US$0.0001 per share. |
The depositary will be the holder of the Class A ordinary shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and registered holders and indirect holders and beneficial owners of ADSs from time to time. |
You may surrender your ADSs to the depositary to withdraw the Class A ordinary shares underlying your ADSs. The depositary will charge you a fee for any such exchange. |
We may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If you continue to hold your ADSs, you will be bound by the deposit agreement as amended. |
To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled Description of American Depositary Shares. You should also read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus. |
Over-Allotment Option |
We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 2,400,000 additional ADSs at the initial public offering price, less underwriting discounts and commissions. |
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Use of Proceeds |
We estimate that we will receive net proceeds of approximately US$115.4 million from this offering (or US$133.3 million if the underwriters exercise their options to purchase additional ADSs in full), assuming an initial public offering price of US$8.00 per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. |
We anticipate using the net proceeds of this offering for (i) expanding and enhancing our content offerings, (ii) product development and technology infrastructure, (iii) marketing and promotion of our products and branding and (iv) general corporate purposes, including potential acquisitions and investments (although we are not currently negotiating any such acquisitions or investments).
See Use of Proceeds for more information. |
Lock-up |
We, our officers and directors, our existing shareholders and The Paper have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ADSs, ordinary shares or similar securities or any securities convertible into or exchangeable or exercisable for our ordinary shares or ADSs, for a period of 180 days after the date of this prospectus. See Shares Eligible for Future Sale and Underwriting. |
Risk Factors |
See Risk Factors and other information included in this prospectus for a discussion of the risks relating to investing in the ADSs. You should carefully consider these risks before deciding to invest in our ADSs. |
Listing |
We will apply to list the ADSs on the NASDAQ Global Market. Our Class A ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. |
Proposed NASDAQ Global Market Trading Symbol |
QTT |
Payment and settlement |
The underwriters expect to deliver the ADSs against payment on , 2018, through the facilities of The Depository Trust Company, or DTC. |
Depositary |
The Bank of New York Mellon |
The total number of ordinary shares that will be outstanding immediately after this offering is based upon:
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50,000,000 ordinary shares issued and outstanding as of the date of this prospectus (including (i) 40,500,000 ordinary shares held by certain of our co-founders and other ordinary shareholders, of which 15,937,500 ordinary shares are restricted shares beneficially owned by certain of our co-founders and are expected to be fully vested upon the completion of this offering; and (ii) 9,500,000 ordinary shares held by a nominee of our equity incentive trust, of which 4,477,377 are underlying shares of vested options as of the date hereof); |
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conversion of all outstanding convertible redeemable preferred shares (including Series A, Series A1, Series B1, Series B2, Series B3 and Series C1 convertible redeemable preferred shares) into 18,981,664 ordinary shares; and |
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4,000,000 ordinary shares issued in connection with this offering (assuming the underwriters do not exercise their option to purchase additional ADSs), |
but excludes:
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1,480,123 ordinary shares issuable to The Paper or convertible from the Series C2 preferred shares issuable to The Paper, as the case may be; and |
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2,873,598 ordinary shares issuable upon the exercise of outstanding share options and 90,543 ordinary shares reserved for future issuance under our 2018 equity incentive plan. |
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated statements of comprehensive loss data and summary consolidated statements of cash flows data for the years ended December 31, 2016 and 2017 and summary consolidated balance sheets data as of December 31, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.
The summary consolidated statements of comprehensive loss data and summary consolidated of cash flow data for the six months ended June 30, 2017 and 2018 and the summary consolidated balance sheet data as of June 30, 2018 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.
Our consolidated financial statements are prepared and presented in accordance with the generally accepted accounting principles in the United States, or the U.S. GAAP. Our historical results are not necessarily indicative of results to be expected for any future period. The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and the information under Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere in this prospectus.
Summary Consolidated Statements of Comprehensive Loss Data
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands, except for percentages, share and per share data) | ||||||||||||||||||||||||||||||||
Revenues (1) : |
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Advertising revenue |
57,880 | 8,747 | 512,883 | 77,509 | 106,348 | 16,072 | 669,871 | 101,233 | ||||||||||||||||||||||||
Other revenue |
74 | 11 | 4,170 | 630 | 925 | 140 | 47,964 | 7,249 | ||||||||||||||||||||||||
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Net revenues |
57,954 | 8,758 | 517,053 | 78,139 | 107,273 | 16,212 | 717,835 | 108,482 | ||||||||||||||||||||||||
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Cost of revenues (2) |
7,178 | 1,085 | 76,481 | 11,558 | 10,322 | 1,560 | 145,993 | 22,063 | ||||||||||||||||||||||||
Gross profit |
50,776 | 7,673 | 440,572 | 66,581 | 96,951 | 14,652 | 571,842 | 86,419 | ||||||||||||||||||||||||
Operating expenses (2) : |
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Research and development expenses |
2,627 | 397 | 15,317 | 2,315 | 2,974 | 450 | 62,912 | 9,508 | ||||||||||||||||||||||||
Sales and marketing expenses |
54,633 | 8,256 | 494,724 | 74,765 | 114,069 | 17,238 | 836,941 | 126,481 | ||||||||||||||||||||||||
General and administrative expenses |
4,427 | 669 | 25,947 | 3,921 | 8,885 | 1,343 | 193,886 | 29,301 | ||||||||||||||||||||||||
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Total operating expenses |
61,687 | 9,322 | 535,988 | 81,001 | 125,928 | 19,031 | 1,093,739 | 165,290 | ||||||||||||||||||||||||
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Loss from operations (3) |
(10,911 | ) | (1,649 | ) | (95,416 | ) | (14,420 | ) | (28,977 | ) | (4,379 | ) | (521,897 | ) | (78,871 | ) | ||||||||||||||||
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Interest income |
51 | 8 | 673 | 103 | 307 | 46 | 5,389 | 815 | ||||||||||||||||||||||||
Foreign exchange related gains, net |
| | | | | | 2,098 | 317 | ||||||||||||||||||||||||
Others, net |
(2 | ) | (1 | ) | (17 | ) | (3 | ) | (5 | ) | (1 | ) | (26 | ) | (4 | ) | ||||||||||||||||
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Loss before income tax expenses |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
Income tax expenses |
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Net loss |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
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Accretion to convertible redeemable preferred shares redemption value |
| | (6,012 | ) | (909 | ) | | | (58,964 | ) | (8,911 | ) | ||||||||||||||||||||
Deemed dividend to preferred shareholders |
| | | | | | (1,916 | ) | (290 | ) | ||||||||||||||||||||||
Net loss attributable to Qutoutiao Inc.s ordinary shareholders |
(10,862 | ) | (1,642 | ) | (100,772 | ) | (15,229 | ) | (28,675 | ) | (4,334 | ) | (575,316 | ) | (86,944 | ) | ||||||||||||||||
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Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands, except for percentages, share and per share data) | ||||||||||||||||||||||||||||||||
Net loss |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
Other comprehensive income/(loss) |
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Foreign currency translation adjustment, net of nil tax |
| | 25 | 3 | | | (12,562 | ) | (1,899 | ) | ||||||||||||||||||||||
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Comprehensive loss attributable to Qutoutiao Inc. |
(10,862 | ) | (1,642 | ) | (94,735 | ) | (14,317 | ) | (28,675 | ) | (4,334 | ) | (526,998 | ) | (79,642 | ) | ||||||||||||||||
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Net loss per share attributable to Qutoutiao Inc. |
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Basic and diluted |
(0.45 | ) | (0.07 | ) | (4.19 | ) | (0.63 | ) | (1.19 | ) | (0.18 | ) | (23.74 | ) | (3.59 | ) | ||||||||||||||||
Weighted average number of ordinary shares used in per share calculation: |
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Basic and diluted |
24,062,500 | 24,062,500 | 24,062,500 | 24,062,500 | 24,062,500 | 24,062,500 | 24,238,324 | 24,238,324 | ||||||||||||||||||||||||
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(1) Revenue from transactions with related parties are set forth below for the periods indicated:
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Advertising revenue |
| | | | | | 1,183 | 179 | ||||||||||||||||||||||||
Other revenue |
| | | | | | 5,293 | 800 |
(2) |
Cost of revenues and operating expenses from transactions with related parties are set forth below for the periods indicated: |
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Cost of revenues |
120 | 18 | 484 | 73 | 145 | 22 | 3,368 | 509 | ||||||||||||||||||||||||
Research and development expenses |
166 | 25 | 220 | 33 | 66 | 10 | | | ||||||||||||||||||||||||
Sales and marketing expenses |
74 | 11 | 950 | 144 | 284 | 43 | 4,918 | 743 | ||||||||||||||||||||||||
General and administrative expenses |
2,664 | 403 | 15,134 | 2,287 | 6,401 | 967 | | |
(3) |
We recognized share-based compensation expenses of RMB0.4 million (US$60.0 thousand), RMB3.4 million (US$0.5 million), RMB0.4 million (US$53.9 thousand) and RMB185.4 million (US$28.0 million) in 2016, 2017 and the six months ended June 30, 2017 and 2018, respectively. Share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018. |
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Summary Consolidated Balance Sheets Data
As of December 31, | As of June 30, | |||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Cash and cash equivalents |
269 | 41 | 278,458 | 42,082 | 1,766,299 | 266,929 | ||||||||||||||||||
Short-term investments |
12,370 | 1,869 | 129,770 | 19,611 | 10,300 | 1,557 | ||||||||||||||||||
Total current assets |
29,758 | 4,497 | 466,208 | 70,455 | 1,873,051 | 283,062 | ||||||||||||||||||
Total assets |
29,896 | 4,518 | 476,581 | 72,023 | 1,942,816 | 293,605 | ||||||||||||||||||
Registered users loyalty payable |
1,023 | 155 | 20,977 | 3,170 | 137,038 | 20,710 | ||||||||||||||||||
Accrued liabilities related to user loyalty programs |
24,509 | 3,704 | 187,003 | 28,261 | 149,011 | 22,519 | ||||||||||||||||||
Total liabilities |
41,087 | 6,209 | 311,246 | 47,037 | 545,027 | 82,366 | ||||||||||||||||||
Mezzanine equity |
| | 273,895 | 41,392 | 1,906,926 | 288,182 | ||||||||||||||||||
Total shareholders deficits |
(11,191 | ) | (1,691 | ) | (108,560 | ) | (16,406 | ) | (509,137 | ) | (76,943 | ) |
Summary Consolidated Statements of Cash Flows Data
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | RMB | US$ | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Selected Consolidated Cash Flows Data: |
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Net cash provided by/(used in) operating activities |
12,719 | 1,923 | 132,226 | 19,983 | 2,037 | (141,738 | ) | (21,420 | ) | |||||||||||||||||||
Net cash (used in)/provided by investing activities |
(12,523 | ) | (1,893 | ) | (121,919 | ) | (18,425 | ) | (1,700 | ) | 70,043 | 10,585 | ||||||||||||||||
Net cash provided by financing activities |
| | 272,121 | 41,124 | | 1,501,333 | 226,887 | |||||||||||||||||||||
Net increase in cash and cash equivalents |
196 | 30 | 282,428 | 42,682 | 337 | 1,429,638 | 216,052 | |||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (4,239 | ) | (641 | ) | | 58,203 | 8,796 | |||||||||||||||||||
Cash and cash equivalents at beginning of the period |
73 | 11 | 269 | 41 | 269 | 278,458 | 42,082 | |||||||||||||||||||||
Cash and cash equivalents at the end of the period |
269 | 41 | 278,458 | 42,082 | 606 | 1,766,299 | 266,930 |
Non-GAAP Financial Measure
We use adjusted net loss, which is an non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net loss represents net loss before share-based compensation expenses. We believe that such non-GAAP financial measure help identify underlying trends in our business that could otherwise be distorted by the effect of such share-based compensation expenses that we include in cost of revenues, total operating expenses and net loss. In particular, share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018. We
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believe that such non-GAAP financial measure also provides useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.
The non-GAAP financial measure is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. It should not be considered in isolation or construed as alternatives to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measure in light of the most directly comparable GAAP measures, as shown below. The non-GAAP financial measure presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measure differently, limiting its usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
The table below sets forth a reconciliation of the non-GAAP financial measure for the periods indicated:
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Net loss |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
Add: share-based compensation expenses: |
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Cost of revenues |
1 | 0 | 942 | 142 | 99 | 15 | 1,429 | 216 | ||||||||||||||||||||||||
Research and development |
149 | 23 | 1,317 | 200 | 140 | 21 | 6,720 | 1,016 | ||||||||||||||||||||||||
Sales and marketing |
35 | 5 | 939 | 142 | 99 | 15 | 3,394 | 513 | ||||||||||||||||||||||||
General and administrative |
209 | 32 | 181 | 27 | 19 | 3 | 173,840 | 26,271 | ||||||||||||||||||||||||
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Adjusted net loss |
(10,468 | ) | (1,582 | ) | (91,381 | ) | (13,809 | ) | (28,318 | ) | (4,280 | ) | (329,053 | ) | (49,727 | ) | ||||||||||||||||
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Key Operating Metrics
We regularly review a number of key operating metrics to evaluate our business and measure our performance. The table below sets forth key operating metrics relating to the Qutoutiao mobile application.
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in millions, except for daily time spent data) | ||||||||||||||||||||||||||||||||
Installed users as of the end of the period |
3.7 | 9.7 | 16.3 | 26.4 | 46.3 | 73.1 | 97.9 | 133.0 | ||||||||||||||||||||||||
Average MAUs during the period |
1.7 | 3.9 | 5.7 | 8.8 | 16.0 | 24.2 | 27.8 | 32.1 | ||||||||||||||||||||||||
Average DAUs during the period |
0.5 | 1.5 | 2.5 | 3.9 | 6.4 | 9.5 | 11.3 | 12.3 | ||||||||||||||||||||||||
Average daily time spent per DAU during the period (minutes) |
27.2 | 29.0 | 31.3 | 33.7 | 34.0 | 32.3 | 32.5 | 47.3 |
In June 2018, our MAUs were approximately 39.3 million, average DAUs were approximately 14.1 million and average daily time spent per DAU was approximately 56.0 minutes. In July 2018, our MAUs were
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approximately 48.8 million, average DAUs were approximately 17.1 million and average daily time spent per DAU was approximately 55.6 minutes. In August 2018, our MAUs were approximately 62.0 million, average DAUs were approximately 21.1 million and average daily time spent per DAU was approximately 55.4 minutes. As of August 31, 2018, the total installed users was approximately 181.1 million.
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An investment in our ADSs involves significant risks. You should carefully consider all the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could materially and adversely affect our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.
Risks Relating to Our Industry and Business
We have a limited operating history, which makes it difficult to evaluate our business.
We launched Qutoutiao in June 2016. We have experienced rapid growth since the launch of Qutoutiao in terms of installed users, MAUs, DAUs and revenues. However, our historical growth may not be indicative of our future performance, and we cannot assure you that this level of significant growth will be sustainable or achievable at all in the future. Our growth prospects should be considered in light of the risks and uncertainties that fast-growing companies with a limited operating history in our industry may encounter, including, among others, risks and uncertainties regarding our ability to:
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retain existing users on, and attract new users to, our platform; |
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present real-time customized feeds to users based on their profiles, behaviors and social relationships; |
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maintain the effectiveness of our user loyalty programs; |
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maintain stable relationships with our content providers; |
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develop and implement successful monetization measures; |
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convince advertising customers of the benefits of our advertising services compared to alternative forms of marketing; |
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increase brand awareness through marketing and promotional activities; |
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upgrade existing technology and infrastructure and develop new technologies to support increasing user traffic, improve user experience, expand functionality and ensure system stability; |
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successfully compete with other companies that are currently in, or may in the future enter, our industry; |
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attract, retain and motivate talented employees; |
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adapt to the evolving regulatory environment; and |
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defend ourselves against litigation, regulatory, intellectual property, privacy or other claims. |
All of these endeavors involve risks and will require significant capital expenditures and allocation of valuable management and employee resources. We cannot assure you that we will be able to effectively manage our growth or implement our business strategies effectively. If the market for our platform does not develop as we expect or if we fail to address the needs of this dynamic market, our business, results of operations and financial condition will be materially and adversely affected.
If we fail to acquire new users or retain existing users, or if user engagement on our platform declines, our business, results of operations and financial condition may be materially and adversely affected.
The growth of our user base and the level of user engagement are critical to our success. Our Qutoutiao mobile application had approximately 62.0 million MAUs, approximately 21.1 million average DAUs and average daily time spent per DAU of approximately 55.4 minutes in August 2018. Our business has been and
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will continue to be significantly affected by our success in growing the number of active users and increasing their overall level of engagement on our platform. We anticipate that our user growth rate will slow over time as the size of our user base increases. To the extent our user growth rate slows, our success will become increasingly dependent on our ability to increase user engagement with our platform. We have implemented user account systems and loyalty programs to, among other things, help us cost effectively acquire new users and develop an engaged and loyal user base. However, although such user account systems and loyalty programs have contributed significantly to the growth in our installed users and high user engagement in the past, there can be no assurance that such systems and programs will continue to function effectively. Additionally, our acquisition cost per user may increase as we implement new marketing initiatives, such as placing advertisements in app stores. Our user engagement efforts, including by increasing the number of content providers, expanding the breadth and quality of content, including video and user generated content, on our platform, diversifying into new content formats and strengthening our content recommendation capabilities, may also not achieve expected results. Users may no longer perceive content and other products and services on our platform to be entertaining and relevant, and we may not be able to attract users or increase their usage frequency of our platform. If we fail to execute any such new initiatives successfully or in a cost-effective manner, our business, results of operations and financial condition would be materially and adversely affected. If we are unable to grow our user base or the level of user engagement, or if the number of users or their level of engagement declines, this could result in our platform being less attractive to potential new users and thus advertising customers, which would have a material and adverse impact on our business, results of operations and financial condition.
If we do not continue to increase the strength of our brand, we may not be able to maintain current or attract new users and customers for our products and services.
Our operational and financial performance is highly dependent on the strength of our brand. We believe we enjoy lower user acquisition cost compared to acquiring users through other means. Our platforms innovative user account systems and gamified loyalty programs enable us to focus our resources on directly connecting with new users. In order to further expand our user base, we may need to substantially increase our marketing expenditures to enhance brand awareness.
In addition, negative coverage in the media of our company could threaten the perception of our brand, and we cannot assure you that we will be able to defuse negative press coverage about our company to the satisfaction of our investors, users, advertising customers and content providers. If we are unable to defuse negative press coverage about our company, our brand may suffer in the marketplace, our operational and financial performance may be negatively impacted and the price of our ADSs may decline.
Furthermore, we have not completed the trademark registration for Qutoutiao , the name of our flagship mobile application. After we submitted our application material with the relevant authorities, one of our competitors filed an objection on the ground that Qutoutiao is similar to a trademark registered by such competitor. We believe such objection is meritless and we have contested the objection and submitted the written defense to the Trademark Office in February 2018. However, there can be no assurance that we will be able to prevail and register Qutoutiao as a trademark. If we fail to do so, we will not be able to protect our brand name. In addition, if our competitors initiate a lawsuit against on for infringing its trademark, we may be forced to adopt a new brand name for our flagship mobile application. As a result, we may incur additional marketing cost to raise awareness of such new brand name. We may also be ordered to pay a significant amount of damages, and our business, results of operations and financial condition could be materially and adversely affected.
Our lack of an Internet news license may expose us to administrative sanctions, including an order to cease our Internet information services that provide news or to cease the Internet access services provided by third parties to us.
The PRC government regulates the Internet industry extensively, including foreign ownership of, and the licensing requirements pertaining to, companies in the Internet industry. A number of regulatory agencies,
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including the Ministry of Culture, or the MOC, the Ministry of Industry and Information Technology, or MIIT, the Cyberspace Administration of China, or CAOC, the State Administration of Radio and Television, or the SART (previously known as GAPPRFT and SARFT), the State Council Information Office, or the SCIO, and other governmental authorities, jointly regulate all major aspects of the Internet industry. Operators are required to obtain various government approvals and licenses prior to providing the relevant Internet information services.
Our platform primarily focuses on light entertainment content. Nonetheless, certain content related to current affairs, finance, society and economy provided on our Qutoutiao mobile application may be deemed to be news content. According to the Provisions for the Administration of Internet News Information Services issued by the national CAOC on May 2, 2017 that became effective on June 1, 2017, an Internet news license shall be obtained for a provider of Internet news information services to the public in a variety of ways, including through the offering of platforms for the dissemination of Internet news. As such, we may be required to obtain an Internet news license from CAOC for the dissemination of news through our mobile application. In practice, Internet news information service providers that are not state-owned, such as our company, are required to introduce a state-owned shareholder in order to apply for the Internet news license. See Regulations Regulation on Internet News Dissemination. As a result of our lack of an Internet news license, the CAOC or its applicable office at the provincial level may order us to cease disseminating news and impose a fine on us of not less than RMB10,000 but not more than RMB30,000. In the event we were ordered to cease disseminating news, our business, results of operations and financial condition could be materially and adversely affected.
We are in the process of preparing an application for an Internet news license and have agreed to introduce The Paper as a state-owned shareholder. However, there can be no assurance that our application will be accepted or approved by the regulatory authorities.
Our lack of an Internet audio-visual program transmission license may expose us to administrative sanctions, which would materially and adversely affect our business, results of operations and financial condition.
Pursuant to the Administrative Provisions on Internet Audio-visual Program Service , or the Audio-visual Program Provisions, which was issued by the State Administration of Radio, Film and Television (the predecessor of GAPPRFT), or SARFT, and MIIT on December 20, 2007 and came into effect on January 31, 2008 and was amended on August 28, 2015, online transmission of audio and video programs requires an Internet audio-visual program transmission license and online audio-visual service providers must be either wholly state-owned or state-controlled. In a press conference jointly held by SARFT and MIIT to answer questions with respect to the Audio-visual Program Provisions in February 2008, SARFT and MIIT clarified that online audio-visual service providers that had already been operating lawfully prior to the issuance of the Audio-visual Program Provisions may re-register and continue to operate without becoming state-owned or controlled, provided that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after the Audio-visual Program Provisions was issued. See Regulation Regulation on Online Transmission of Audio-visual Programs.
We currently do not possess an Internet audio-visual program transmission license. As a result, the relevant regulatory authorities may find our operations to be in violation of the applicable laws and regulations. We may receive a warning and be ordered to pay a fine of not more than RMB30,000. In the case of severe contravention, we may be ordered to cease transmission of audio and video programs, be subject to a penalty equal to one to two times our total investment in the affected business and the devices we used for such operation may be confiscated. Furthermore, according to the Audio-visual Program Provisions, the telecommunications administrative authorities may, based on written opinions of GAPPRFT, and in accordance with the relevant laws and regulations on supervision of telecommunications and Internet, close our platform, revoke the license for the provision of Internet information services, or the ICP license, and order the relevant network operation entity which provides us signal access services to stop such provision of services. Such penalties would materially and adversely affect our business, results of operations and financial condition.
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New content formats and other products and services and changes to existing content formats and products and services could fail to attract users or generate revenues.
Our ability to increase the size and engagement level of our user base, attract advertising customers and generate revenues will depend in part on our ability to create and offer successful new content formats and other products and services. Such new content formats and other products and services may involve new distribution capabilities or technologies with which we have little or no prior development or operating experience, such as literature, casual games and live streaming. We may also continuously refine our existing content formats and other products and services as part of our efforts to further enhance user engagement. However, if such efforts or our efforts in launching new content formats and other products and services fail to engage users, we may fail to attract or retain users or to generate sufficient revenues to justify our investments, and our business, results of operations and financial condition could be adversely affected.
If we are unable to compete effectively in the industry we operate, our business, results of operations and financial condition may be materially and adversely affected.
Competition for user traffic and user engagement, as well as advertising and marketing spending, is intense and we face strong competition in our business. Our primary competitors include content aggregators such as Jinritoutiao, Kuaibao (operated by Tencent) and Yidianzixun (an affiliate of Phoenix News). To a lesser extent, we also compete with mobile news portals such as Tencent News, SINA News, Sohu News, NetEase News and Phoenix News. Many of our competitors have more resources and longer operating history than us. New players may emerge and seek to imitate our business strategies, thereby directly competing with us for users. Furthermore, we may face potential competition from global online content delivery platforms that seek to enter the China market, whether independently or through the formation of strategic alliances with, or acquisition of, PRC Internet companies. If we are not able to effectively compete with our competitors, our overall user base and level of user engagement may decrease. We may be required to spend additional resources to further enhance our brand recognition and promote our products and services, and such additional spending could adversely affect our profitability. Furthermore, if we are involved in disputes with any of our competitors that result in negative publicity to us, such disputes, regardless of their veracity or outcome, may harm our reputation or brand image and in turn lead to reduced number of users and advertising customers. Our competitors may unilaterally decide to adopt a wide range of measures targeted at us, including possibly designing their products to negatively impact our operations. Any legal proceedings or measures we take in response to competition and disputes with our competitors may be expensive, time-consuming and disruptive to our operations and divert our managements attention.
In addition, our users face a vast array of entertainment choices. Other forms of entertainment, including other Internet-based activities such as social networking, online video or games, live streaming, as well as offline games and activities such as television, movies and sports, are much larger and more well-established markets and may be perceived by our users to offer greater variety, affordability, interactivity and enjoyment. Our platform competes against these other forms of entertainment for the discretionary time and spending of our users. If we are unable to sustain sufficient interest in our platform in comparison to other forms of entertainment, including new forms of entertainment that may emerge in the future, our business model may no longer be viable.
The Chinese government may prevent us from distributing content that it believes is inappropriate and we may be subject to penalties for such content or we may have to interrupt or stop the operation of our platform.
China has enacted regulations governing Internet access and the distribution of news and other information. In the past, the Chinese government has stopped the distribution of information over the Internet or through mobile Internet devices that it believes violates Chinese law, including content that it believes is obscene, defamatory, misleading or inappropriately satirical, incites violence, endangers the national security, concerns politically sensitive topics, or contravenes the national interest. In the past, new downloads of certain mobile content
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aggregator applications and mobile news applications were temporarily blocked and suspended for different lengths of time, ranging from a few days to a few weeks, following publication of content considered to be noncompliant. In addition, in July 2018 PRC governmental and regulatory authorities responsible for eradicating pornography and illegal publications announced new coordinated efforts to regulate and control the nascent online short video sector, including citations against 19 online short video platforms which allegedly had disregarded previous and repeated warnings not to distribute content deemed by the authorities as obscene, misleading, pornographic, violent, infringing, sensationalist, deviant from socialist core values, harmful to younger viewers, or otherwise unlawful or detrimental. Of these 19 platforms, 15 had their applications removed from app stores and new downloads blocked; among these 15 platforms, three also had their operations suspended by relevant authorities. Any such future suspension in operations or downloads of our mobile applications for this or other reasons may negatively affect our relationships with users and advertisers, and thereby adversely affect our business and results of operations. Although our mobile applications historically have not been blocked or suspended due to non-compliant content, there can be no assurance that such suspensions in downloads of our mobile applications will not occur in the future, or that such incidents will not result in loss of users, advertisers and revenue, reputational damage to us, and will not have an adverse effect on our business and results of operations. The Chinese government may continue to implement stricter standards for content to be considered compliant, and increase enforcement against content considered to be noncompliant. In addition, certain news items, such as news relating to national security, may not be published without permission from the Chinese government. If the Chinese government were to take any action to limit or prohibit the distribution of information through our mobile applications, or to limit or regulate any current or future content or services available to users on our platform, our business could be significantly harmed. Although we have adopted internal procedures to monitor the content displayed on our platform, due to the significant amount of content, including user generated content, we may not be able to identify all the content that may violate relevant laws and regulations, whether or not due to a failure on the part of our staff. Failure to identify and prevent inappropriate or illegal content from being displayed on our platform may subject us to penalties, including suspension of operations.
Moreover, because the interpretation of prohibited content is in many cases vague and subjective, and the definition of prohibited content may be subject to change on an ongoing basis, it is not always possible to determine or predict what content might be prohibited under existing restrictions, or what restrictions might be imposed in the future. SART or other Chinese government authorities may prohibit the marketing of other types of wireless value-added services through mobile applications, which could materially and adversely affect our business, results of operations and financial condition.
We generate a substantial majority of our revenues from advertising. A decline in our advertising revenue could harm our business.
We generated almost all of our revenues from advertising services in 2016, 2017, and the six months ended June 30, 2018. When we first commenced our business, we collaborated with various third-party advertising platforms to place advertisements on our mobile applications. To enhance our platforms monetization capabilities, we acquired an advertising agent in February 2018 that operates a programmatic advertising system. This system will serve to power our advertising solutions while reducing the use of third-party advertising platforms. In 2017 and the six months ended June 30, 2018, 26.2% and 78.2%, respectively, of our net revenues were generated through this advertising agent. We have limited experience in operating the programmatic advertising system and in acquiring our own advertising agents and advertising customers. We may not be able to establish our own sales personnel to effectively and efficiently acquire and retain advertising agents and advertising customers. The effectiveness of our programmatic advertising system may not perform as expected and achieve widespread acceptance by advertising customers.
Our advertising customers for our programmatic advertising system are comprised of advertising agents and end advertisers. There can be no assurance that these advertising agents will continue to attract advertising customers to our platform. Furthermore, as is common in the industry, we do not enter into long-term agreements with advertising agents or advertising customers. Advertising agents and advertising customers are not obligated
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to use our advertising solutions on an exclusive basis and they generally use multiple channels to manage their advertising need. Accordingly, we or advertising agents must convince advertising customers to use our programmatic advertising system, increase their usage and spend a larger share of their online advertising budgets with us, and to do so on an on-going basis. Advertising customers may not continue to utilize our platform or may only be willing to advertise with us at reduced prices if we do not deliver advertising services in an effective manner, including persuading our advertising customers as to the relevancy of our user base for their products or services, or if they do not believe that their investment in advertising with us will generate a competitive return relative to alternative advertising platforms. If we fail to retain existing advertising customers or ensure that their advertising spend with us remains at similar or increased levels or attract new advertising customers to advertise on our platform, our business, results of operations and financial condition may be materially and adversely affected.
Our efforts to expand the monetization of our products and services in addition to advertising may not be successful.
In order to sustain our revenue growth, we must effectively monetize our user base and expand the monetization of our products and services in addition to advertising. We plan to leverage our user account systems and loyalty programs to induce users not only to spend the cash credits in their accounts from using our platform but also to supplement their spending on our platform with additional funds. These measures include introducing paid content such as literature, casual games, animation and comics, as well as content-driven e-commerce and live streaming products. There can be no assurance that we can successfully capture such monetization opportunities. For example, users may prefer to purchase merchandise from pure play e-commerce platforms, which tend to offer wider selections and may provide better services due to their deeper industry experience. In addition, we have primarily offered free content to users, and our paid content may not gain significant user acceptance. If we were unable to successfully execute our monetization strategies, our business, results of operations and financial condition would be materially and adversely affected.
If we fail to continue to anticipate user preferences and interests, we may not be able to generate sufficient user traffic to remain competitive.
Our success depends on our ability to intelligently deliver personalized light entertainment content to users. Through an automated process, we develop interest and social graphs for each user based on such persons profile, behavior and social relationships. The users behavior also provides us with a granular view of the topics and content characteristics that likely are of interest to the user. In addition, the interest and social graphs take into account the users social relationships with other users and such other users interests, including their behaviors. Our content recommendation engine analyzes content and the interest and social graphs of each user to identify content that is most likely to interest such person. Such recommendation is based on analysis we have made as to user preferences and interests, and any errors in such analysis may lead our system to recommend content that fails to attract users. Furthermore, our future success will depend on our ability to anticipate and adapt new technologies. If we fail to continuously improve user experience through better recommendation results, we may not be able to compete effectively with our competitors, and our business, results of operations and financial condition may be materially and adversely affected.
If content providers on our platform do not continue to contribute content, decrease the amount of content contributed or the quality of their contributions declines, we may experience a decrease in the number of users and level of user engagement.
Our success depends on our ability to generate sufficient user traffic through the intelligent delivery of personalized light entertainment content, which in turn depends on the content contributed by our content providers. We believe that access to light entertainment-oriented and easily digestible content is one of the main reasons users visit Qutoutiao . We encourage our content providers to actively contribute quality content that will resonate with our users by implementing a system in which fees paid to them are related to the amount of views
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associated with content they contribute. We also seek to foster a broader and more engaged user base by encouraging social interactions and production of user generated content. If our content providers do not continue to contribute content, including user generated content, to our mobile applications due to their dissatisfaction with our fee arrangements with them, their entry into exclusive arrangements with other platforms or any other reasons, or the attractiveness of their content declines, and we are unable to provide users with entertaining and relevant content, our user base and user engagement may decline. If we were required to share a higher proportion of advertising revenue with content providers in order to enhance the quality of content delivered by us or increase the amount of content provided to us, our profitability could be materially and adversely affected. If we experience a decline in the number of users or the level of user engagement, advertising customers may not view our platform as attractive for their advertising expenditures and may reduce their spending with us, which would harm our business, results of operations and financial condition.
We have incurred net losses in the past, and we may not be able to achieve or subsequently maintain profitability.
Since our inception, we have incurred net losses. In 2016, 2017 and the six months ended June 30, 2017 and 2018, we recorded net losses of RMB10.9 million (US$1.6 million), RMB94.8 million (US$14.3 million), RMB28.7 million (US$4.3 million) and RMB514.4 million (US$77.7 million), respectively and our adjusted net losses was RMB10.5 million (US$1.6 million), RMB91.4 million (US$13.8 million), RMB28.3 million (US$4.3 million) and RMB329.1 million (US$49.7 million), respectively. We believe that our future revenue growth will depend on, among other factors, our ability to attract new users, increase user stickiness and level of engagement, establish effective monetization strategies, compete effectively and successfully, and develop new products and services. Accordingly, you should not rely on the revenues of any prior quarterly or annual period as an indication of our future performance. We also expect our costs to increase in future periods as we continue to expand our business and operations. In addition, we expect to incur substantial costs and expenses as a result of being a public company. If we are unable to generate adequate revenues and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or subsequently maintain profitability.
Our current dependence on a limited number of customers may cause significant fluctuations or declines in our revenues.
We currently generate a significant portion of our net revenues from a limited number of third-party advertising platforms. Baidu, which is our largest customer and operates a third-party advertising platform, contributed 69.9%, 43.7%, 75.8% and 12.1% of our net revenues in 2016, 2017 and the six months ended June 30, 2017 and 2018, respectively. Baidu also accounted for 92.6%, 59.8% and 30.5% of our accounts receivable as of December 31, 2016 and 2017 and June 30, 2018, respectively. We supply traffic to the customers platform through advertisements placed on our mobile applications. Baidu has the right to terminate its agreement with us at any time. Such concentration of customers was primarily the result of our limited operating history and the fact that when we first commenced our business, we only collaborated with a limited number of third-party advertising platforms to place advertisements on our platform. Although we are reducing our collaboration with third-party advertising platforms, certain of these platforms may continue to contribute a large portion of our net revenues in the near future. Any adverse change in our relationship with these advertising platforms, including our arrangements with them, or a decrease in the amount or quality of the advertisement placed by these platforms on our mobile applications may materially and adversely affect our results of operations.
Our user metrics and other estimates are subject to inherent challenges in measuring our operating performance, which may harm our reputation.
We regularly review MAUs, DAUs, average time spent per DAU and other operating metrics to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using
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internal company data, have not been validated by an independent third party, and may not be indicative of our future financial results. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring how our platform is used across a large population in China. For example, we may not be able to distinguish individual users who have multiple registered accounts.
Errors or inaccuracies in our metrics or data could result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of active users were to occur, we might expend resources to implement unnecessary business measures or fail to take required actions to remedy an unfavorable trend. If advertising customers or investors do not perceive our user or other operating metrics to accurately represent our user base, or if we discover inaccuracies in our user or other operating metrics, our reputation may be harmed.
If we fail to effectively manage our growth, our business, results of operations and financial condition could be harmed.
We expect we will continue to experience rapid growth in our business and operations, which will place significant demands on our management, operational and financial resources. We may encounter difficulties as we establish and expand our operations, product development, sales and marketing, and general and administrative capabilities. We face significant competition for talented employees from other high-growth companies, which include both publicly traded and privately held companies, and we may not be able to hire new employees quickly enough to meet our needs. To attract highly skilled personnel, we have had to offer, and believe we will need to continue to offer, competitive compensation packages. As we continue to grow, we are subject to the risks of over-hiring, over-compensating our employees and over-expanding our operating infrastructure, and to the challenges of integrating, developing and motivating a growing employee base. In addition, we may not be able to innovate or execute as quickly as a smaller and more efficient organization. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business, results of operations and financial condition could be adversely affected.
Providing products and services to users may be costly and we expect our expenses to continue to increase in the future as we broaden our user base and increase user engagement, and develop and implement new content formats, features, products and services that require more infrastructure, such as literature, casual games and live streaming. In addition, our costs and expenses, such as our labor-related expenses, product development expenses and sales and marketing expenses have grown rapidly as we have expanded our business. In particular, we have focused considerable resources on user acquisition through our loyalty programs. Our sales and marketing expenses consist primarily of cost of users loyalty points associated with our user loyalty programs, which increased from RMB50.9 million (US$7.7 million) in 2016 to RMB419.6 million (US$63.4 million) in 2017, and further from RMB105.4 million (US$15.9 million) in the six months ended June 30, 2017 to RMB611.9 million (US$92.5 million) in the same period in 2018, representing 87.8%, 81.2%, 98.2% and 85.2% of our net revenues in 2016, 2017 and the six months ended June 30, 2017 and 2018, respectively. Historically, our costs have increased due to these factors and we expect to continue to incur increasing costs to support our anticipated future growth. We expect to continue to invest in our infrastructure to enable us to provide our products and services rapidly and reliably to users. Continued growth could also strain our ability to maintain reliable service levels for our users, content providers and advertising customers, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Our expenses may grow faster than our revenues, and our expenses may be greater than we anticipate. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, results of operations and financial condition could be harmed.
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Advertisements on our mobile applications may subject us to penalties and other administrative actions.
Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our mobile applications to ensure that such content is true, accurate and in full compliance with applicable laws and regulations. On April 24, 2015, the Standing Committee of the National Peoples Congress issued the Advertisement Law , which took effect on September 1, 2015, to further strengthen the supervision and management of advertisement services. On July 4, 2016, SAIC issued the Interim Measures for the Administration of Internet Advertising, or the New Interim Measures , to further regulate Internet advertising activities. Pursuant to these laws and regulations, any advertisement that contains false or misleading information to deceive or mislead consumers shall be deemed false advertising. Furthermore, the Advertisement Law explicitly stipulates detailed requirements for the content of several different kinds of advertisement, including advertisements for medical treatment, pharmaceuticals, medical instruments, health food, alcoholic drinks, education or training, products or services having an expected return on investment, real estate, pesticides, feed and feed additives, and some other agriculture-related advertisement. Also, according to the New Interim Measures, no advertisement of such special products or services which are subject to examination by an advertising examination authority shall be published unless it has passed such examination. In addition, an Internet advertisement shall be identifiable and clearly identified as an advertisement so that consumers will know that it is an advertisement. The New Interim Measures also provide that Internet advertisement publishers shall verify related supporting documents, check the content of the advertisement and be prohibited from publishing any advertisement with nonconforming content or without all the necessary certification documents. However, for the determination of the truth and accuracy of the advertisements, there are no implementing rules or official interpretations, and such a determination is at the sole discretion of the relevant local branch of the State Administration for Market Regulation, or the SAMR (successor of SAIC and the State Food and Drug Administration), which results in uncertainty in the application of these laws and regulations. In addition, advertising content deemed as obscene, defamatory, inappropriately satirical or otherwise inappropriate by a relevant government authority may also subject us to penalties. For instance, the Chinese government has temporarily suspended advertising services on a short video platform in China because advertising content shown on the platform was deemed to be offensive and disrespectful to a revolutionary figure.
We cannot assure you that all the advertisements shown on our mobile applications are true, accurate, appropriate and in full compliance with applicable laws and regulations. For example, advertisers on our mobile applications, or their agents, may use measures that are designed to evade our monitoring, such as providing inauthentic material that does not match the actual advertisement, or supplying advertising which is superficially compliant but nevertheless is linked to one or more webpages that feature noncompliant advertising content. In addition, our employees responsible for reviewing advertisements may not fully understand the relevant laws and regulations or may be inappropriately influenced by the advertisers. In each case, we may still be held responsible for noncompliant advertising content. We include clauses in most of our advertising contracts requiring that all advertising content provided by advertising customers must comply with relevant laws and regulations. Pursuant to the contracts between us and the relevant advertising agents or advertising customers, they are liable for all damages to us caused by their breach of such representations. However, there can be no assurance that we will be able to successfully enforce our contractual rights.
Violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to eliminate the effect of illegal advertisement. If an illegal advertisement featured on our mobile applications were to have excessive negative effects, our brand and reputation may be harmed, and PRC governmental authorities may pursue more severe penalties and administrative actions against us. PRC governmental authorities may even force us to terminate our advertising operation or revoke our licenses in circumstances involving serious violations. Such penalties may have a material and adverse effect on our business, results of operations and financial condition.
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Increased government regulation of content platforms may subject us to penalties and other administrative actions.
Recently, PRC government authorities have strengthened their oversight of content platforms similar to our mobile applications. Other than the content that are considered to be violating PRC laws and regulations, such oversight has tend to pay more attention to content that is or may be deemed misleading, obscene, pornographic, detrimental, and/or contrary to social values and morals prevailing in China, which content may subject the platforms operator to penalties and other administrative actions. For example, in April 2018, a platform that provides entertainment-oriented contents was ordered by the SART to permanently cease its operation for delivering content that were considered to be vulgar and deviating from mainstream values. In addition, in July 2018 PRC governmental and regulatory authorities responsible for eradicating pornography and illegal publications announced new coordinated efforts to regulate and control the nascent online short video sector, including citations against 19 online short video platforms which allegedly had disregarded previous and repeated warnings not to distribute content deemed by the authorities as obscene, misleading, pornographic, violent, infringing, sensationalist, deviant from socialist core values, harmful to younger viewers, or otherwise unlawful or detrimental. Of these 19 platforms, 15 had their applications removed from app stores and new downloads blocked; among these 15 platforms, three also had their operations suspended by relevant authorities.
Government regulation of content and of content platforms generally may broaden in scope and oversee additional aspects of content platforms operation, such as information security, user suitability management, anti-addiction, and sales and marketing, in addition to being strengthened and becoming more strict as to content and advertising. Any such new or broadened regulatory measures or oversight may cause us to incur higher compliance costs, revise or amend our operational strategies, target user groups, or promotional models, and thereby adversely affect our business and results of operations.
If we fail to detect click-through fraud of our platform, we could lose the confidence of advertising customers and our revenues could decline.
We are exposed to the risk of click-through fraud on our advertising services. Click-through fraud occurs when a person, automated script or computer program imitates a legitimate user clicking on an advertisement, for the purpose of generating a charge per click without having an actual interest in the target of the advertisements link. If we fail to detect fraudulent clicks or otherwise are unable to prevent such fraudulent activity, the affected advertising customers may experience a reduced return on their investment in our mobile advertising services and lose confidence in the integrity of our services. If this happens, our reputation may be damaged and we may be unable to retain existing advertising customers and attract new advertising customers for our advertising services and our advertising revenue could decline.
If we fail to detect user misconduct on our platform, our business, results of operations and financial condition may be materially and adversely affected.
Our platform enables users to upload content, post comments, interact with others and engage in various other online activities. As the gatekeeper for our platform, our content management system is designed to ensure both the quality and appropriateness of information presented to users, which include content and comment postings. We undertake an efficient and thorough screening process that involves both algorithm-based screening and manual review. We have also implemented a complaint procedure that enables us to identify bad content with our users help. However, such procedures may not prevent all illegal or impropriate content or comments from being posted, and our staff may fail to review and screen such content or comments effectively. In response to allegations of illegal or inappropriate activities conducted through our platform or any negative media coverage about us, PRC government authorities may intervene and hold us liable and subject us to administrative penalties or other sanctions, such as requiring us to restrict or discontinue some of the features and services provided on our mobile application. As a result, our business may suffer and our user base, revenues and profitability may be materially and adversely affected, and the price of the ADSs may decline.
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Additionally, we may be subject to fines or other disciplinary actions, including suspension or revocation of the licenses necessary to operate our platform, if we are deemed to have facilitated the appearance of inappropriate content placed by third parties on our platform, including user generated content. Although we require content providers on our platform to promise that they will not infringe upon the intellectual property rights of third parties, such content may nevertheless be unauthorized and infringe upon others intellectual property, including copyrights, and we may not be able to detect and identify every instance of intellectual property infringement. See Non-compliance with law on the part of third parties with which we conduct business could disrupt our business and adversely affect results of our operation and financial condition and We may be subject to intellectual property infringement claims or other allegations by third parties for information or content displayed on, retrieved from or linked to our platform, or delivered to our users, which may materially and adversely affect our business, financial condition and prospects. As a result, we may face claims for defamation, libel, negligence, copyright, patent or trademark infringement, other unlawful activities or other claims based on the nature and content of the information delivered on or otherwise accessed through our platform. Defending such actions could be costly and involve significant time and attention of our management and other resources, which would materially and adversely affect our business, results of operations and financial conditions.
Our ability to prevent the misuse of our user loyalty programs while ensuring their efficacy in user acquisition and engagement will have a material effect as to our business, results of operations and financial condition.
To incentivize word-of-mouth viral referrals and improve user engagement and loyalty, we have gamified our platform by giving users loyalty points and cash credits in certain cases for taking specific actions. Such actions primarily include making referrals of our Qutoutiao mobile application to new users or for user engagement such as through the viewing or sharing of content, providing valuable comments and encourage inactive users to continue to use Qutoutiao . Loyalty points are automatically exchanged into cash credits at the end of each day based on an exchange rate determined by us. A user can then withdraw cash credits, which reflects the same amount of cash value, from the users account after the balance exceed a minimum amount as determined by us from time to time. A user can also currently redeem cash credits by purchasing merchandise through the marketplace on our Qutoutiao mobile application. Our user loyalty programs also cover our Quduopai mobile application. Our user loyalty programs have contributed significantly to the growth in our installed users and high user engagement. Although we believe consuming content, rather than earning loyalty points, is the main purpose for our registered users to use Qutoutiao , we have nonetheless designed our loyalty programs to balance between their efficacy in user acquisition and engagement while preventing users from using our mobile applications merely for the loyalty points. Our inability to achieve such balance may make our user loyalty programs no longer becoming enticing to users, which may materially and adversely affect user growth and user engagement. Moreover, we cannot assure you that there will still be users who are only attracted to our mobile applications because of our user loyalty programs. We have mechanisms in place to prevent potential abuse of our user loyalty programs. For example, our system takes into account how fast the user scrolls down the page to determine whether the viewer has actually viewed the article and loyalty points are now provided on a per minute spent on viewing content basis. However, our system may not be able to detect all instances of abuse. Furthermore, although our loyalty programs are designed so that only a small amount of loyalty points is provided for taking any specific action with the aim to entice user referral and engagement, we cannot ensure you that there will not be users who will be able to hack our user loyalty programs to make earning loyalty points a highly lucrative endeavor. We have also focused on developing fraud detection technologies to combat fraudulent users and activities targeting our user loyalty programs and we cannot assure you that such system will be effective in identifying fraud. If we allow users to improperly earn loyalty points, our business, results of operations and financial condition may be materially and adversely affected. As clearly stated in our user agreement, we have the sole discretion in determining user misuse of our user loyalty programs, and we may freeze a users account if we find such user misused our user loyalty programs. Certain users that have their accounts frozen have complained online. Such complaints could undermine the public perception and credibility of our platform, and our business, results of operations and financial condition could be materially and adversely affected.
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Our results of operations may fluctuate from quarter to quarter, which makes them difficult to predict.
Our quarterly results of operations have fluctuated in the past and will continue to fluctuate in the future. As a result, our past quarterly results of operations are not necessarily indicators of future performance. Our results of operations in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:
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our ability to grow our user base and user engagement; |
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fluctuations in spending by our advertising customers, including as a result of seasonality or other factors; |
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our ability to attract and retain advertising customers; |
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the occurrence of planned or unplanned significant events, including events that may cause substantial share-based compensation or other charges; |
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the development and introduction of new content formats, products or services or changes in features of existing content formats, products or services; |
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the impact of competitors or competitive products and services; |
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increases in our costs and expenses that we may incur to grow and expand our operations and to remain competitive; |
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changes in the legal or regulatory environment or proceedings, including with respect to security, privacy or enforcement by government regulators, including fines, orders or consent decrees; and |
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changes in Chinese or global business or macroeconomic conditions. |
Given our limited operating history and the rapidly evolving market in which we compete, our historical results of operations may not be useful to you in predicting our future results of operations. Our short operating history and our rapid growth make it difficult for us to identify recurring seasonal trends in our business. The advertising industry in China experiences seasonality. Historically, advertising spending and user activities on our platform tend to be the lowest in the first quarter of each calendar year due to long holidays around the Lunar New Year, during which users tend to spend more time with family and celebrations offline and less time online, including on our mobile applications. In addition, advertising customers, such as those in the e-commerce industry, may also reduce its advertising spending during the holidays around the Lunar New Year due to reduced consumer spending or reduced or suspended production and logistics activities by manufacturers or other service providers. We believe this seasonality affects our quarterly results especially our results of operations in the first quarter of each year.
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of Internet businesses and companies, including limitations on our ability to own key assets such as our mobile applications.
The Chinese government heavily regulates the Internet industry, including foreign investment in the Chinese Internet industry, content on the Internet and license and permit requirements for service providers in the Internet industry. Since some of the laws, regulations and legal requirements with respect to the Internet are relatively new and evolving, their interpretation and enforcement involve significant uncertainties. In addition, the Chinese legal system is based on written statutes, such that prior court decisions can only be cited for reference and have little precedential value. As a result, in many cases it is difficult to determine what actions or omissions may result in liabilities. Issues, risks and uncertainties relating to Chinas government regulation of the Chinese Internet sector include the following:
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We operate our mobile applications in China through businesses controlled via contractual arrangements versus direct ownership due to restrictions on foreign investment in businesses providing value-added telecommunication services, including substantially all of our paid services and advertising services. |
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Uncertainties relating to the regulation of the Internet business in China, including evolving licensing practices, give rise to the risk that some of our permits, licenses or operations may be subject to challenge, which may be disruptive to our business, subject us to sanctions or require us to increase capital, compromise the enforceability of relevant contractual arrangements, or have other adverse effects on us. The numerous and often vague restrictions on acceptable content in China subject us to potential civil and criminal liability, temporary blockage of our mobile applications or complete shut-down of our mobile applications. For example, the State Secrecy Bureau, which is directly responsible for the protection of state secrets of all Chinese government and Chinese Communist Party organizations, is authorized to block any website or mobile applications it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the distribution of online information. In addition, the newly amended Law on Preservation of State Secrets which became effective on October 1, 2010 provides that whenever an Internet service provider detects any leakage of state secrets in the distribution of online information, it should stop the distribution of such information and report to the authorities of state security and public security. As per request of the authorities of state security, public security or state secrecy, the Internet service provider should delete any content on its website that may lead to disclosure of state secrets. Failure to do so on a timely and adequate basis may subject the service provider to liability and certain penalties imposed by the State Security Bureau, Ministry of Public Security and/or MIIT or their respective local counterparts. |
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On September 28, 2009, the General Administration of Press and Publication (the predecessor of GAPPRFT), or the GAPP, and the National Office of Combating Pornography and Illegal Publications jointly published a circular expressly prohibiting foreign investors from participating in Internet game operating business via wholly owned, equity joint venture or cooperative joint venture investments in China, and from controlling and participating in such businesses directly or indirectly through contractual or technical support arrangements. On February 4, 2016, the GAPPRFT and the MIIT jointly issued the Rules for the Administration for Internet Publishing Services , or the Internet Publishing Rules, which took effect in March 10, 2016 and prohibit wholly foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign cooperative enterprises from engaging in the provision of web publishing services. Under such rules, an Internet publishing license is required for a provider of online publications. Uncertainty remains regarding the interpretation of relevant concepts, including online publications. Although we have not been required by the SART or other relevant authorities to obtain an Internet publishing license so far, we may face further scrutiny by such authorities, which may require us to apply for such license and/or subject us to penalties. In addition, project cooperation between an Internet publishing service provider and a wholly foreign-owned enterprise, Sino-foreign equity joint venture, or Sino-foreign cooperative enterprise within China or an overseas organization or individual involving Internet publishing services shall be subject to examination and approval by the SART in advance. |
Due to the increasing popularity and use of the Internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. The adoption of additional laws or regulations may impede the growth of the Internet or other online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business. Moreover, the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could significantly disrupt our operations or subject us to penalties.
The interpretation and application of existing PRC laws, regulations and policies, the stated positions of relevant PRC government authorities and possible new laws, regulations or policies have created substantial
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uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Internet businesses in China, including our business.
Non-compliance with law on the part of third parties with which we conduct business could disrupt our business and adversely affect results of our operation and financial condition.
Third parties with which we conduct business, such as content providers, advertising agents, advertising customers and merchandise suppliers, may be subject to regulatory penalties or punishments because of their regulatory compliance failures or may be infringing upon other parties legal rights, which may, directly or indirectly, disrupt our business. Although we conduct review of legal formalities and certifications before entering into contractual relationships with third parties, and take measures to reduce the risks that we may be exposed to in case of any non-compliance by third parties, we cannot be certain whether such third party has violated any regulatory requirements or infringed or will infringe any other parties legal rights. For example, content providers may submit copyrighted content that they have no right to distribute. While our content management system screens content for potential copyright infringements, we may not be able to identify all instances of copyright infringement. In the event we deliver content that violates the copyrights of a third party, we may be required to pay damages to compensate such third party. Even though we have the contractual right to seek indemnification from the relevant content provider for such payment, there can be no assurance that we will be able to enforce such right. As a result, our business, results of operations and financial condition could be materially and adversely affected. Similarly, advertising content of advertising customers may also not be in full compliance with applicable laws and regulations that may have an adverse effect as to our business, results of operations and financial condition. See Advertisements on our mobile applications may subject us to penalties and other administrative actions.
We cannot rule out the possibility of incurring liabilities or suffering losses due to any non-compliance by third parties. We cannot assure you that we will be able to identify irregularities or non-compliance in the business practices of third parties we conduct business with, or that such irregularities or non-compliance will be corrected in a prompt and proper manner. Any legal liabilities and regulatory actions affecting third parties involved in our business may affect our business activities and reputation, and may in turn affect our business, results of operations and financial condition.
Privacy concerns relating to our products and services and the use of user information could damage our reputation, deter current and potential users and customers from using our mobile applications and negatively impact our business.
We collect personal data from our users in order to better understand our users and their needs and to help advertising customers target specific demographic groups. Through an automated process, we develop a social graph for each user based on such persons profile, behavior and social relationships. Concerns about the collection, use, disclosure or security of personal information or other privacy-related matters, even if unfounded, could damage our reputation, cause us to lose users and customers and adversely affect our business, results of operations and financial condition. While we strive to comply with applicable data protection laws and regulations, as well as our own posted privacy policies and other obligations we may have with respect to privacy and data protection, the failure or perceived failure to comply may result, and in some cases has resulted, in inquiries and other proceedings or actions against us by government agencies or others, as well as negative publicity and damage to our reputation and brand, each of which could cause us to lose users and customers, which could have an adverse effect on our business.
Any systems failure or compromise of our security that results in the unauthorized access to or release of our users or customers data could significantly limit the adoption of our products and services, as well as harm our reputation and brand and, therefore, our business. We expect to continue to expend significant resources to protect against security breaches. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of products and services we offer and expand our user base.
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New laws or regulations concerning data protection, or the interpretation and application of existing consumer and data protection laws or regulations, which is often uncertain and in flux, may be inconsistent with our practices. Complying with new laws and regulations could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. For example, if privacy concerns or regulatory restrictions prevent us from selling demographically targeted advertising, we may become less attractive to advertising customers.
If we are unable to keep pace with rapid technological changes in the mobile Internet industries, our business may suffer.
The mobile feed industry, and the Internet industry in general, are characterized by constant changes, including rapid technological evolution, continual shifts in customer demands, frequent introductions of new products and services and constant emergence of new industry standards and practices. Thus, our success will depend, in part, on our ability to respond to these changes in a cost-effective and timely manner. If we are unable to keep up with big data analysis, artificial intelligence and other technological developments, users may no longer be attracted to our platform. A decrease in the number of active users may reduce our monetization opportunities and have a material and adverse effect on our business, results of operations and financial condition.
Our technological capabilities and infrastructure underlying our platform are critical to our success. The industry we operate in is subject to rapid technological changes and is evolving quickly in terms of technology innovation. We need to anticipate the emergence of new technologies and assess their market acceptance. We also need to invest significant resources, including financial resources, in research and development to keep pace with technological advances in order to make our products and services competitive in the market. However, development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our development results. Our significant expenditures on research and development may not generate corresponding benefits. Given the fast pace with which the technology has been and will continue to be developed, we may not be able to timely upgrade our technologies in an efficient and cost-effective manner, or at all. New technologies in programming or operations could render our technologies, our platform or products or services that we are developing or expect to develop in the future obsolete or unattractive, thereby limiting our ability to recover related product development costs, outsourcing costs and licensing fees, which could result in a decline in our revenues and market share.
If our security measures are breached, or if our products and services are subject to attacks that degrade or deny the ability of users to access our products and services, our products and services may be perceived as not being secure, users may curtail or stop using our products and services and our business, results of operations and financial condition may be harmed.
Our products and services involve the storage and transmission of users information, and security breaches expose us to a risk of loss of this information, litigation and potential liability. We may experience cyber-attacks of varying degrees, including attempts to hack into our user accounts or redirect our user traffic to other websites. Functions that facilitate interactivity with other mobile applications, such as WeChat, which among other things allows users to log into our platform using their WeChat identities, could increase the scope of access of hackers to user accounts. Our security measures may also be breached due to employee error, malfeasance or otherwise. Additionally, outside parties may attempt to fraudulently induce employees or users to disclose sensitive information in order to gain access to our data or our users data or accounts, or may otherwise obtain access to such data or accounts. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our products and services that could have an adverse effect on our business, results of operations and financial condition. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market
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perception of the effectiveness of our security measures could be harmed, we could lose users and we may be exposed to significant legal and financial risks, including legal claims and regulatory fines and penalties. Any of these actions could have a material and adverse effect on our business, results of operations and financial condition.
Negative publicity about us, our services, operations and our management may adversely affect our reputation and business.
We have from time to time received negative publicity, including negative Internet and blog postings about our company, our business, our management or our services. Certain of such negative publicity may be the result of malicious harassment or unfair competition acts by third parties. We may even be subject to government or regulatory investigation as a result of such third-party conduct and may be required to spend significant time and incur substantial costs to defend ourselves against such third-party conduct, and we may not be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our brand and reputation may be materially and adversely affected as a result of any negative publicity, which in turn may cause us to lose market share, users, advertising customers and other third parties we conduct business with. We have implemented user loyalty programs to gamify user experience and tap into the competitive reward psyche of users. However, some users have misunderstood the purpose of the system and expect it to function as a source of significant monetary compensation. This system and aspect of our referral-based viral user acquisition approach has been criticized and negatively evaluated in certain user generated content uploaded by users. Such users have also complained about the inadequacy of loyalty points through Internet blog postings. Though we believe such criticisms are without merit, such postings could have a material and adverse effect on our ability to acquire new customers.
We may incur liability for merchandise sold on our platform that is without or has yet to receive proper authorization, infringe on other parties intellectual property rights, or fail to comply with related permits or filing requirements.
Our Qutoutiao mobile application includes an online marketplace which users can access and purchase merchandise offered by third-party merchandise suppliers, which allows us to both enhance user stickiness and capture valuable monetization opportunities. We may incur liability for merchandise sold by third-party merchandise suppliers that are without or have yet to receive proper authorization, infringe on other parties intellectual property rights, or fail to comply with related permits or filing requirements. If any material claim occurs in the future, irrespective of the validity of such claims, we may incur significant costs and efforts in either defending against or settling such claims. If there is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant merchandise. Moreover, such claims could result in negative publicity and our reputation could be severely damaged. Any of these events could have a material and adverse effect on our business, results of operations or financial condition.
We rely on third-party online payment platforms as to certain aspects of our operations.
Our users withdraw cash credits from their accounts on Qutoutiao through third-party online payment systems. Our users also can use third-party online payment systems to supplement their spending on Qutoutiao with additional funds. In such online payment transactions, secured transmission of confidential information such as customers personal information over public networks is essential to maintain consumer confidence.
We do not have control over the security measures of our third-party online payment platforms, and security breaches of the online payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of all of the online payment systems that we use. If a well-publicized Internet or mobile network security breach were to occur, users concerned about the security of their online financial transactions may become reluctant to purchase our virtual items even if the publicized breach did not involve payment
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systems or methods used by us. In addition, there may be billing software errors that would damage customer confidence in these online payment systems. If any of the above were to occur and damage our reputation or the perceived security of the online payment systems we use, we lose active users, which may have an adverse effect on our business.
Furthermore, if any of the payment platforms we use decide to significantly increase the percentage they charge us for using their payment systems, our business, results of operations and financial condition may be materially and adversely affected.
Any change, disruption, discontinuity in the features and functions of major social networks could limit our ability to continue growing our user base, and our business may be materially and adversely affected.
We leverage social networks, such as WeChat and QQ, as part of our user acquisition and engagement effort. These social networks enable users to share content on our mobile applications or recommend our mobile applications to their friends, family and other social contacts to generate low-cost organic traffic and enhance user engagement for us. To the extent that we fail to leverage such social networks, our ability to attract or retain users may be harmed. If any of these social networks makes changes to its functions or support, or stops offering its functions or support to us, we may not be able to locate alternative social networks of similar scale to provide similar functions or support. Furthermore, we may fail to establish or maintain relationships with additional social network operators to support the growth of our business on economically viable terms, or at all. Any interruption to or discontinuation of our relationships with major social network operators may severely and negatively impact our ability to continue growing our user base, and any occurrence of the circumstances mentioned above may have a material adverse effect on our business, financial condition and results of operations.
Our business and growth could suffer if we are unable to hire and retain key personnel.
We depend on the continued contributions of our senior management and other key employees, many of whom are difficult to replace. The loss of the services of any of our executive officers or other key employees could harm our business. Competition for qualified talent in China is intense. Our future success is dependent on our ability to attract a significant number of qualified employees and retain existing key employees. If we are unable to do so, our business and growth may be materially and adversely affected and the trading price of our ADSs could suffer. Our need to significantly increase the number of our qualified employees and retain key employees may cause us to materially increase compensation-related costs, including share-based compensation.
We are also dependent on the services of Mr. Eric Siliang Tan, our co-founder and executive chairman. Although Mr. Tan spends significant time with us and is active in the management of our business, he does not devote his full time and attention to us. If Mr. Tan reduces his time with us in the future and become less involved with the management of our business, we may no longer benefit from his extensive industry experience and our business and growth may suffer.
Our co-founder and executive chairman Mr. Eric Siliang Tan has control over us and our corporate matters.
Our co-founder and executive chairman, Mr. Eric Siliang Tan, has control over us and our corporate matters. Innotech Group Holdings Ltd., a British Virgin Islands limited liability company which is ultimately controlled by Mr. Tan, holds 27,123,442 of our ordinary shares. In addition, pursuant to the power of attorney by several shareholders, Innotech Group Holdings Ltd. has the right to exercise the voting power associated with 1,931,265 ordinary shares held by such shareholders. As a result, Innotech Group Holdings Ltd. has the voting power over 29,054,707 ordinary shares, or 48.4% of the aggregate voting power of our issued and outstanding share capital as of the date of this prospectus. However, such power of attorney will be terminated upon the completion of this offering.
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In addition, immediately prior to the completion of this offering, we expect to create a dual-class share structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class B ordinary shares will be entitled to ten (10) votes per share, subject to certain conditions, while holders of Class A ordinary shares will be entitled to one vote per share based on our proposed dual-class share structure. We will sell Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity which is not an affiliate of such holder, each of such Class B ordinary shares shall be converted into one Class A ordinary share in accordance with our amended and restated memorandum and articles of association.
Immediately prior to the completion of this offering, Mr. Tan will beneficially own 27,123,442 of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately 37.2% of our total issued and outstanding share capital immediately after the completion of this offering and 73.0% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering (or approximately 36.4% of our total issued and outstanding share capital and 72.7% of the aggregate voting power of our total issued and outstanding share capital assuming the issuance of the Series C2 preferred shares to The Paper) due to the disparate voting powers associated with our dual-class share structure, assuming the underwriters do not exercise their over-allotment option. See Principal Shareholders. As a result of the dual-class share structure and the concentration of ownership, Mr. Tan will have considerable influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the prevailing market price.
We will be a controlled company under the rules of NASDAQ Global Market and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
We will be a controlled company as defined under the Nasdaq Stock Market Rules because Mr. Eric Siliang Tan will hold more than 50% of the aggregate voting power of our company upon the completion of this offering. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
We have incurred and may continue to incur substantial share-based compensation expenses.
We have adopted a 2017 equity incentive plan that permits the grant of share options, and a 2018 equity incentive plan that permits the grant of share options, restricted shares, restricted share units, dividend equivalents, share appreciation rights and share payments as equity-based awards, to our directors, officers, employees and consultants. The maximum aggregate number of ordinary shares that may be issued pursuant to all share options and other awards under our equity incentive plans is 12,964,141, of which 9,500,000 ordinary shares are held by a nominee of our equity incentive trust. As of the date of this prospectus, options to purchase 12,297,276 ordinary shares have been granted and are outstanding under our equity incentive plans. We are required to account for options granted to our employees, directors and consultants. We are required to classify options granted to our employees, directors and consultants as equity awards and recognize share-based compensation expense based on the fair value of such share options, with the share-based compensation expense recognized over the period in which the recipient is required to provide service in exchange for the share option or other equity award.
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On January 3, 2018, entities respectively controlled by our co-founders Mr. Eric Siliang Tan and Mr. Lei Li entered into share restriction deeds with us, pursuant to which a total of 15,937,500 ordinary shares beneficially owned by such co-founders became restricted shares. 12,187,500 of such restricted shares are beneficially owned by Mr. Eric Siliang Tan and will be vested in a period over 34 months. 3,750,000 of such restricted shares are beneficially owned by Mr. Lei Li and will be vested in a period over 24 months. These share restriction deeds will be terminated, and any remaining restricted shares will be vested, upon the completion of this offering. For accounting purposes, this transaction has been reflected retrospectively similar to a reverse stock split, with a grant of 15,937,500 restricted shares to be recognized in January 2018 at their then fair value of approximately RMB818.4 million (US$128.1 million) and recognized as compensation expense over the vesting periods. In the six months ended June 30, 2018, RMB158.6 million (US$24.8 million) was recognized as share-based compensation expenses. In addition, upon the completion of this offering, any remaining unrecognized share-based compensation expenses relating to the foregoing will be expensed immediately. For further information, see Management Equity Incentive Plans Share Restriction Deeds.
We believe the granting of share-based compensation is of significant importance to our ability to attract, retain and motivate our management team and talented employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase significantly, which may have an adverse effect on our results of operations and financial condition. See Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies, Judgments and Estimates Share-based Compensation and Valuation of Our Ordinary Shares.
Future investments in and acquisitions of complementary assets, technologies and businesses may fail and may result in equity or earnings dilution.
We may invest in or acquire assets, technologies and businesses that are complementary to our existing business. Our investments or acquisitions may not yield the results we expect. In addition, investments and acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, significant amortization expenses related to goodwill or intangible assets and exposure to potential unknown liabilities of the acquired business. Furthermore, if such goodwill or intangible assets become impaired, we may be required to record a significant charge to our results of operations. Such investments and acquisitions may also require our management team to devote a significant amount of attention. Moreover, the cost of identifying and consummating investments and acquisitions, and integrating the acquired businesses into ours, may be significant, and the integration of acquired businesses may be disruptive to our existing business operations. In addition, we may have to obtain approval from the relevant PRC governmental authorities for the investments and acquisitions and comply with any applicable PRC rules and regulations, which may be costly. In the event our investments and acquisitions are not successful, our results of operations and financial condition may be materially and adversely affected.
We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.
We regard our intellectual property as critical to our success. Such intellectual property includes trademarks, domain names, copyrights, know-how and proprietary technologies. We currently rely on trademarks, copyrights, trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. See Business Intellectual Property and Regulations Regulations Related to Intellectual Property Rights. However, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated or circumvented, or such intellectual property will be sufficient to provide us with competitive advantages. We have not completed the trademark registration for Qutoutiao , the name of our flagship mobile application. After we submitted our application material with the relevant authorities, one of our competitors filed an objection on the purported ground that Qutoutiao is similar to a trademark registered by such competitor. We believe such objection is meritless and we have contested the
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objection and submitted the written defense to the Trademark Office in February 2018. However, there can be no assurance that we will be able to prevail and register Qutoutiao as a trademark. See If we do not continue to increase the strength of our brand, we may not be able to maintain current or attract new users and customers for our products and services. In addition, other parties may misappropriate our intellectual property rights, which would cause us to suffer economic or reputational damages. Because of the rapid pace of technological change, nor can we assure you that all of our proprietary technologies and similar intellectual property can be patented in a timely or cost-effective manner, or at all. Furthermore, parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, and we may not be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all.
It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could materially and adversely affect our business, results of operations and financial condition.
We may be subject to intellectual property infringement claims or other allegations by third parties for information or content displayed on, retrieved from or linked to our platform, or delivered to our users, which may materially and adversely affect our business, financial condition and prospects.
We may be subject to intellectual property infringement claims or other allegations by third parties for products or services on our platform, which may materially and adversely affect our business, financial condition and prospects.
Companies in the Internet, technology and media industries are frequently involved in litigation based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of other parties rights. The validity, enforceability and scope of protection of intellectual property rights in Internet-related industries, particularly in China, are uncertain and still evolving. As we face increasing competition and as litigation becomes more common in China in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims.
We allow content providers to upload texts, images and videos on our platform. We have procedures designed to reduce the likelihood that content might be used without proper licenses or third-party consents. However, these procedures may not be effective in preventing the unauthorized posting of copyrighted content. We may face liability for copyright or trademark infringement, defamation, unfair competition, libel, negligence, and other claims based on the nature and content of the materials that are delivered, shared or otherwise accessed through our platform.
Defending intellectual property litigation is costly and can impose a significant burden on our management and employees, and there can be no assurances that favorable final outcomes will 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 platform to reduce the risk of future liability, may materially and adversely affect our business, financial condition and prospects.
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If we fail to implement and maintain an effective system of internal control, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.
We will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the NASDAQ Global Market after the completion of this offering. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year ending December 31, 2019, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our Form 20-F filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. In addition, once we cease to be an emerging growth company as the 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 may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may not reach the same conclusion. Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal control and procedures, and we were never required to evaluate our internal control over financial reporting within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting.
In the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2016 and 2017, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2017. In accordance with U.S. GAAP and financial reporting requirements set forth by the SEC, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our companys annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize key controls over financial reporting and to prepare consolidated financial statements and related disclosures. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting. We and they are required to do so only after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control weaknesses may have been identified. To remedy our identified material weakness subsequent to December 31, 2017, we plan to undertake steps to strengthen our internal control over financial reporting, including: (i) hiring more qualified resources including financial controller, equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, (iii) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements, and (iv) enhancing an internal audit function as well as engaging an external consulting firm to help us assess our compliance readiness under rule 13a-15 of the Exchange Act and improve overall internal control. However, we cannot assure you that we will remediate our material weakness in a timely manner.
Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
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control systems objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal control, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our ADSs could decline and we could be subject to sanctions or investigations by the NASDAQ Global Market, SEC or other regulatory authorities.
The discontinuation of any of the preferential tax treatments available to us in China could materially and adversely affect our results of operations and financial condition.
Under PRC tax laws and regulations, our consolidated VIE, Shanghai Jifen enjoyed, or is qualified to enjoy, certain preferential income tax benefits. The modified Enterprise Income Tax Law, effective on February 24, 2017, or the EIT Law, and its implementation rules generally impose a uniform income tax rate of 25% on all enterprises, but grant preferential treatment to high and new technology enterprises strongly supported by the state, or HNTEs, to enjoy a reduced enterprise tax rate of 15%. According to the relevant administrative measures, to qualify as a HNTE, Shanghai Jifen must meet certain financial and non-financial criteria and complete verification procedures with the administrative authorities. Continued qualification as a HNTE is subject to a three-year review by the relevant government authorities in China, and in practice certain local tax authorities also require annual evaluation of the qualification. In the event the preferential tax treatment for Shanghai Jifen is discontinued or is not verified by the local tax authorities, and the affected entity fails to obtain preferential income tax treatment based on other qualifications such as Advanced Technology Service Enterprise, it will become subject to the standard PRC enterprise income tax rate of 25%. We cannot assure you that the tax authorities will not, in the future, discontinue any of our preferential tax treatments, potentially with retroactive effect.
User growth and engagement depend upon effective interoperation with operating systems, networks, devices and major mobile application distribution channels that we do not control.
We make our products and services available across a variety of mobile operating systems and through major mobile application distribution channels, namely app stores. We are dependent on the interoperability of our products and services with popular devices and mobile operating systems that we do not control, such as Android and iOS. We are also dependent on users ability to find and download our mobile applications through app stores operated by third parties, such as the Apple App Store and app stores operated by mobile phone manufacturers in China such as Huawei, Oppo, Vivo and Xiaomi.
Any changes in such operating systems, devices or mobile application distribution channels that degrade the functionality of our products and services or give preferential treatment to competitive products or services could adversely affect usage of our products and services. Further, if the number of platforms for which we develop our products increases, it will result in an increase in our costs and expenses. In order to deliver high-quality products and services, it is important that our products and services work well with a range of mobile operating systems and devices which we do not control. The various app stores also have their own rules and requirements that our mobile applications need to comply with for them to be included in the respective app stores. Such rules and requirements may change from time to time. There are no assurances that our mobile applications will be able to continue to meet these rules and requirements, which may result in their removal from the relevant app stores. Compliance with these rules and requirements may also prove to be costly or require change to the functionality of our mobile applications that may make them less desirable to users. We may not be successful in developing relationships with key participants in the mobile Internet industry or in developing products or services that operate effectively with these mobile operating systems, devices and mobile application distribution channels. In the event it is difficult for our users to access and use our products and services on their mobile devices, our user
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growth and user engagement could be harmed, and our business, results of operations and financial condition could be adversely affected.
Our operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China.
Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. Moreover, we primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and Internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with Chinas Internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. Internet traffic in China has experienced significant growth during the past few years. Effective bandwidth and server storage at Internet data centers in large cities such as Shanghai are scarce. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the Internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in Internet usage. If we are unable to increase our online content and service delivering capacity accordingly, we may not be able to continuously grow our traffic, and the adoption of our products and services may be hindered, which could adversely impact our business and our share price.
In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and Internet services rise significantly, our business, results of operations and financial condition may be materially and adversely affected. Furthermore, if mobile Internet access fees or other charges to mobile Internet users increase, some users may be prevented from accessing the mobile Internet and thus cause the growth of mobile Internet users to decelerate. Such deceleration may adversely affect our ability to continue to expand our user base and increase our attractiveness to online customers.
Our business, results of operations and financial condition may be harmed by service disruptions, or by our failure to timely and effectively scale and adapt our existing technology and infrastructure.
We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, hardware failure, capacity constraints due to an overwhelming number of people accessing our products and services simultaneously, computer viruses and denial of service, fraud and security attacks. Any disruption or failure in our infrastructure could hinder our ability to handle existing or increased traffic on our platform or cause us to lose content stored on our platform, which could significantly harm our business and our ability to retain existing users and attract new users.
As the number of our users increases and our users generate increasing volumes of user generated videos on our platform, and as we continue to diversify into new content formats, we may be required to expand and adapt our technology and infrastructure to continue to reliably store, analyze and deliver content. It may become increasingly difficult to maintain and improve the performance of our products and services, especially during peak usage times, as our products and services become more complex and our user traffic increases. In addition, because we lease our data center facilities, we cannot be assured that we will be able to expand our data center infrastructure to meet users demand in a timely manner, or on favorable economic terms. If our users are unable to access Qutoutiao or we are not able to make information available rapidly on Qutoutiao , or at all, users may become frustrated and seek other channels for their light entertainment needs, and may not return to Qutoutiao or use Qutoutiao as often in the future, or at all. This would negatively impact our ability to attract users and maintain high level of user engagement as well as our ability to attract advertising customers.
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Legal or administrative proceedings or allegations of impropriety against us or our management could have a material adverse impact on our reputation, results of operation and financial condition.
We and members of our management may be subject to allegations or lawsuits brought by our competitors, individuals, government and regulatory authorities or other persons in the future. Any such lawsuit or allegation, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong-doing by any key member of our management team could harm our reputation and cause our user base to decline and distract our management from day-to-day operations of our company. We cannot assure you that we or key members of our management team will not be subject to lawsuits or allegations of a similar nature in the future. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that an adverse liability resulting from such litigation is probable, we will record a related contingent liability. As additional information becomes available, we will assess the potential liability and revise estimates as appropriate. In 2016, 2017 and the six months ended June 30, 2018, we did not record any contingent liabilities relating to pending litigation. However, when we record or revise our estimates of contingent liabilities in the future, the amount of our estimates may be inaccurate due to the inherent uncertainties relating to litigation. In addition, the outcomes of actions we institute against third parties may not be successful or favorable to us. Litigation and allegations against us or any of our management members, irrespective of their veracity, may also generate negative publicity that significantly harms our reputation, which may materially and adversely affect our user base and our ability to attract content providers and advertising customers. In addition to the related cost, managing and defending litigation and related indemnity obligations can significantly divert our management and the board of directors attention from operating our business. We may also need to pay damages or settle the litigation with a substantial amount of cash. All of these could have a material adverse impact on our reputation, results of operation and financial condition.
We may not have fully paid certain fees and surcharges in the past. As such, we may be subject to further scrutiny by the PRC tax authorities that may result in a finding which may subject us to additional taxes, fees and surcharges and fines or other penalties.
According to the Circular on Issues Relating to Cultural Undertaking Development Fee Policies and Administration of Levying and Collection Relating to Levying VAT in place of Business Tax , which was issued by the Ministry of Finance and the State Administration of Taxation, or the SAT, on March 28, 2016, or Circular 25, the provision of advertising services by advertising media agencies and outdoor advertisement business operators (including entities engaging in distribution, screening, promotion and exhibition of outdoor advertisements and other advertisements, as well as entities engaging in advertisement agency services) in China is subject to a cultural development fee at an applicable rate of 3% of the net advertising revenue. The net advertising revenue refers to, as specified in Circular 25, the balance after deducting advertisement distribution fee paid to other advertising company or advertisement distributor, from the total tax inclusive price and out of pocket expenses obtained from provision of advertising services. Historically, we did not pay cultural development fee and surcharges for the part of our revenue that we did not consider as revenue from advertising services subject to Circular 25. Although we have not been challenged by the tax authorities so far, we may face further scrutiny by the PRC tax authorities that may result in a conclusion that subjects us to additional taxes, fees and surcharges and substantially increases our taxes owed, thereby materially and adversely affecting our results of operations. As a result of not making adequate contributions, we may also be subject to fines or other penalties imposed by the relevant authorities pursuant to applicable laws and regulations.
A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business, results of operations and financial condition.
Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect advertising customers willingness to advertise or consumers willingness to spend on entertainment. Economic conditions in
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China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of the Chinese economy since 2012. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the worlds leading economies, including the United States and China. There have been concerns over unrest in North Korea, Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns over the expected withdrawal of the United Kingdom from the European Union as well as concerns about the economic effect of the tensions in the relationship between the United States, China and neighboring Asian countries. If present Chinese and global economic uncertainties persist, we may have difficulty in attracting advertising customers or spending by consumers on entertainment. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
We have limited business insurance coverage.
Insurance companies in China currently do not offer as extensive an array of insurance products as are offered by insurance companies in more developed economies. We do not have any business liability or disruption insurance coverage for our operations. Any uninsured business disruptions may result in our incurring substantial costs and diversion of resources, which could have an adverse effect on our results of operations and financial condition.
Any catastrophe, including natural catastrophes and outbreaks of health pandemics and other extraordinary events, could disrupt our business operation.
We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures or Internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide our products or services.
Our business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or another contagious disease or condition, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our business, results of operations and financial condition could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.
Risks Relating to Our Corporate Structure
We rely on contractual arrangements with our consolidated VIE and its shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and otherwise materially and adversely affect our business.
We rely on contractual arrangements with our consolidated VIE and its shareholders to operate our business. For a description of these contractual arrangements, see Our History and Corporate Structure Contractual Arrangements among Shanghai Quyun, Shanghai Jifen and Its Shareholders. All of our revenue is attributed to our consolidated VIE and its subsidiaries. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated VIE. If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by our consolidated VIE is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in connection with
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litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in our consolidated VIE, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to the contractual arrangement or ownership by the record holder of the equity interest.
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control over our consolidated VIE, and our ability to conduct our business and our results of operations and financial condition may be materially and adversely affected. See Risks Relating to Doing Business in China There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
The arbitration provisions under these contractual arrangements have no effect on the rights of our shareholders to pursue claims against us under United States federal securities laws.
Furthermore, in connection with the share purchase agreement entered into with The Paper, Shanghai Jifen has agreed to issue equity interests representing 1% of its enlarged share capital to The Paper at a nominal price. See Prospectus Summary Recent Developments. However, The Paper will not be a party to the contractual arrangements that are currently entered into among Shanghai Quyun and Shanghai Jifen and its shareholders. As such, despite the fact that we will still be able to enjoy economic benefits and exercise effective control over Shanghai Jifen and its subsidiaries, in contrast to what we have been granted by other shareholders of Shanghai Jifen under the contractual arrangements, we will not be able to purchase or have The Paper pledge such 1% equity interests in the same manner as agreed under existing contractual arrangements, nor we will be granted the authorization of voting rights over these 1% equity interests. We believe Shanghai Quyun, our wholly-owned PRC subsidiary, still controls and is the primary beneficiary of Shanghai Jifen as it continues to have a controlling financial interest in Shanghai Jifen pursuant to ASC 810-10-25-38A after the issuance of such 1% equity interests. See Our History and Corporate Structure Contractual Arrangements among Shanghai Quyun and Shanghai Jifen and its Shareholders Supplemental Agreement to the Contractual Arrangements in Connection with The Paper.
Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would materially and adversely affect our business.
We, through one of our subsidiaries and a wholly foreign-owned enterprise in the PRC, have entered into a series of contractual arrangements with our consolidated VIE and its shareholders. For a description of these contractual arrangements, see Our History and Corporate Structure Contractual Arrangements among Shanghai Quyun, Shanghai Jifen and Its Shareholders. If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of our consolidated VIE were to refuse to transfer their equity interests in the consolidated VIE to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The
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legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated VIE and relevant rights and licenses held by it which we require in order to operate our business, and our ability to conduct our business may be negatively affected. See Risks Related to Doing Business in China There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
The shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect our business, results of operations and financial condition.
The interests of the shareholders of our consolidated VIE in their capacities as such shareholders may differ from the interests of our company as a whole, as what is in the best interests of our consolidated VIE, including matters such as whether to distribute dividends or to make other distributions to fund our offshore requirement, may not be in the best interests of our company. There can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or those conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause our consolidated VIE and their subsidiaries to breach or refuse to renew the existing contractual arrangements with us.
Currently, we do not have arrangements to address potential conflicts of interest the shareholders of our consolidated VIE may encounter, on the one hand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive option agreement to cause them to transfer all of their equity ownership in our consolidated VIE to a PRC entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the then existing shareholders of our consolidated VIE as provided under the power of attorney agreements, directly appoint new directors of our consolidated VIE. We rely on the shareholders of our consolidated VIE to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our consolidated VIE, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
If the PRC government deems that the contractual arrangements in relation to our consolidated VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign
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investors are not allowed to own more than a 50% equity interest in any PRC company engaging in value-added telecommunications businesses. The primary foreign investor must also have experience and a good track record in providing value-added telecommunications services, or VATS, overseas.
Because we are an exempted company incorporated in the Cayman Islands, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly foreign-owned enterprise in the PRC is a foreign-invested enterprise, or FIE. Accordingly, none of these subsidiaries are eligible to operate VATS business in China. We conduct our business in China through our consolidated VIE and its affiliates. Our PRC subsidiary, Shanghai Quyun, has entered into a series of contractual arrangements with our consolidated VIE and its shareholders, which enable us to (i) exercise effective control over the consolidated VIE, (ii) receive substantially all of the economic benefits of the consolidated VIE, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the consolidated VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of the consolidated VIE and hence consolidate its financial results as our consolidated VIE under U.S. GAAP. For a description of these contractual arrangements, see Our History and Corporate Structure Contractual Arrangements among Shanghai Quyun, Shanghai Jifen and Its Shareholders.
We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, King & Wood Mallesons, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned PRC subsidiary, Shanghai Quyun, our consolidated VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors , or the M&A Rules, and the Telecommunications Regulations and the relevant regulatory measures concerning the telecommunications industry, there can be no assurance that the PRC government authorities, such as the MOFCOM or the MIIT, or other authorities that regulate Internet content providers and other participants in the telecommunications industry, would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.
If our corporate structure and contractual arrangements are deemed by the MIIT or the MOFCOM or other regulators having competent authority to be illegal, either in whole or in part, we may lose control of our consolidated VIE and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
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revoking our business and operating licenses; |
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levying fines on us; |
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confiscating any of our income that they deem to be obtained through illegal operations; |
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shutting down our services; |
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discontinuing or restricting our operations in China; |
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imposing conditions or requirements with which we may not be able to comply; |
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requiring us to change our corporate structure and contractual arrangements; |
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restricting or prohibiting our use of the proceeds from overseas offering to finance our consolidated VIEs business and operations; and |
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taking other regulatory or enforcement actions that could be harmful to our business. |
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Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. See Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law, and its enactment may materially and adversely affect our business, results of operations and financial condition. Occurrence of any of these events could materially and adversely affect our business, results of operations and financial condition. In addition, if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to direct the activities of our consolidated VIE or our right to receive its economic benefits, we would no longer be able to consolidate the financial results of such VIE in our consolidated financial statements. However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned subsidiary in China or our consolidated VIE or its subsidiaries. See Our History and Corporate Structure Contractual Arrangements among Shanghai Quyun, Shanghai Jifen and Its Shareholders.
Contractual arrangements in relation to our consolidated VIE may be subject to scrutiny by the PRC tax authorities and they may determine that our consolidated VIE owes additional taxes, which could negatively affect our results of operations and financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arms length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our wholly-owned PRC subsidiary, Shanghai Quyun, our consolidated VIE and its shareholders were not entered into on an arms length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust their income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Shanghai Quyun or our consolidated VIE for PRC tax purposes, which could in turn increase their tax liabilities without reducing their tax expenses. In addition, if our wholly-owned PRC subsidiary, Shanghai Quyun, requests the shareholders of our consolidated VIE to transfer their equity interests in our consolidated VIE at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject the relevant subsidiary to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our PRC subsidiary, Shanghai Quyun, and consolidated VIE for adjusted but unpaid taxes according to applicable regulations. Our financial position could be materially and adversely affected if the tax liabilities of our PRC subsidiary, Shanghai Quyun, and consolidated VIE increase, or if they are required to pay late payment fees and other penalties.
We may lose the ability to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
Our consolidated VIE holds substantially of all our assets. Under the contractual arrangements, our consolidated VIE may not and its shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior consent. However, in the event that the shareholders of our consolidated VIE breach these contractual arrangements and voluntarily liquidate our consolidated VIE, or our consolidated VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, results of operations and financial condition. If our consolidated VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, results of operations and financial condition.
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If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.
Under PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the SAMR. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.
We have three major types of chops corporate chops, contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiaries and consolidated VIE and its subsidiaries are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiaries and consolidated VIE and its subsidiaries have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.
In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiaries and consolidated VIE and its subsidiaries, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key employees or designated legal representatives could abuse their authority, for example, by binding our subsidiaries and consolidated VIE and its subsidiaries with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representatives misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations, and our business and operations may be materially and adversely affected.
Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law, and its enactment may materially and adversely affect our business, results of operations and financial condition.
The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the major existing laws and regulations governing foreign investment in China. While the MOFCOM solicited comments on this draft, substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the proposed legislation and the extent of revision to the currently proposed draft. The draft Foreign Investment Law, if enacted as proposed, may materially impact the entire legal framework regulating foreign investments in China.
Among other things, the draft Foreign Investment Law purports to introduce the principle of actual control in determining whether a company is considered a foreign invested enterprise, or an FIE. The draft
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Foreign Investment Law specifically provides that entities established in China but controlled by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction, but cleared by the MOFCOM as controlled by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic entity for investment in the restriction category that could appear on any such negative list. In this connection, control is broadly defined in the draft law to cover any of the following summarized categories: (i) holding 50% or more of the voting rights or similar rights and interests of the subject entity; (ii) holding less than 50% of the voting rights or similar rights and interests of the subject entity but having the power to directly or indirectly appoint or otherwise secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to materially influence the board, the shareholders meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entitys operations, financial, staffing and technology matters.
Once an entity is determined to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls within a negative list purported to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts would be required.
The variable interest entity structure, or VIE structure, has been adopted by many PRC-based companies, including us, to conduct business in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law, VIEs that are controlled via contractual arrangements would also be deemed as FIEs, if they are ultimately controlled by foreign investors. For any companies with a VIE structure in an industry category that is in the restriction category that could appear on any such negative list, the existing VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs, in which case, the existing VIE structures will likely to be scrutinized and subject to foreign investment restrictions and approval from the MOFCOM and other supervising authorities such as MIIT. Any operation in the industry category on the negative list without market entry clearance may be considered as illegal.
However, there are significant uncertainties as to how the control status of our consolidated VIE would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain whether any of the businesses that we currently operate or plan to operate in the future through our consolidated VIE would be on the to-be-issued negative list and therefore be subject to any foreign investment restrictions or prohibitions. If our consolidated VIE were deemed as an FIE under the enacted version of the Foreign Investment Law, and any of the businesses that we operate were in the restricted category on the to-be-issued negative list, such determination would materially and adversely affect the value of our ADSs. We also face uncertainties as to whether the enacted version of the Foreign Investment Law and the final negative list would mandate further actions, such as MOFCOM market entry clearance, to be completed by companies with existing VIE structure and whether such clearance can be timely obtained, or at all. If we were not considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign Investment Law, further actions required to be taken by us under the enacted Foreign Investment Law may materially and adversely affect our business, results of operations and financial condition.
In addition, our corporate governance practice may be materially impacted and our compliance costs could increase if we were not considered as ultimately controlled by PRC domestic investors under the Foreign Investment Law, if enacted as currently proposed. For instance, the draft Foreign Investment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that would be required for each investment and alteration of investment specifics, an annual report would be mandatory, and large foreign investors meeting certain criteria would be required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations could potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible could be subject to criminal liabilities.
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Risks Relating to Doing Business in China
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, results of operations and financial condition and may result in our inability to sustain our growth and expansion strategies.
Substantially all of our operations are conducted in the PRC and substantially all of our revenue is sourced from the PRC. Accordingly, our business, results of operations and financial condition are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over Chinas economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our business, results of operations and financial condition could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently materially and adversely affect our business, results of operations and financial condition.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Substantially all of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries and consolidated VIE and its subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
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Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, results of operations and financial condition.
The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.
On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, or the SASAC, the State Administration of Taxation, the SAIC, the CSRC, and the State Administration of Foreign Exchange, or the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors , or the M&A Rules, which came into effect on September 8, 2006 and were amended on June 22, 2009. The M&A Rules include, among other things, provisions that purport to require that an offshore special purpose vehicle that is controlled by PRC domestic companies or individuals and that has been formed for the purpose of an overseas listing of securities through acquisitions of PRC domestic companies or assets to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicles securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles.
While the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC legal counsel, King & Wood Mallesons, that the CSRC approval is not required in the context of this offering because (i) our wholly-owned PRC subsidiary, Shanghai Quyun, was incorporated as a foreign-invested enterprise by means of foreign direct investments rather than by merger with or acquisition of any PRC domestic companies as defined under the M&A Rules, and (ii) there is no statutory provision that clearly classifies the contractual arrangement among our wholly-owned PRC subsidiary, Shanghai Quyun, and our consolidated VIE and its shareholders as transactions regulated by the M&A Rules. There can be no assurance that the relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal counsel. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRCs approval for this offering or if the CSRC or any other PRC government authorities promulgates any interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for this offering, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into the PRC or take other actions that could materially and adversely affect our business, results of operations, financial condition as well as our ability to complete this offering. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered by this prospectus. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring us to obtain their approvals for this offering, we may be unable to obtain waivers of such approval requirements. Any uncertainties and/or negative publicity regarding such approval requirements could materially and adversely affect the trading price of the ADSs.
These regulations also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex. For example, the M&A rules require that the MOFCOM be notified in advance of any change-of-control transaction in which a
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foreign investor takes control of a PRC domestic enterprise if (i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. The approval from the MOFCOM shall be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Mergers, acquisitions or contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance to the MOFCOM when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, or the Prior Notification Rules, issued by the State Council in August 2008 is triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise national defense and security concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise national security concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. See Regulations Regulations Related to Mergers and Acquisitions and Overseas Listings.
PRC laws and regulations mandate complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to make acquisitions in China.
PRC laws and regulations, such as the M&A Rules, and other relevant rules, established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to a merger control security review. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System , or MOFCOM Security Review Rules, effective from September 1, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to a security review by the MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements of offshore transaction. Factors that the MOFCOM considers in its review are whether (i) an important industry is involved, (ii) such transaction involves factors that have had or may have an impact on national economic security and (iii) such transaction will lead to a change in control of a domestic enterprise that holds a well-known PRC trademark or a time-honored PRC brand. If a business of any target company that we plan to acquire falls into the ambit of security review, we may not be able to successfully acquire such company. Complying with the requirements of the relevant regulations to complete any such transaction could be time-consuming, and any required approval process, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries ability to increase their registered capital or distribute profits.
The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents Offshore Investment and Financing and Roundtrip Investment through Special Purpose
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Vehicles , or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as SAFE Circular 75 promulgated by the SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a special purpose vehicle. Pursuant to SAFE Circular 37, control refers to the act through which a PRC resident obtains the right to carry out business operation of, to gain proceeds from or to make decisions on a special purpose vehicle by means of, among others, shareholding entrustment arrangement. SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as change of shareholders of the special purpose vehicle, increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
Mr. Eric Siliang Tan and Mr. Lei Li have completed the SAFE registration pursuant to SAFE Circular 37 in 2017, with Innotech Group Holdings Ltd. and News Optimizer (BV) Ltd. being separately registered as the respective special purpose vehicle. After transferring all shares in Innotech Group Holdings Ltd. to the trust of which himself is also a beneficiary, Mr. Eric Siliang Tan, as well as all the other beneficiaries of the trust who are PRC residents are required to complete relevant registrations pursuant to SAFE Circular 37. We have notified substantial beneficial owners of our ordinary shares and the beneficiaries of the trust who we know are PRC residents of their filing obligation, including the obligation to make updates under SAFE Circular 37, and the beneficial owners have undertaken to complete relevant registrations as soon as such registration is practical with local SAFE. Nevertheless, we may not be continuously aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries ability to distribute dividends to our company. These risks may materially and adversely affect our business, results of operations and financial condition.
Any failure to comply with PRC regulations regarding employee equity incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in equity incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRC residents and who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes an overseas listed company. After our
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company becomes an overseas listed company upon completion of this offering, we and our directors, executive officers and other employees who are PRC residents and who have been granted options will be subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members participating in any equity incentive plans of an overseas publicly listed company who are PRC residents are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. We will make efforts to comply with these requirements upon completion of our initial public offering. However, there can be no assurance that they can successfully register with SAFE in full compliance with the rules. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payment under our equity incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprise in China and limit our wholly-foreign owned enterprises ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our directors and employees under PRC law.
We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements. Any limitation on the ability of our PRC operating subsidiaries to make payments to us could materially and adversely affect our ability to conduct our business.
We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries and on remittances from the consolidated VIE for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our principal operating subsidiaries or the consolidated VIE incur additional debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries and certain other subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.
Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. Certain of our subsidiaries did not have any retained earnings available for distribution in the form of dividends as of December 31, 2017. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.
Limitations on the ability of our consolidated VIE to make remittance to the wholly-foreign owned enterprise and on the ability of our subsidiaries to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.
Under the modified Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of China with de facto management bodies located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at
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the rate of 25% on their global income. De facto management body refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies , or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the de facto management body of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxations general position on how the de facto management body test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term de facto management body.
Dividends payable to our foreign investors and gains on the sale of ADSs or our ordinary shares by our foreign investors may become subject to PRC tax.
Under the modified Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares, and any gain realized from the transfer of our ordinary shares or the ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or ordinary shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions. If we or any of our subsidiaries established outside China are considered a PRC resident enterprise, it is unclear whether holders of ADSs or our ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of ADSs or our ordinary shares by such investors, are deemed as income derived from sources within the PRC and thus are subject to PRC tax, the value of your investment in ADSs or our ordinary shares may decline significantly.
We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.
On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises , or Bulletin 7, which partially replaced and supplemented previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises , or SAT Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin 7, an indirect transfer of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial
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purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, PRC taxable assets include assets attributed to an establishment in China, immovable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a reasonable commercial purpose of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immovable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor is required to declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange. On October 17, 2017, the State Administration of Taxation promulgated the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source , or SAT Circular 37, which became effective on December 1, 2017, and SAT Circular 698 then was repealed with effect from December 1, 2017. SAT Circular 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident enterprises.
There is uncertainty as to the application of Bulletin 7. We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions under Bulletin 7. For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Bulletin 7. As a result, we may be required to expend valuable resources to comply with Bulletin 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may materially and adversely affect our results of operations and financial condition.
We are subject to restrictions on currency exchange.
All of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the current account, which includes dividends, trade and service-related foreign exchange transactions, but not under the capital account, which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiary or consolidated VIE. Currently, certain of our PRC subsidiaries may purchase foreign currency for settlement of current account transactions, including payment of dividends to us, without the approval of the SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities. Since a significant amount of our future revenue and cash flow will be denominated in Renminbi, any
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existing and future restrictions on currency exchange may limit our ability to utilize cash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, and may limit our ability to obtain foreign currency through debt or equity financing for our onshore subsidiary and consolidated VIE.
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of this offering to make loans to our PRC subsidiaries and our consolidated VIE, or to make additional capital contributions to our PRC subsidiaries.
In utilizing the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, through loans or capital contributions. However, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE and capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and registration with other governmental authorities in China.
SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises , or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises , or SAFE Circular 142, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses , or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses , or Circular 45. According to Circular 19, the flow and use of the Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for the issuance of Renminbi entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account , or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue Renminbi entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our consolidated VIE and its subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of our consolidated VIE and its subsidiaries by means of capital contributions given the restrictions on foreign investment in the businesses that are currently conducted by our consolidated VIE and its subsidiaries.
In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary
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government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or any consolidated VIE or future capital contributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or consolidated VIE and its subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign currency, including the proceeds we received from this offering, and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
Substantially all of our revenue and costs are denominated in Renminbi. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant fluctuation of Renminbi against the U.S. dollar may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable in U.S. dollars. To the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount.
The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit report included in our prospectus filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. Because our auditors are located in the Peoples Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.
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Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditors audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our consolidated financial statements.
If additional remedial measures are imposed on the big four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging such firms failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.
Starting in 2011, the Chinese affiliates of the big four accounting firms, including our independent registered public accounting firm, were affected by a conflict between the United States and Chinese law. Specifically, for certain United States listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the United States regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firms performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States listed companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delay or abandonment of this offering, delisting of our ADSs from the NASDAQ Global Market or deregistration
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from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.
Risks Relating to This Offering
There has been no public market for our shares or the ADSs prior to this offering, and you may not be able to resell ADSs at or above the price you paid, or at all.
Prior to this offering, there has been no public market for our shares or the ADSs. We will apply to list the ADSs representing Class A ordinary shares on the NASDAQ Global Market. Our Class A ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for the ADSs does not develop after this offering, the market price and liquidity of the ADSs will be materially and adversely affected.
Negotiations with the underwriters will determine the initial public offering price for the ADSs which may bear no relationship to their market price after the initial public offering. There can be no assurance that an active trading market for the ADSs will develop or that the market price of the ADSs will not decline below the initial public offering price.
The trading price of the ADSs may be volatile, which could result in substantial losses to you.
The trading prices of the ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed companies based in China. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies securities after their offerings, including technology companies and mobile content feed platforms, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of the ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009, the second half of 2011 and in 2015, which may have a material and adverse effect on the trading price of the ADSs.
In addition to the above factors, the price and trading volume of the ADSs may be highly volatile due to multiple factors, including the following:
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regulatory developments affecting us or our industry; |
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announcements of studies and reports relating to the quality of our credit offerings or those of our competitors; |
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changes in the economic performance or market valuations of other mobile content feed platforms; |
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actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results; |
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changes in financial estimates by securities research analysts; |
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conditions in the markets for mobile content feed and targeted advertising services; |
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announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments; |
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additions to or departures of our senior management; |
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fluctuations of exchange rates between the Renminbi and the U.S. dollar; |
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release or expiry of lock-up or other transfer restrictions on our outstanding shares or the ADSs; and |
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sales or perceived potential sales of additional ordinary shares or ADSs. |
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for the ADSs and trading volume could decline.
The trading market for the ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades the ADSs or publishes inaccurate or unfavorable research about our business, the market price for the ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for the ADSs to decline.
As our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.
If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$6.48 per ADS (assuming no exercise of the underwriters option to purchase additional ADSs), representing the difference between our pro forma as adjusted net tangible book value per ADS of US$1.52 as of June 30, 2018 and the assumed initial public offering price of US$8.00 per ADS. In addition, you will experience further dilution to the extent that our Class A ordinary shares are issued upon the vesting of any share awards under our equity incentive plans. All of the Class A ordinary shares issuable under our then equity incentive plans will be issued at a purchase price on a per ADS basis that is less than the public offering price per ADS in this offering. See Dilution for a more complete description of how the value of your investment in ADSs will be diluted upon completion of this offering.
We have not determined a specific use for the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.
We have not determined a specific use for the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that will improve our results of operations or increase the ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.
Because we do not expect to pay cash dividends in the foreseeable future after this offering, you may not receive any return on your investment unless you sell your Class A ordinary shares or ADSs for a price greater than that which you paid for them.
We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. See Dividend Policy. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will
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depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in ADSs and you may even lose your entire investment in ADSs.
Substantial future sales or perceived potential sales of ADSs in the public market could cause the price of the ADSs to decline.
Sales of ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of the ADSs to decline significantly. Upon completion of this offering, we will have 38,733,222 Class A ordinary shares and 34,248,442 Class B ordinary shares outstanding, including 4,000,000 Class A ordinary shares represented by ADSs newly issued in connection with this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. All ADSs representing our Class A ordinary shares sold in this offering will be freely transferable by persons other than our affiliates without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. All of the other ordinary shares outstanding after this offering will be available for sale, upon the expiration of the lock-up periods described elsewhere in this prospectus beginning from the date of this prospectus (if applicable to such holder), subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. Any or all of these ordinary shares may be released prior to the expiration of the applicable lock-up period at the discretion of the designated representatives. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market price of the ADSs could decline significantly. See Shares Eligible for Future Sale Lock-up Agreements.
Certain holders of our ordinary shares after completion of this offering will have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable lock-up periods in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these ADSs in the public market could cause the price of the ADSs to decline significantly.
You, as holders of ADSs, may have fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.
Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under our amended and restated memorandum and articles of association, the minimum notice period required to convene a general meeting will be seven calendar days. When a general meeting is convened, you may not receive sufficient notice of a shareholders meeting to permit you to withdraw your Class A ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send information to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but there can be no assurance that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders meeting.
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Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the U.S. unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.
You may not receive cash dividends if the depositary decides it is impractical to make them available to you.
The depositary will pay cash distributions on the ADSs only to the extent that we decide to distribute dividends on our Class A ordinary shares or other deposited securities, and we do not have any present plan to pay any cash dividends in the foreseeable future. See Dividend Policy. To the extent that there is a distribution, the depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.
Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ Global Market, impose various requirements on the corporate governance practices of public companies.
We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. In addition, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal control and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that companys securities. If we were involved in a class action suit, it could divert a significant amount of our managements attention and other resources from our
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business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could materially and adversely affect our business, results of operations and financial condition.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs.
S&P Dow Jones has recently announced changes to its eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.
Our amended and restated memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders opportunity to sell their shares, including Class A ordinary shares represented by ADSs, at a premium.
We have adopted amended and restated memorandum and articles of association to be effective upon the completion of this offering that contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our ordinary shares and the ADSs may be materially and adversely affected.
Certain judgments obtained against us may not be enforceable.
We are an exempted company incorporated under the laws of the Cayman Islands. Substantially all of our assets are located outside the United States. In addition, substantially all of our directors and executive officers and the experts named in this prospectus reside outside the United States, and most of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against them in the United States, in the event that you believe that your rights have been infringed under the
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U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands, China or other relevant jurisdiction may render you unable to enforce a judgment against our assets or the assets of our directors and officers and/or their assets. For more information regarding the relevant laws of the Cayman Islands and China, see Enforcement of Civil Liabilities.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands (as amended) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities laws than the United States. Some states in the United States, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors will have discretion under the amended and restated memorandum and articles of association expected to be effective immediately prior to completion of this offering, to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the U.S. For a discussion of significant differences between the provisions of the Companies Law (2018 Revision) of the Cayman Islands and the laws applicable to companies incorporated in the U.S. and their shareholders, see Description of Share Capital Differences in Corporate Law.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempted from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempted from certain provisions of the securities rules and regulations in the United States that are applicable to United States domestic issuers, including: (i) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules
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and regulations of the NASDAQ Global Market. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by United States domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
We are an emerging growth company and may take advantage of certain reduced reporting requirements.
We are an emerging growth company, as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to opt out of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We may be or may become a passive foreign investment company, or PFIC, which could result in adverse United States tax consequences to United States investors.
Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill, we do not believe we were a passive foreign investment company (a PFIC), for our most recent taxable year, and we do not expect to become a PFIC in the current taxable year or the foreseeable future, although there can be no assurance in this regard.
In general, we will be a PFIC for any taxable year in which:
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at least 75% of our gross income is passive income, or |
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at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income, which include cash, such as cash raised in this offering. |
The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have calculated the value of our goodwill by taking into account the market value of our ADSs, a decrease in the price of our ADSs may also result in our becoming a PFIC.
In addition, there is uncertainty as to the treatment of our corporate structure and ownership of our consolidated VIE for United States federal income tax purposes. For United States federal income tax purposes, we consider ourselves to own the equity of our consolidated VIE. If it is determined, contrary to our view, that we do not own the equity of our consolidated VIE for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC.
If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, our PFIC status could result in adverse United States federal income tax consequences to you if you are a United States Holder, as defined under Taxation Certain United States Federal Income Tax Considerations. For example, if we are or become a PFIC, you may become subject to increased tax liabilities under United States federal income tax laws and regulations, and will become subject to burdensome reporting requirements. See Taxation Certain United States Federal Income Tax Considerations Passive Foreign Investment Company. There can be no assurance that we will not be a PFIC for the current or any future taxable year.
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As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NASDAQ Global Market corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ Global Market corporate governance listing standards.
We are a company incorporated in the Cayman Islands, and we will apply to list our ADSs on the NASDAQ Global Market. The NASDAQ Global Market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NASDAQ Global Market corporate governance listing standards.
For instance, we are not required to: (i) have a majority of the board be independent; (ii) have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors; or (iii) have regularly scheduled executive sessions with only independent directors each year.
We intend to rely on some of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of the NASDAQ Global Market.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us and our industry. The forward-looking statements are contained principally in the sections entitled Prospectus Summary, Risk Factors, Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations, Industry and Business. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue, is/are likely to or other similar expressions. The forward-looking statements included in this prospectus relate to, among others:
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our goal and strategies; |
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our ability to maintain and strengthen our position as a leader amongst content aggregators in Chinas mobile content feed industry; |
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our expansion plans; |
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our ability to monetize through advertising and other products and services that we plan to introduce; |
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our future business development, financial condition and results of operations; |
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our expectation regarding the use of proceeds from this offering; |
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PRC laws, regulations, and policies relating to the Internet and Internet content providers; and |
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general economic and business conditions. |
This prospectus also contains market data relating to the mobile content feed industry in China, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. This prospectus contains statistical data and estimates published by Analysys International, including a report which we commissioned Analysys International to prepare and for which we paid a fee. This information involves a number of assumptions, estimates and limitations. These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Nothing in such data should be construed as advice. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The mobile content feed industry in China may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may materially and adversely affect our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Risk Factors and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we have referred to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.
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We estimate that we will receive net proceeds from this offering of approximately US$115.4 million, or approximately US$133.3 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and based upon an assumed initial offering price of US$8.00 per ADS (the mid-point of the estimated public offering price range shown on the front cover of this prospectus). A US$1.00 increase (decrease) in the assumed initial public offering price of US$8.00 per ADS would increase (decrease) the net proceeds to us from this offering by US$14.9 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus.
We plan to use the net proceeds of this offering as follows:
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up to approximately US$40.0 million for expanding and enhancing our content offerings; |
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up to approximately US$30.0 million for product development and technology infrastructure; |
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up to approximately US$30.0 million for marketing and promotion of our products and branding; and |
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the balance for general corporate purposes, including potential acquisitions and investments (although we are not currently negotiating any such acquisitions or investments). |
The foregoing represents our intentions as of the date of this prospectus with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of the offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.
To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits.
In utilizing the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiary only through loans or capital contributions and to our consolidated VIE only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiary or make additional capital contributions to our PRC subsidiary to fund its capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. For further information, see Risk Factors Risks Relating to Doing Business in China PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of this offering to make loans to our PRC subsidiaries and our consolidated VIE, or to make additional capital contributions to our PRC subsidiaries.
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Since inception, we have not declared or paid any dividends on our shares. We do not have any present plan to pay any dividends on our Class A ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Any other future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, ADS holders will receive payment to the same extent as holders of our Class A ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See Description of American Depositary Shares. Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.
We are an exempted company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we may rely on dividends distributed by our PRC subsidiaries. Certain payments from our PRC subsidiaries to us may be subject to PRC withholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends.
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The following table sets forth our capitalization as of June 30, 2018 presented on:
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an actual basis; |
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a pro forma basis to reflect the conversion of all our outstanding Series A, Series A1, Series B1, Series B2 and Series B3 convertible redeemable preferred shares into 17,386,092 of our Class A ordinary shares immediately upon the completion of this offering; and |
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a pro forma as adjusted basis to give effect to (i) the conversion of all our outstanding Series A, Series A1, Series B1, Series B2 and Series B3 convertible redeemable preferred shares into 17,386,092 of our Class A ordinary shares immediately upon the completion of this offering, (ii) the issuance of Series C1 convertible redeemable preferred shares and the conversion of all our outstanding Series C1 convertible redeemable preferred shares into 1,595,572 of our Class A ordinary shares immediately upon the completion of this offering, which would result in an increase in ordinary shares and additional paid-in capital of RMB1,055.8 (US$159.6) and RMB392.5 million (US$59.3 million), respectively, (iii) the vesting of 15,937,500 ordinary shares owned by our co-founders that became subsequently restricted on January 3, 2018 upon the completion of this offering into 15,937,500 of our Class B ordinary shares, which would result in immediate recognition of previously unrecognized compensation expense that would be reflected as an increase in accumulated deficit and increase in additional paid-in capital of RMB683.5 million (US$103.3 million), and (iv) the issuance and sale of the Class A ordinary shares in the form of ADSs offered hereby at an assumed initial public offering price of US$8.00 per ADS, the mid-point of the estimated public offering price range shown on the front cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters option to purchase additional ADSs. |
Although 9,500,000 ordinary shares held by a nominee of our equity incentive trust are legally issued and outstanding as disclosed elsewhere in this prospectus, they are accounted for as treasury shares and as a result, are not outstanding on an actual, pro forma or pro forma as adjusted basis from an accounting perspective.
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The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the closing of this offering is subject to adjustment based on the initial public offering price of our ADSs and other terms of this offering determined at pricing. You should read this table in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus.
As of June 30, 2018 | ||||||||||||||||||||||||
Actual | Pro Forma |
Pro Forma
as Adjusted |
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RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Total mezzanine equity |
1,906,926 | 288,182 | | | | | ||||||||||||||||||
Shareholders (deficit)/equity: |
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Ordinary shares (US$0.0001 par value; 482,613,908 shares authorized, 50,000,000 shares issued as of June 30, 2018, 24,562,500 shares outstanding as of June 30, 2018; 41,948,592 shares outstanding on a pro-forma basis as of June 30, 2018 and 63,481,664 outstanding on a pro-forma as adjusted basis as of June 30, 2018) |
16 | 2 | 28 | 4 | 43 | 6 | ||||||||||||||||||
Additional paid-in capital |
202,994 | 30,677 | 2,109,908 | 318,857 | 3,956,349 | 597,891 | ||||||||||||||||||
Treasury stock (US$0.0001 par value; 9,500,000 shares as of June 30, 2018; actual, pro-forma and pro-forma as adjusted basis) |
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Accumulated other comprehensive loss |
(12,537 | ) | (1,895 | ) | (12,537 | ) | (1,895 | ) | (12,537 | ) | (1,895 | ) | ||||||||||||
Accumulated deficit |
(699,610 | ) | (105,727 | ) | (699,610 | ) | (105,727 | ) | (1,383,158 | ) | (209,027 | ) | ||||||||||||
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Total shareholders (deficit)/equity |
(509,137 | ) | (76,943 | ) | 1,397,789 | 211,239 | 2,560,697 | 386,975 | ||||||||||||||||
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Total mezzanine equity and shareholders (deficit)/equity |
1,397,789 | 211,239 | 1,397,789 | 211,239 | 2,560,697 | 386,975 | ||||||||||||||||||
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If you invest in ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per Class A ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders.
Our net tangible book value as of June 30, 2018 was approximately US$209.5 million, or US$8.53 per ordinary share as of that date, and US$2.13 per ADS. Net tangible book value represents the amount of our total consolidated assets (except for the deferred initial public offering costs), less the amount of our intangible assets, goodwill and total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share from our consolidated total assets, after giving effect to (i) the conversion of all of our outstanding Series A, Series A1, Series B1, Series B2 and Series B3 convertible redeemable preferred shares into 17,386,092 of our Class A ordinary shares immediately upon the completion of this offering (ii) the issuance of Series C1 convertible redeemable preferred shares and the conversion of all our outstanding Series C1 convertible redeemable preferred shares into 1,595,572 of our Class A ordinary shares immediately upon the completion of this offering, (iii) the vesting of 15,937,500 ordinary shares owned by our co-founders that became subsequently restricted on January 3, 2018 upon the completion of this offering into 15,937,500 of our Class B ordinary shares and (iv) the issuance and sale by us of ADSs in this offering at an assumed initial public offering price of US$8.00 per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us.
Without taking into account any other changes in net tangible book value after June 30, 2018, other than to give effect to (i) the conversion of all of our outstanding Series A, Series A1, Series B1, Series B2 and Series B3 convertible redeemable preferred shares into 17,386,092 of our Class A ordinary shares immediately upon the completion of this offering (ii) the issuance of Series C1 convertible redeemable preferred shares and the conversion of all our outstanding Series C1 convertible redeemable preferred shares into 1,595,572 of our Class A ordinary shares immediately upon the completion of this offering, (iii) the vesting of 15,937,500 ordinary shares owned by our co-founders that became subsequently restricted on January 3, 2018 upon the completion of this offering into 15,937,500 of our Class B ordinary shares and (iv) the issuance and sale by us of ADSs in this offering at an assumed initial public offering price of US$8.00 per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, and assuming the over-allotment option is not exercised, our adjusted pro forma net tangible book value as of June 30, 2018 would have been US$385.2 million, or US$6.07 per outstanding ordinary share and US$1.52 per ADS. This represents an immediate decrease in net tangible book value of US$2.46 per ordinary share and US$0.61 per ADS to the existing shareholders, and an immediate dilution in net tangible book value of US$25.93 per ordinary share and US$6.48 per ADS to investors purchasing ADSs in this offering.
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The following table illustrates such dilution:
Per
Ordinary Share |
Per ADS | |||||||
Actual net tangible book value per share as of June 30, 2018 |
US$ | 8.53 | US$ | 2.13 | ||||
Adjusted pro forma net tangible book value per share that gives effect to (i) the conversion of all of our outstanding Series A, Series A1, Series B1, Series B2 and Series B3 convertible redeemable preferred shares into Class A ordinary shares (ii) the issuance of Series C1 convertible redeemable preferred shares and the conversion of all our outstanding Series C1 convertible redeemable preferred shares into Class A ordinary shares, (iii) the vesting of 15,937,500 restricted ordinary shares owned by our co-founders and (iv) this offering |
US$ | 6.07 | US$ | 1.52 | ||||
Assumed initial public offering price |
US$ | 32.00 | US$ | 8.00 | ||||
Dilution in net tangible book value per ordinary share and per ADS to new investors in the offering |
US$ | 25.93 | US$ | 6.48 |
The amount of dilution in net tangible book value to new investors in this offering set forth above is calculated by deducting (i) the adjusted pro forma net tangible book value after giving effect to the conversion of our outstanding Series A, Series A1, Series B1, Series B2 and Series B3 convertible redeemable preferred shares, the issuance and conversion of Series C1 convertible redeemable preferred shares, the vesting of restricted shares and this offering from (ii) the assumed initial public offering price.
The following table summarizes, on a pro forma as adjusted basis as of June 30, 2018, the differences between existing shareholders, including holders of our Series A, Series A1, Series B1, Series B2, Series B3 and Series C1 convertible redeemable preferred shares and 15,937,500 restricted ordinary shares owned by the Companys co-founders, and the new investors with respect to the number of Class A ordinary shares (including ordinary shares represented by ADSs) purchased from us, the total consideration paid and the average price per Class A ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include Class A ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.
A US$1.00 increase (decrease) in the assumed public offering price of US$8.00 per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) would increase (decrease) our adjusted pro forma net tangible book value by US$14.9 million, the adjusted pro forma net tangible book value per ordinary share and per ADS by US$0.23 per ordinary share and US$0.06 per ADS and the dilution in net tangible book value per ordinary share and per ADS to new investors in this offering by US$3.77 per ordinary share and US$0.94 per ADS, assuming no change to the number of ADS offered by us as set forth on the front cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.
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The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.
The discussion and tables above take into consideration the conversion into ordinary shares immediately upon the completion of this offering all of our outstanding Series A, Series A1, Series B1, Series B2, Series B3 and Series C1 convertible redeemable preferred shares, and they do not take into consideration of (i) 9,500,000 ordinary shares held by a nominee of our equity incentive trust and accounted for as treasury shares, (ii) Class A ordinary shares issuable to The Paper or convertible from the Series C2 preferred shares issuable to The Paper, as the case may be and (iii) any outstanding share options. As of the date of this prospectus, there are also (i) 2,873,598 ordinary shares issuable upon exercise of outstanding share options under our 2018 equity incentive plan and (ii) 90,543 ordinary shares available for future issuance upon the exercise of future grants under our 2018 equity incentive plan. If any of these options are exercised, there will be further dilution to new investors.
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Substantially all of our operations are conducted in the PRC and substantially all of our revenue is denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.6171 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on June 29, 2018. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus 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. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On August 24, 2018, the noon buying rate for Renminbi was RMB6.8030 to US$1.00.
The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods presented. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. For all dates and periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.
Noon Buying Rate | ||||||||||||||||
Period |
Period End | Average (1) | Low | High | ||||||||||||
(RMB per US$1.00) | ||||||||||||||||
2013 |
6.0537 | 6.1412 | 6.2438 | 6.0537 | ||||||||||||
2014 |
6.2046 | 6.1704 | 6.2591 | 6.0402 | ||||||||||||
2015 |
6.4778 | 6.2869 | 6.4896 | 6.1870 | ||||||||||||
2016 |
6.9430 | 6.6549 | 6.9580 | 6.4480 | ||||||||||||
2017 |
6.5063 | 6.7350 | 6.9575 | 6.4773 | ||||||||||||
2018 |
||||||||||||||||
January |
6.2841 | 6.4232 | 6.5263 | 6.2841 | ||||||||||||
February |
6.3329 | 6.3182 | 6.3471 | 6.2649 | ||||||||||||
March |
6.2726 | 6.3174 | 6.3565 | 6.2685 | ||||||||||||
April |
6.3325 | 6.2967 | 6.3340 | 6.2655 | ||||||||||||
May |
6.4096 | 6.3701 | 6.4175 | 6.3325 | ||||||||||||
June |
6.6171 | 6.4651 | 6.6235 | 6.3850 | ||||||||||||
July |
6.8038 | 6.7164 | 6.8102 | 6.6123 | ||||||||||||
August (through August 24) |
6.8030 | 6.8519 | 6.9330 | 6.8030 |
Source: Federal Reserve Statistical Release
(1) |
Annual averages are calculated using the average of the rates on the last business day of each month during the relevant year. Monthly averages are calculated using the average of the daily rates during the relevant month. |
74
ENFORCEMENT OF CIVIL LIABILITIES
We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a lesser extent. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.
Substantially all of our operations are conducted in the PRC, and substantially all of our assets are located in the PRC. In addition, most of our directors and officers are residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce in United States courts judgments obtained in United States courts based on the civil liability provisions of the United States federal securities laws against us and our officers and directors.
We have appointed Cogency Global Inc. as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.
Walkers, our counsel as to Cayman Islands law, and King & Wood Mallesons, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would, respectively, (1) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States and (2) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
Walkers has informed us that the uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Walkers has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.
In addition, Walkers has advised us that there is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that such judgment (i) is final and conclusive, (ii) is one in respect of which the foreign court had jurisdiction over the defendant according to Cayman Islands conflict of law rules; (iii) is either for a liquidated sum not in respect of penalties or taxes or a fine or similar fiscal or revenue obligations or, in certain circumstances, for in personam non-money relief, and (iv) was neither obtained in a manner, nor is of a kind enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.
75
King & Wood Mallesons has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. King & Wood Mallesons has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between China and the United States governing the recognition and enforcement of judgments as of the date of this prospectus, including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts.
76
OUR HISTORY AND CORPORATE STRUCTURE
We launched our flagship mobile application, Qutoutiao , in June 2016. We primarily operate our business through our consolidated VIE, Shanghai Jifen, and its subsidiaries. To facilitate financing offshores, we incorporated Qtech Ltd. in July 2017. Through a series of transactions, Qtech Ltd. then became our ultimate holding company. On July 5, 2018, Qtech Ltd. was renamed to Qutoutiao Inc.
We currently conduct our business primarily through the following subsidiaries, consolidated VIE and its subsidiaries:
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Shanghai Jifen, our consolidated VIE, primarily engages in the operation of our Qutoutiao mobile application; |
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Shanghai Xike Information Technology Service Co., Ltd., or Shanghai Xike, primarily engages in the operation of our Qudoupai mobile application; |
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Anhui Zhangduan Internet Technology Co., Ltd., or Anhui Zhangduan, primarily engages in content management; |
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Beijing Qukandian Internet Technology Co., Ltd., or Beijing Qukandian, primarily engages in content procurement; |
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Shanghai Dianguan Internet Technology Co., Ltd., or Shanghai Dianguan, our subsidiary in China acquired in February 2018, primarily provides advertising services; and |
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Kubik Technology Pte. Ltd., our subsidiary in Singapore, primarily engages in the operation of our mobile application launched in late 2017 targeted towards the Southeast Asia market. |
In April 2018, we entered into a share purchase agreement to purchase 100% equity interests of an audio/video content platform for a total cash consideration of RMB70.0 million (US$10.6 million). As of June 30, 2018, we have paid RMB43.0 million (US$6.5 million). We currently expect to complete the transaction by the end of 2018.
Our Corporate Structure
The following diagram illustrates our corporate structure with our principal subsidiaries, consolidated VIE and its subsidiaries as of the date of this prospectus. Except as otherwise specified, equity interests depicted in this diagram are held as to 100%. The relationships between Shanghai Quyun, Shanghai Jifen and its shareholders as illustrated in this diagram are governed by contractual arrangements and do not constitute equity ownership.
77
In connection with the share purchase agreement entered into with The Paper, Shanghai Jifen has agreed to issue equity interests representing 1% of its enlarged share capital to The Paper. As such, on August 27, 2018, Shanghai Jifen, together with its existing shareholders, entered into an agreement with The Paper pursuant to which Shanghai Jifen will increase its registered capital and The Paper will, at a nominal price, subscribe for the newly issued equity interests representing 1% of Shanghai Jifens enlarged share capital. We believe Shanghai Quyun, our wholly-owned PRC subsidiary, still controls and is the primary beneficiary of Shanghai Jifen as it continues to have a controlling financial interest in Shanghai Jifen pursuant to ASC 810-10-25-38A after the issuance of such 1% equity interests.
(1) |
Mr. Eric Siliang Tan, Mr. Lei Li, Tianjin Shanshi Technology L.P. and Shanghai Xihu Cultural Transmission Co., Ltd. held 45%, 15%, 20% and 20% equity interest in Shanghai Jifen, respectively. |
Both Tianjin Shanshi Technology L.P. and Shanghai Xihu Cultural Transmission Co., Ltd. are controlled by Mr. Eric Siliang Tan. |
Upon the completion of The Papers subscription of the newly issued equity interests in Shanghai Jifen, Mr. Eric Siliang Tan, Mr. Lei Li, Tianjin Shanshi Technology L.P. and Shanghai Xihu Cultural Transmission Co., Ltd. will hold 44.55%, 14.85%, 19.80% and 19.80% equity interest in Shanghai Jifen, respectively. |
(2) |
We acquired Shanghai Dianguan in February 2018. |
(3) |
Include Anhui Zhangduan, Beijing Qukandian, Shanghai Xike, Shanghai Tuile Information Technology Service Co., Ltd. and Tianjin Quwen Internet Technology Co., Ltd. |
Contractual Arrangements among Shanghai Quyun and Shanghai Jifen and its Shareholders
PRC laws and regulations place certain restrictions on foreign investment in and ownership of internet-based businesses. Accordingly, we conduct our operations mainly through Shanghai Jifen, or the consolidated
78
VIE, and its subsidiaries. We effectively control the consolidated VIE through a series of contractual arrangements with the consolidated VIE, its shareholders and Shanghai Quyun, as described in more detail below, which collectively enables us to:
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exercise effective control over our consolidated VIE and its subsidiaries; |
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receive substantially all the economic benefits of our consolidated VIE; and |
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have an exclusive option to purchase all or part of the equity interests in the equity interest in or all or part of the assets of Shanghai Jifen when and to the extent permitted by PRC law. |
As a result of these contractual arrangements, we are the primary beneficiary of Shanghai Jifen and its subsidiaries. We have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP.
In the opinion of King & Wood Mallesons, our PRC legal counsel:
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the ownership structures of Shanghai Quyun and our consolidated VIE in China, both currently and immediately after giving effect to this offering, do not and will not violate any applicable PRC law, regulation, or rule currently in effect; and |
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the contractual arrangements among Shanghai Quyun, Shanghai Jifen and its shareholders governed by PRC laws are valid, binding and enforceable in accordance with their terms and applicable PRC laws, rules, and regulations currently in effect, and will not violate any applicable PRC law, regulation, or rule currently in effect. |
However, we have been further advised by our PRC legal counsel, King & Wood Mallesons, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations. In particular, in January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of actual control in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, VIEs would also be deemed as FIEs, if they are ultimately controlled by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not arrived at a position on what actions will be taken with respect to the existing companies with the variable interest entity structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft may be signed into law, if at all, and whether any final version would have substantial changes from the draft. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See Risk Factors Risks Relating to Our Corporate Structure.
All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. For additional information, see Risk Factors Risks Relating to Our Corporate Structure Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business. Such arbitration provisions have no effect on the rights of our shareholders to pursue claims against us under United States federal securities laws.
The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Quyun, our consolidated VIE, Shanghai Jifen, and its subsidiaries, and the shareholders of Shanghai Jifen.
79
Agreements that Provide Us with Effective Control over Our Consolidated VIE and Its Subsidiaries
Equity Interest Pledge Agreement . Pursuant to the equity interest pledge agreement, each shareholder of Shanghai Jifen has pledged all of such shareholders equity interest in Shanghai Jifen as a security interest to respectively guarantee Shanghai Jifen and its shareholders performance of their obligations under the relevant contractual arrangement, which include the voting rights proxy agreement, loan agreement, exclusive technology and consulting service agreement and exclusive option agreement. If Shanghai Jifen or any of its shareholders breaches their contractual obligations under these agreements, Shanghai Quyun, as pledgee, will be entitled to certain rights regarding the pledged equity interests. In the event of such breaches, Shanghai Quyuns rights include being paid in priority with the equity interest of Shanghai Jifen based on the monetary valuation that such equity interest is converted into or from the proceeds from auction or sale of the equity interest. Each of the shareholders of Shanghai Jifen agrees that, during the term of the equity interest pledge agreements, such shareholder shall not transfer the equity interest, place or permit the existence of any security interest or other encumbrance on the equity interest or any portion thereof, without the prior written consent of Shanghai Quyun, except for the performance of the relevant contractual agreement. Shanghai Quyun is entitled to receive dividends distributed on the equity interest of Shanghai Jifen, and Shanghai Jifens shareholders may receive dividends distributed on the equity interest only with prior written consent of Shanghai Quyun. The equity interest pledge agreement remains effective until all obligations under the relevant contractual agreements have been fully performed and all secured indebtedness have been fully paid.
Voting Rights Proxy Agreement . Pursuant to the voting rights proxy agreement, each shareholder of Shanghai Jifen has irrevocably authorized Shanghai Quyun to exercise the following rights relating to all equity interests held by such shareholder in Shanghai Jifen during the term of the voting rights proxy agreement: to act on behalf of such shareholder as its exclusive agent and attorney with respect to all matters concerning its shareholding in Shanghai Jifen, including without limitation: (1) proposing and attending shareholders meetings of Shanghai Jifen; (2) exercising all the shareholders voting rights such shareholder is entitled to under the laws of China and Shanghai Jifens articles of association, including but not limited to designate and appoint on behalf of such shareholder the directors and other senior management members of Shanghai Jifen. During the period that each of Shanghai Quyun and Shanghai Jifen remains in operation, the voting rights proxy agreement shall be irrevocable and continuously effective and valid for ten years from the execution date unless otherwise agreed to by all parties. Upon the expiration of the original term or any renewal term of the voting rights proxy agreement, the agreement shall be automatically renewed for an additional one year period unless, at least 30 days prior to the expiration date, Shanghai Quyun provides notice to the other parties to the voting rights proxy agreement not to renew the agreement.
Agreement that Allow Us to Receive Economic Benefits from our Consolidated VIE and Its Subsidiaries
Exclusive Technology and Consulting Service Agreement . Under the exclusive technology and consulting service agreement, Shanghai Jifen appoints Shanghai Quyun as its exclusive services provider to provide Shanghai Jifen with comprehensive technical support, business support and relevant consulting services during the term of the exclusive technology and consulting service agreement. In return, Shanghai Quyun is entitled to receive a monthly service fee from Shanghai Jifen at an amount to be determined at the sole discretion of Shanghai Quyun. Shanghai Quyun shall have exclusive and proprietary ownership, rights and interests in any and all intellectual properties arising out of or created during the performance of the exclusive technology and consulting service agreement. Unless terminated in accordance with the provisions of the exclusive technology and consulting service agreement or in accordance with other agreements between the parties, the exclusive cooperation agreement shall remain effective for ten years from the execution date of the exclusive technology and consulting service agreement. Upon the expiration of the exclusive technology and consulting cooperation agreement, Shanghai Quyun has the sole discretion to extend the term of the agreement to any date by written notice to Shanghai Jifen. Shanghai Quyun may terminate the agreement at any time by providing 30 days prior written notice to Shanghai Jifen.
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Agreements that Provides Us with the Option to Purchase the Equity Interest in Shanghai Jifen
Loan Agreemen t. Shanghai Quyun entered into a loan agreement with each shareholder of Shanghai Jifen in October 2017. Pursuant to the loan agreement, Shanghai Quyun has granted an interest-free loan to each shareholder of Shanghai Jifen, the amount of which are to be separately agreed to between Shanghai Quyun and Shanghai Jifen in writing, which may only be used by such shareholder for the purpose of capital contribution to Shanghai Jifen as to its business development. Shanghai Quyun also has agreed to provide Shanghai Jifen with unconditional financial support pursuant to the loan agreement. The shareholders of Shanghai Jifen pledge all of its share equity in Shanghai Jifen as security for the outstanding loans. Unless other agreed by all the parties of the loan agreement, the term of the loan is the earlier of ten years, the end of Shanghai Quyuns operation or the end of Shanghai Jifens operation. Shanghai Quyun also has the right to accelerate the date of maturity of such loans at its sole discretion. Upon maturity, Shanghai Quyun or its designated third party may purchase the equity interests in Shanghai Jifen held by the shareholders of Shanghai Jifen at a price equal to the lowest allowable amount for a similar transaction pursuant to relevant PRC laws, rules and regulations instead of cash repayment. The loan agreement also prohibits the shareholders of Shanghai Jifen from entering into any transactions that could materially affect the assets, liabilities, interests or operations of Shanghai Jifen or its subsidiaries without prior written consent from Shanghai Quyun.
Exclusive Option Agreement. Pursuant to the exclusive option agreement, each of Shanghai Jifens shareholders has irrevocably granted Shanghai Quyun an unconditional and exclusive right to purchase, or designate one or more persons agreed by the board of directors of Shanghai Quyun to purchase the equity interests in Shanghai Jifen then held by its shareholders once or at multiple times at any time in part or in whole at Shanghai Quyuns sole and absolute discretion to the extent permitted by PRC laws. The purchase price of the optioned interests shall be the minimum price permitted under PRC laws when Shanghai Quyun exercises equity interest purchase option. The shareholders of Shanghai Jifen have agreed the consideration received from the exercise of such equity interest purchase option shall be used to settle the outstanding loans under the loan agreement as described above and/or transferred back to Shanghai Quyun as permitted under relevant PRC laws. Shanghai Jifen and its shareholders have agreed that, without Shanghai Quyuns prior written consent, Shanghai Jifen shall not, among others, in any manner supplement, change or amend the articles of association of Shanghai Jifen; increase or decrease its registered capital, change its structure of registered capital in other manners; sell, transfer, mortgage or dispose of in any other manner any legal or beneficial interest in the equity interests in Shanghai Jifen held by such shareholders, or allow the encumbrance thereon; entry into, inherit, or tolerant any existence of any loan or other debtor-creditor relationship with any third party; enter into any material contract outside the ordinary course of business; merge with any other persons or make any investments; or distribute dividends. The initial term of this agreement is ten years, which will be renewed at the sole discretion of Shanghai Quyun. Shanghai Quyun may terminate the agreement at any time by providing 30 days prior written notice to Shanghai Jifen.
Supplemental Agreement to the Contractual Arrangements in Connection with The Paper
In August 2018, Shanghai Quyun and Shanghai Jifen and its shareholders entered into a supplemental agreement as to the contractual arrangements as described above. The parties acknowledge and confirm, through the supplemental agreement, that the total equity interests held by existing shareholders in Shanghai Jifen would be 99% of Shanghai Jifens enlarged share capital upon completion of The Papers subscription of the newly issued equity interests.
As The Paper will not be a party to the existing contractual arrangements, it will not be bound by such arrangements nor will have any obligation to perform or assume any liability under the contractual arrangements. In contrast to what we have been granted by other shareholders of Shanghai Jifen under the contractual arrangements, the voting rights over these 1% equity interests will be exercised by The Paper itself and we will not be granted the authorization of the voting rights over such 1% equity interests. Accordingly, we will not be able to request The Paper to sell or pledge such 1% equity interests in the way agreed under existing contractual arrangements.
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Despite the above, as agreed by The Paper, Shanghai Jifen and its shareholders, (i) The Paper will not have any economic interest such as dividend over these 1% equity interests of Shanghai Jifen; and (ii) unless otherwise instructed and approved by the competent governmental authority, The Paper may not transfer its equity interests in Shanghai Jifen to any third party. Based on the foregoing, we believe Shanghai Quyun, our wholly-owned PRC subsidiary, still controls and is the primary beneficiary of Shanghai Jifen as it continues to have a controlling financial interest in Shanghai Jifen pursuant to ASC 810-10-25-38A after the issuance of such 1% equity interests.
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated statements of comprehensive loss data and selected consolidated statements of cash flows data for the years ended December 31, 2016 and 2017 and selected consolidated balance sheets data as of December 31, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.
The following selected consolidated statements of comprehensive loss data and summary consolidated of cash flow data for the six months ended June 30, 2017 and 2018 and the selected consolidated balance sheet data as of June 30, 2018 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.
Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and the information under Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere in this prospectus.
Selected Consolidated Statements of Comprehensive Loss Data
Year Ended December 31, |
Six Months Ended
June 30, |
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2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands, except for percentages, share and per share data) | ||||||||||||||||||||||||||||||||
Revenues (1) : |
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Advertising revenue |
57,880 | 8,747 | 512,883 | 77,509 | 106,348 | 16,072 | 669,871 | 101,233 | ||||||||||||||||||||||||
Other revenue |
74 | 11 | 4,170 | 630 | 925 | 140 | 47,964 | 7,249 | ||||||||||||||||||||||||
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Net revenues |
57,954 | 8,758 | 517,053 | 78,139 | 107,273 | 16,212 | 717,835 | 108,482 | ||||||||||||||||||||||||
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Cost of revenues (2) |
7,178 | 1,085 | 76,481 | 11,558 | 10,322 | 1,560 | 145,993 | 22,063 | ||||||||||||||||||||||||
Gross profit |
50,776 | 7,673 | 440,572 | 66,581 | 96,951 | 14,652 | 571,842 | 86,419 | ||||||||||||||||||||||||
Operating expenses (2) : |
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Research and development expenses |
2,627 | 397 | 15,317 | 2,315 | 2,974 | 450 | 62,912 | 9,508 | ||||||||||||||||||||||||
Sales and marketing expenses |
54,633 | 8,256 | 494,724 | 74,765 | 114,069 | 17,238 | 836,941 | 126,481 | ||||||||||||||||||||||||
General and administrative expenses |
4,427 | 669 | 25,947 | 3,921 | 8,885 | 1,343 | 193,886 | 29,301 | ||||||||||||||||||||||||
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Total operating expenses |
61,687 | 9,322 | 535,988 | 81,001 | 125,928 | 19,031 | 1,093,739 | 165,290 | ||||||||||||||||||||||||
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Loss from operations (3) |
(10,911 | ) | (1,649 | ) | (95,416 | ) | (14,420 | ) | (28,977 | ) | (4,379 | ) | (521,897 | ) | (78,871 | ) | ||||||||||||||||
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Interest income |
51 | 8 | 673 | 103 | 307 | 46 | 5,389 | 815 | ||||||||||||||||||||||||
Foreign exchange related gains, net |
| | | | | | 2,098 | 317 | ||||||||||||||||||||||||
Others, net |
(2 | ) | (1 | ) | (17 | ) | (3 | ) | (5 | ) | (1 | ) | (26 | ) | (4 | ) | ||||||||||||||||
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Loss before income tax expenses |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
Income tax expenses |
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Net loss |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
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Accretion to convertible redeemable preferred shares redemption value |
| | (6,012 | ) | (909 | ) | | | (58,964 | ) | (8,911 | ) |
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Year Ended December 31, |
Six Months Ended
June 30, |
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2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands, except for percentages, share and per share data) | ||||||||||||||||||||||||||||||||
Deemed dividend to preferred shareholders |
| | | | | | (1,916 | ) | (290 | ) | ||||||||||||||||||||||
Net loss attributable to Qutoutiao Inc.s ordinary shareholders |
(10,862 | ) | (1,642 | ) | (100,772 | ) | (15,229 | ) | (28,675 | ) | (4,334 | ) | (575,316 | ) | (86,944 | ) | ||||||||||||||||
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Net loss |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
Other comprehensive income/(loss) |
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Foreign currency translation adjustment, net of nil tax |
| | 25 | 3 | | | (12,562 | ) | (1,899 | ) | ||||||||||||||||||||||
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Comprehensive loss attributable to Qutoutiao Inc. |
(10,862 | ) | (1,642 | ) | (94,735 | ) | (14,317 | ) | (28,675 | ) | (4,334 | ) | (526,998 | ) | (79,642 | ) | ||||||||||||||||
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Net loss per share attributable to Qutoutiao Inc. |
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Basic and diluted |
(0.45 | ) | (0.07 | ) | (4.19 | ) | (0.63 | ) | (1.19 | ) | (0.18 | ) | (23.74 | ) | (3.59 | ) | ||||||||||||||||
Weighted average number of ordinary shares used in per share calculation: |
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Basic and diluted |
24,062,500 | 24,062,500 | 24,062,500 | 24,062,500 | 24,062,500 | 24,062,500 | 24,238,324 | 24,238,324 | ||||||||||||||||||||||||
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(1) |
Revenue from transactions with related parties are set forth below for the periods indicated: |
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Advertising revenue |
| | | | | | 1,183 | 179 | ||||||||||||||||||||||||
Other revenue |
| | | | | | 5,293 | 800 |
(2) |
Cost of revenues and operating expenses from transactions with related parties are set forth below for the periods indicated: |
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Cost of revenues |
120 | 18 | 484 | 73 | 145 | 22 | 3,368 | 509 | ||||||||||||||||||||||||
Research and development expenses |
166 | 25 | 220 | 33 | 66 | 10 | | | ||||||||||||||||||||||||
Sales and marketing expenses |
74 | 11 | 950 | 144 | 284 | 43 | 4,918 | 743 | ||||||||||||||||||||||||
General and administrative expenses |
2,664 | 403 | 15,134 | 2,287 | 6,401 | 967 | | |
(3) |
We recognized share-based compensation expenses of RMB0.4 million (US$60.0 thousand), RMB3.4 million (US$0.5 million), RMB0.4 million (US$53.9 thousand) and RMB185.4 million (US$28.0 million) in 2016, 2017 and the six months ended June 30, 2017 and 2018, respectively. Share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders |
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that became restricted pursuant to share restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018. |
Selected Consolidated Balance Sheets Data
As of December 31, | As of June 30, | |||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Cash and cash equivalents |
269 | 41 | 278,458 | 42,082 | 1,766,299 | 266,929 | ||||||||||||||||||
Short-term investments |
12,370 | 1,869 | 129,770 | 19,611 | 10,300 | 1,557 | ||||||||||||||||||
Total current assets |
29,758 | 4,497 | 466,208 | 70,455 | 1,873,051 | 283,062 | ||||||||||||||||||
Total assets |
29,896 | 4,518 | 476,581 | 72,023 | 1,942,816 | 293,605 | ||||||||||||||||||
Registered users loyalty payable |
1,023 | 155 | 20,977 | 3,170 | 137,038 | 20,710 | ||||||||||||||||||
Accrued liabilities related to user loyalty programs |
24,509 | 3,704 | 187,003 | 28,261 | 149,011 | 22,519 | ||||||||||||||||||
Total liabilities |
41,087 | 6,209 | 311,246 | 47,037 | 545,027 | 82,366 | ||||||||||||||||||
Mezzanine equity |
| | 273,895 | 41,392 | 1,906,926 | 288,182 | ||||||||||||||||||
Total shareholders deficits |
(11,191 | ) | (1,691 | ) | (108,560 | ) | (16,406 | ) | (509,137 | ) | (76,943 | ) |
Selected Consolidated Statements of Cash Flows Data
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | RMB | US$ | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Selected Consolidated Cash Flows Data: |
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Net cash provided by/(used in) operating activities |
12,719 | 1,923 | 132,226 | 19,983 | 2,037 | (141,738 | ) | (21,420 | ) | |||||||||||||||||||
Net cash (used in)/provided by investing activities |
(12,523 | ) | (1,893 | ) | (121,919 | ) | (18,425 | ) | (1,700 | ) | 70,043 | 10,585 | ||||||||||||||||
Net cash provided by financing activities |
| | 272,121 | 41,124 | | 1,501,333 | 226,887 | |||||||||||||||||||||
Net increase in cash and cash equivalents |
196 | 30 | 282,428 | 42,682 | 337 | 1,429,638 | 216,052 | |||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (4,239 | ) | (641 | ) | | 58,203 | 8,796 | |||||||||||||||||||
Cash and cash equivalents at beginning of the period |
73 | 11 | 269 | 41 | 269 | 278,458 | 42,082 | |||||||||||||||||||||
Cash and cash equivalents at the end of the period |
269 | 41 | 278,458 | 42,082 | 606 | 1,766,299 | 266,930 |
Non-GAAP Financial Measure
We use adjusted net loss, which is an non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net loss represents net loss before share-based compensation expenses. We believe that such non-GAAP financial measure help identify underlying trends in our business that could otherwise be distorted by the effect of such share-based compensation expenses that we include in cost of revenues, total operating expenses and net loss. In particular, share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share
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restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018. We believe that such non-GAAP financial measure also provides useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.
The non-GAAP financial measure is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. It should not be considered in isolation or construed as alternatives to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measure in light of the most directly comparable GAAP measures, as shown below. The non-GAAP financial measure presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measure differently, limiting its usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
The table below sets forth a reconciliation of the non-GAAP financial measure for the periods indicated:
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Net loss |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
Add: share-based compensation expenses: |
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Cost of revenues |
1 | 0 | 942 | 142 | 99 | 15 | 1,429 | 216 | ||||||||||||||||||||||||
Research and development |
149 | 23 | 1,317 | 200 | 140 | 21 | 6,720 | 1,016 | ||||||||||||||||||||||||
Sales and marketing |
35 | 5 | 939 | 142 | 99 | 15 | 3,394 | 513 | ||||||||||||||||||||||||
General and administrative |
209 | 32 | 181 | 27 | 19 | 3 | 173,840 | 26,271 | ||||||||||||||||||||||||
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Adjusted net loss |
(10,468 | ) | (1,582 | ) | (91,381 | ) | (13,809 | ) | (28,318 | ) | (4,280 | ) | (329,053 | ) | (49,727 | ) | ||||||||||||||||
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Key Operating Metrics
We regularly review a number of key operating metrics to evaluate our business and measure our performance. The table below sets forth key operating metrics relating to the Qutoutiao mobile application.
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in millions, except for daily time spent data) | ||||||||||||||||||||||||||||||||
Installed users as of the end of the period |
3.7 | 9.7 | 16.3 | 26.4 | 46.3 | 73.1 | 97.9 | 133.0 | ||||||||||||||||||||||||
Average MAUs during the period |
1.7 | 3.9 | 5.7 | 8.8 | 16.0 | 24.2 | 27.8 | 32.1 | ||||||||||||||||||||||||
Average DAUs during the period |
0.5 | 1.5 | 2.5 | 3.9 | 6.4 | 9.5 | 11.3 | 12.3 | ||||||||||||||||||||||||
Average daily time spent per DAU during the period (minutes) |
27.2 | 29.0 | 31.3 | 33.7 | 34.0 | 32.3 | 32.5 | 47.3 |
In June 2018, our MAUs were approximately 39.3 million, average DAUs were approximately 14.1 million and average daily time spent per DAU was approximately 56.0 minutes. In July 2018, our MAUs were
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approximately 48.8 million, average DAUs were approximately 17.1 million and average daily time spent per DAU was approximately 55.6 minutes. In August 2018, our MAUs were approximately 62.0 million, average DAUs were approximately 21.1 million and average daily time spent per DAU was approximately 55.4 minutes. As of August 31, 2018, the total installed users was approximately 181.1 million.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this prospectus, particularly in the section titled Risk Factors.
Overview
Our flagship mobile application, Qutoutiao , meaning fun headlines in Chinese, aggregates articles and short videos from professional media and freelancers and presents customized feeds to users. These feeds are optimized in real time based on each users profile, behavior and social relationships through our proprietary AI-powered content recommendation engine. Since its launch in June 2016, Qutoutiao has rapidly gained popularity, reaching MAUs of approximately 62.0 million, average DAUs of approximately 21.1 million and average daily time spent per DAU of approximately 55.4 minutes in August 2018.
Our rapidly increasing and engaged user base has provided us with strong monetization potentials. We currently generate revenue primarily by providing advertising services. We place advertisements on the main pages, topic pages as well as content pages of our mobile applications. When we first commenced our business, we collaborated with various third-party advertising platforms to place advertisements on our mobile applications. We later engaged an advertising agent who operates a programmatic advertising system to serve as our sales agent in selling our advertising solutions to other advertising agents and end advertisers. To enhance our platforms monetization capabilities, we acquired such advertising agent in February 2018. We will utilize the programmatic advertising system of such advertising agent to power our advertising solutions. We will also begin to sell our advertising solutions to advertising agents or advertising customers directly. We believe that our differentiated user base represents an attractive demographic target for businesses.
We also generate revenue by providing agent and platform service between the advertising customers and third-party advertising platforms and through the marketplace on Qutoutiao . We plan to capture additional monetization opportunities by continuing to expand our existing content formats and introducing new content formats. These opportunities include paid content such as literature, casual games, animation and comics, as well as content-driven e-commerce and live streaming products.
Our net revenues have increased rapidly from RMB58.0 million (US$8.8 million) in 2016 to RMB517.1 million (US$78.1 million) in 2017, and further from RMB107.3 million (US$16.2 million) in the six months ended June 30, 2017 to RMB717.8 million (US$108.5 million) in the same period in 2018. As we focused on growing our user base and enhancing our services, we have incurred net losses of RMB10.9 million (US$1.6 million) in 2016, RMB94.8 million (US$14.3 million) in 2017, RMB28.7 million (US$4.3 million) in the six months ended June 30, 2017 and RMB514.4 million (US$77.7 million) in the same period in 2018. Adjusted net losses, which represented net losses before share-based compensation expenses, were RMB10.5 million (US$1.6 million) in 2016, RMB91.4 million (US$13.8 million) in 2017, RMB28.3 million (US$4.3 million) in the six months ended June 30, 2017 and RMB329.1 million (US$49.7 million) in the same period in 2018. Share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018.
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Key Factors Affecting Our Results of Operations
We believe the most significant drivers affecting our revenues are user engagement and our ability to monetize. On the other hand, we believe the most significant drivers affecting our costs and expenses are those related to our user acquisition and engagement efforts and content procurement.
User Base and Level of Engagement
Our fast growing and engaged user base has contributed to our ability to attract advertising customers to our advertising services and the significant growth in our revenue. Our average MAUs increased from approximately 3.9 million in the three months ended December 31, 2016 to approximately 24.2 million in the three months ended December 31, 2017 and further to approximately 32.1 million in the three months ended June 30, 2018. Our average DAUs increased from approximately 1.5 million in the three months ended December 31, 2016 to approximately 9.5 million in the three months ended December 31, 2017 and further to approximately 12.3 million in the three months ended June 30, 2018. A continued increase in the number of DAUs and the amount of time they spent on our platform will lead to increase in the number of advertisements served and potential clicks and impressions from users. User engagement in turn will depend on the quality and attractiveness of content on our platform and our continued ability to fine tune our understanding of users to deliver content that is most likely to interest them. Our ability to maintain high user engagement will also be affected by our planned introduction of new content formats, users reception to them and the growth in the volume of such content. Users engagement to these new content formats will help not only in driving demand for our advertising services but creating further monetization opportunities.
Our Ability to Monetize
Our current financial condition and results of operations depend substantially on the demand for our advertising solutions. Demand for our advertising solutions will be affected by the size of our user base and their continued engagement. Such demand will also be dependent on our ability to enhance the efficacy of our advertising solutions through technology and an even deeper understanding of our user base. In addition, we have started to operate our programmatic advertising system and focus on the direct sale of our advertising solutions in February 2018. Our ability to successfully expand the number of advertising agents or advertising customers and increase their advertising spending on our programmatic advertising system will affect our revenue growth.
We also intend to further monetize our user base by introducing paid content and other products and services in the future. The number of users that will pay for such future paid content and other products and services, and the average spending by such users, are affected by various factors, including the volume and diversity of the content that we offer, or the interest among our users in paying for such content, products or services. Changes to any of the above or other factors, many of which are beyond our control, will affect our revenues.
Cost of User Acquisition and Engagement
Our user loyalty programs have contributed to the significant growth in the number of our installed users and high user engagement. The cost of users loyalty points associated with our user loyalty programs is recognized as sales and marketing expenses. A majority of such cost of users loyalty points is currently associated with engagement-based loyalty points to promote user engagement and retention, with the remainder related to referral-based loyalty points to acquire new installed users. We design our user loyalty programs to ensure the cost of the loyalty points provided is appropriate in relation to the growth of our business. Our ability to ensure that our user loyalty programs will continue to advance strong growth in user base and keep user engaged at a manageable cost level will affect our results of operations. Furthermore, we have started to and will continue to explore other online and offline marketing channels to acquire users and promote brand awareness and supplement our user loyalty programs. Such efforts may affect our overall user acquisition and engagement costs in the future.
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Content Procurement
We encourage our content providers to actively contribute quality content that will resonate with our users by implementing a system in which fees paid to them are related to the number of views of the content they contribute. These fees are accounted for as part of our cost of revenues. Our ability to balance our content procurement cost while ensuring content providers continue to contribute content that is attractive to users will affect our results of operations going forward. We will also need to manage the relevant content cost while taking into account its revenue potential to ensure value are realized. Furthermore, as additional content formats are introduced, we may enter into different content procurement arrangements with content providers, affecting our content procurement cost structure.
Seasonality
We generate most of our revenues from providing advertising services. The advertising industry in China experiences seasonality. Historically, advertising spending and user activities on our platform tend to be the lowest in the first quarter of each calendar year due to long holidays around the Lunar New Year, during which users tend to spend more time with family and celebrations offline and less time online, including on our mobile applications. In addition, advertising customers, such as those in the e-commerce industry, may also reduce its advertising spending during the holidays around the Lunar New Year due to reduced consumer spending or reduced or suspended production and logistics activities by manufacturers or other service providers. We believe this seasonality affects our quarterly results especially our results of operations in the first quarter of each year. For example, our net revenues in the first quarter may be lower than those of other quarters, and may experience a slower rate of growth or even decline from the last quarter in the prior year. On the other hand, our cost of revenues and operating expenses as a percentage of our net revenues may be higher in the first quarter as compared to other quarters, which may lead to lower profit margin.
Key Operating Metrics
We regularly review a number of key operating metrics to evaluate our business and measure our performance. The table below sets forth key operating metrics relating to the Qutoutiao mobile application.
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in millions, except for daily time spent data) | ||||||||||||||||||||||||||||||||
Installed users as of the end of the period |
3.7 | 9.7 | 16.3 | 26.4 | 46.3 | 73.1 | 97.9 | 133.0 | ||||||||||||||||||||||||
Average MAUs during the period |
1.7 | 3.9 | 5.7 | 8.8 | 16.0 | 24.2 | 27.8 | 32.1 | ||||||||||||||||||||||||
Average DAUs during the period |
0.5 | 1.5 | 2.5 | 3.9 | 6.4 | 9.5 | 11.3 | 12.3 | ||||||||||||||||||||||||
Average daily time spent per DAU during the period (minutes) |
27.2 | 29.0 | 31.3 | 33.7 | 34.0 | 32.3 | 32.5 | 47.3 |
In June 2018, our MAUs were approximately 39.3 million, average DAUs were approximately 14.1 million and average daily time spent per DAU was approximately 56.0 minutes. In July 2018, our MAUs were approximately 48.8 million, average DAUs were approximately 17.1 million and average daily time spent per DAU was approximately 55.6 minutes. In August 2018, our MAUs were approximately 62.0 million, average DAUs were approximately 21.1 million and average daily time spent per DAU was approximately 55.4 minutes. As of August 31, 2018, the total installed users was approximately 181.1 million.
We view installed users as a measure of the size of our user base, and we view average MAUs and average DAUs as measures of the size of active user base and user engagement. Installed users, average MAUs and
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average DAUs rapidly increased during the periods presented. Increases in these measures were mainly driven by our user loyalty programs, light entertainment-oriented content and content recommendation technology.
We monitor average daily time spent per DAU to measure the level of user engagement on our platform. Average daily time spent per DAU increased from approximately 29 minutes in the three months ended December 31, 2016 to approximately 32 minutes in the three months ended December 31, 2017 and further to approximately 47 minutes in the three months ended June 30, 2018, which reflects an increase in user stickiness.
Key Components of Our Results of Operations
Revenues
We generate most of our revenues from advertising services. The following table sets forth a breakdown of our revenues, both in absolute amount and as a percentage of our net revenues, for the periods indicated.
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | |||||||||||||||||||||||||||||||||||||
(in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: |
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Advertising revenue |
57,880 | 8,747 | 99.9 | 512,883 | 77,509 | 99.2 | 106,348 | 16,072 | 99.1 | 669,871 | 101,233 | 93.3 | ||||||||||||||||||||||||||||||||||||
Other revenue |
74 | 11 | 0.1 | 4,170 | 630 | 0.8 | 925 | 140 | 0.9 | 47,964 | 7,249 | 6.7 | ||||||||||||||||||||||||||||||||||||
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Net revenues |
57,954 |
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8,758 |
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100.0 | 517,053 | 78,139 | 100.0 | 107,273 | 16,212 | 100.0 | 717,835 | 108,482 | 100.0 | ||||||||||||||||||||||||||||||||||
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We charge our advertising services mainly on a cost-per-click, or CPC, basis, and in certain circumstances, on a cost-per-thousand-impressions, or CPM, basis.
Baidu, which is our largest customer and operates a third-party advertising platform, contributed 69.9%, 43.7%, 75.8% and 12.1% of our net revenues in 2016 and 2017 and the six months ended June 30, 2017 and 2018, respectively. Baidu also accounted for 92.6%, 59.8% and 30.5% of our accounts receivable as of December 31, 2016 and 2017 and June 30, 2018, respectively. To enhance our platforms monetization capabilities, we acquired an advertising agent in February 2018 that operates a programmatic advertising system. We expect this system will allow us to reduce our reliance on third-party advertising platforms such as Baidu. Prior to our acquisition of this advertising agent in February 2018, we engaged such advertising agent to serve as our sales agent in selling our advertising solutions to other second-tier advertising agents and end advertisers. In 2017 and the six months ended June 30, 2018, 26.2% and 78.2% of our net revenues, respectively, were generated through this advertising agent. These second-tier advertising agents and end advertisers are our customers as they select our mobile applications to place their advertisement and our performance obligation is to provide the underlying advertising display services to them. We recognize advertising revenue from this advertising agent on a gross basis as clicks are delivered on a CPC basis. We also engage certain other advertising agents in selling our advertising solutions to our advertising customers.
In addition, we collaborate with various third-party advertising platforms to place advertisements on our platform. Under our arrangements with these advertising platforms, these advertising platforms are our customers and our performance obligation is to provide traffic to these advertising platforms. As such, we recognize advertising revenue on the net amount as impressions or clicks are delivered on a CPC or CPM basis. We have started to reduce the utilization of third-party advertising platforms in 2017 and we expect such collaboration to continue to decrease in the future as we further increase direct sales of our advertising solutions. However, certain of these third-party advertising platforms were historically our largest customers and may continue to contribute a significant portion of our net revenues in the near future.
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Other revenue primarily represents revenues from providing agent and platform service between the advertising customers and third-party advertising platforms by facilitating the advertising customers to select third-party advertising platforms to display their advertisements. We recognize revenue from the advertising customers based on the net amount equal to certain agreed percentage of the gross revenue earned by the third-party advertising platforms when impressions or clicks are successfully delivered. Other revenue also includes revenues from the sale of merchandise by suppliers through the marketplace on Qutoutiao . A user pays the purchase price for a merchandise to us. We deduct our commission related to the merchandise and remit the remainder to the relevant merchandise supplier.
Cost of Revenues
The following table sets forth the components of our cost of revenues, both in absolute amount and as a percentage of our net revenues, for the periods indicated.
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | |||||||||||||||||||||||||||||||||||||
(in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenues (1) : |
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Content procurement costs |
| | | 22,862 | 3,455 | 4.4 | 2,293 | 347 | 2.1 | 57,281 | 8,657 | 8.0 | ||||||||||||||||||||||||||||||||||||
Bandwidth costs |
1,947 | 294 | 3.4 | 16,682 | 2,521 | 3.2 | 3,322 | 502 | 3.1 | 35,268 | 5,330 | 4.9 | ||||||||||||||||||||||||||||||||||||
Cultural development fee and surcharges |
1,950 |
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295 |
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3.4 | 17,020 | 2,572 | 3.3 | 3,680 | 556 |
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16,586 |
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2,507 |
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2.3 | ||||||||||||||||||||||||||||
Others |
3,281 | 496 | 5.7 | 19,917 | 3,010 | 3.9 | 1,027 | 155 | 1.0 | 36,858 | 5,569 | 5.1 | ||||||||||||||||||||||||||||||||||||
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Total cost of revenues |
7,178 | 1,085 | 12.5 | 76,481 | 11,558 | 14.8 | 10,322 | 1,560 | 9.6 | 145,993 | 22,063 | 20.3 | ||||||||||||||||||||||||||||||||||||
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(1) |
Cost of revenues from transactions with related parties are set forth below for the periods indicated: |
Content Procurement Costs . Represent fees paid to content providers. We did not incur such content procurement costs in 2016. Content available through our platform at that time were primarily derived from publicly available sources as we were still in the process of developing our online content upload system for content providers to upload content. Fees paid to content providers relate to the number of views of content contributed by the respective content providers. However, the relevant arrangements with each content provider may differ.
Bandwidth Costs . Represent fees we pay to service providers for hosting our servers and for other telecommunications services.
Cultural Development Fee and Surcharges . Represent cultural development fee and certain surcharges levied. The provision of advertising services in China is subject to a cultural development fee at an applicable rate of 3% of net advertising revenue. The cultural development fee and surcharges recorded were
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RMB2.0 million (US$ 0.3 million), RMB17.0 million (US$2.6 million), RMB3.7 million (US$0.6 million) and RMB16.6 million (US$2.5 million) in 2016 and 2017 and the six months ended June 30, 2017 and 2018, respectively.
Others . Our other costs of revenues include salaries and benefits for our personnel responsible for our revenues, including share-based compensation. Personnel responsible for our revenues include our content management personnel, and we expect the number of such employees to increase in the future given the significant growth in the amount of content on our platform. Our other costs of revenues also include commissions paid to advertising agents to serve as our sales agents, direct costs incurred relating to our content editing cost, rental cost, depreciation and other miscellaneous costs. We do not expect to incur commissions paid to advertising agents in the future after our acquisition of an advertising agent in February 2018.
Operating Expenses
The following table sets forth our operating expenses, both in absolute amount and as a percentage of our net revenues, for the periods indicated.
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | |||||||||||||||||||||||||||||||||||||
(in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses (1) : |
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Research and development expenses |
2,627 | 397 | 4.5 | 15,317 | 2,315 | 3.0 | 2,974 | 450 | 2.8 | 62,912 | 9,508 | 8.8 | ||||||||||||||||||||||||||||||||||||
Sales and marketing expenses |
54,633 | 8,256 | 94.3 | 494,724 | 74,765 | 95.7 | 114,069 | 17,238 | 106.3 | 836,941 | 126,481 | 116.6 | ||||||||||||||||||||||||||||||||||||
General and administrative expenses |
4,427 | 669 | 7.6 | 25,947 | 3,921 | 5.0 | 8,885 | 1,343 | 8.3 | 193,886 | 29,301 | 27.0 | ||||||||||||||||||||||||||||||||||||
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Total operating expenses |
61,687 |
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9,323 |
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106.4 | 535,988 | 81,001 | 103.7 | 125,928 | 19,031 | 117.4 | 1,093,739 | 165,290 | 152.4 | ||||||||||||||||||||||||||||||||||
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(1) |
Operating expenses from transactions with related parties are set forth below for the periods indicated: |
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | |||||||||||||||||||||||||||||||||||||
(in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
Research and development-related party |
166 | 25 | 0.3 | 220 | 33 | 0.0 | 66 | 10 | 0.1 | | | | ||||||||||||||||||||||||||||||||||||
Sales and marketing-related party |
74 | 11 | 0.1 | 950 | 144 | 0.2 | 284 | 43 | 0.3 | 4,918 | 743 | 0.7 | ||||||||||||||||||||||||||||||||||||
General and administrative-related party |
2,664 | 403 | 4.6 | 15,134 | 2,287 | 2.9 | 6,401 | 967 | 6.0 | | | |
Research and Development Expenses . Our research and development expenses consist primarily of salaries and benefits for our research and development personnel, including share-based compensation, rental expenses and deprecation related to properties and servers utilized by our research and development personnel.
Sales and Marketing Expenses . Our sales and marketing expenses consist primarily of cost of users loyalty points associated with our user loyalty programs which increased from RMB50.9 million (US$7.7 million) in 2016 to RMB419.6 million (US$63.4 million) in 2017, representing 87.8% and 81.2% of our net revenues in 2016 and 2017, respectively, and increased from RMB105.4 million (US$15.9 million) in the six months ended June 30, 2017 to RMB611.9 million (US$92.5 million) in the same period in 2018, representing 98.2% and
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85.3% of our net revenues in the six months ended June 30, 2017 and 2018, respectively, and increased from RMB273.3 million (US$41.3 million) in the three months ended March 31, 2018 to RMB338.6 million (US$51.2 million) in the three months ended June 30, 2018, representing 115.6% and 70.3% of our net revenues in the three months ended March 31 and June 30, 2018, respectively. Among the cost of users loyalty points associated with our user loyalty programs, approximately 68.6% and 71.6% was related to user engagement in 2017 and the six months ended June 30, 2018, respectively, and the remainder was related to user acquisition. Such percentage was 70.4% and 72.6% in the three months ended March 31 and June 30, 2018, respectively.
Cost of users loyalty points is comprised of amount of loyalty points redeemed by users during a specific period and the change in estimated liabilities as to accumulated unredeemed loyalty points during such period. Pursuant to our user agreements, we can adjust at any time the minimum amount of loyalty points that must be earned before users can redeem their loyalty points. As such, change to such threshold in any specific period will affect the amount of sales and marketing expenses recorded during such period. For additional information on the accounting policy of our loyalty programs, see Critical Accounting Policies, Judgments and Estimates Loyalty Programs.
Our sales and marketing expenses also consist of advertising and marketing expenses through third-party online and offline channels to acquire users and to promote brand awareness, which increased from RMB171.5 thousand (US$25.9 thousand) in 2016 to RMB41.9 million (US$6.3 million) in 2017, representing 0.3% and 8.1% of our net revenues in 2016 and 2017, respectively, and increased from RMB2.0 million (US$0.3 million) in the six months ended June 30, 2017 to RMB184.4 million (US$27.9 million) in the same period in 2018, representing 1.9% and 25.7% of our net revenues in the six months ended June 30, 2017 and 2018, respectively, and increased from RMB72.5 million (US$11.0 million) in the three months ended March 31, 2018 to RMB111.9 million (US$16.9 million) in the three months ended June 30, 2018, representing 30.7% and 23.3% of our net revenues in the three months ended March 31 and June 30, 2018, respectively. Other sales and marketing expenses include short mobile messaging expenses and salaries and benefits for our sales and marketing personnel, including share-based compensation.
General and Administrative Expenses . Our general and administrative expenses consist primarily of salaries and benefits for our general and administrative personnel, including share-based compensation, office expense and professional service fees. Share-based compensation expenses accounted for as general and administrative expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018.
Taxation
Cayman Islands
We are an exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to tax based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. In addition, upon payment of dividends by us to our shareholders, no Cayman Islands withholding tax will be imposed.
Hong Kong
Our subsidiary incorporated in Hong Kong is subject to Hong Kong profit tax at a rate of 16.5%. No Hong Kong profit tax has been levied as we did not have assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose a withholding tax on dividends.
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China
Generally, our subsidiaries and consolidated VIE and its subsidiaries in China are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entitys global income as determined under PRC tax laws and accounting standards.
Our revenues are subject to value-added tax at a rate of approximately 6%. The provision of advertising services in China is subject to a cultural development fee at an applicable rate of 3% of the net advertising revenue.
Any dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority, in which case the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%.
If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a resident enterprise under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%.
Critical Accounting Policies, Judgments and Estimates
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.
The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. When reviewing our consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.
Consolidation of Variable Interest Entities
Foreign ownership in companies providing Internet-content is subject to certain restrictions under PRC laws and regulations. To comply with the PRC laws and regulations, we, through our wholly-owned subsidiary, Shanghai Quyun, entered into a set of contractual arrangements with Shanghai Jifen and its shareholders. The contractual arrangements between Shanghai Quyun, Shanghai Jifen and the shareholders of Shanghai Jifen allow us to:
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exercise effective control over Shanghai Jifen whereby having the power to direct Shanghai Jifens activities that most significantly drive the economic results of Shanghai Jifen; |
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receive substantially all of the economic benefits and residual returns, and absorb substantially all the risks and expected losses from Shanghai Jifen as if it was their sole shareholder; and |
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have an exclusive option to purchase all of the equity interests in Shanghai Jifen. |
Our consolidated financial statements include the financial statements of our company, our subsidiaries, our consolidated VIE and its subsidiaries for which we are the primary beneficiary. All transactions and balances among our company, our subsidiaries, our consolidated VIE and its VIEs subsidiaries have been eliminated upon consolidation.
A subsidiary is an entity in which we, directly or indirectly, control more than one half of the voting powers; or has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
A consolidated VIE is an entity in which we, or our subsidiaries, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity. In determining whether we or our subsidiaries are the primary beneficiary, we considered whether it has the power to direct activities that are significant to the consolidated VIEs economic performance, and also our obligation to absorb losses of the consolidated VIE that could potentially be significant to the consolidated VIE or the right to receive benefits from the consolidated VIE that could potentially be significant to the consolidated VIE. We hold all the variable interests of the consolidated VIE and its subsidiaries, and has been determined to be the primary beneficiary of the consolidated VIE.
In accordance with the contractual agreements among the Shanghai Quyun, Shanghai Jifen and the shareholders of Shanghai Jifen, we have power to direct activities of the consolidated VIE, and can have assets transferred out of the consolidated VIE. Therefore, we consider that there is no asset in the consolidated VIE that can be used only to settle obligations of the consolidated VIE, except for registered capital and PRC statutory reserves of the consolidated VIE and its subsidiaries, as of December 31, 2016 and 2017 and June 30, 2018 . As the consolidated VIE was incorporated as limited liability company under the PRC Company Law, the creditors do not have recourse to the general credit of our company for all the liabilities of the consolidated VIE.
As we are conducting our businesses in the PRC through Shanghai Jifen and its subsidiaries, we will, if needed, provide such support on a discretion basis in the future, which could expose us to a loss.
We believe that the contractual arrangements among Shanghai Quyun, Shanghai Jifen and the shareholders of Shanghai Jifen are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements and if the shareholders of our consolidated VIE were to reduce their interest in us, their interests may diverge from ours and that may potentially increase the risk that they would seek to act contrary to the contractual terms.
Our ability to control the consolidated VIE also depends on the voting rights proxy agreement and our company, through Shanghai Quyun, has to vote on all matters requiring shareholder approval in the consolidated VIE. As noted above, we believe this voting rights proxy agreement is legally enforceable but may not be as effective as direct equity ownership.
Revenue Recognition
Our main services are the provision of advertising services. We derive revenue from performing specified actions, i.e. a CPM or CPC basis. Revenue is recognized on a CPM or CPC basis as impressions or clicks are delivered. We also provide other services and recognizes revenue when the service is rendered. Our revenue is presented either on a gross or net basis which is further discussed below.
We recognize revenue when or as the control of the goods or services is transferred to the customer.
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Gross Advertising Revenue
Before February 2018, in the arrangement with a particular advertising agent, the advertising agent served as our sales agent in selling our advertising solutions to other second-tier advertising agents and end advertisers. These second-tier advertising agents and end advertisers are our customers as they select our mobile applications to place their advertisement and our performance obligation is to provide the underlying advertising display services to them. The advertising agent earns a commission of 2% of the advertising revenue in the arrangement in return for providing bidding system for placement on Qutoutiao , which we recognize as cost of revenues. We control the advertising services as a principal and recognize advertising revenue on a gross basis as impressions or clicks are delivered.
We receive refundable advance payments from advertising customers through this advertising agent and reconcile the advertising revenue with this advertising agent on a weekly basis. If the advance payment deposited in us is not ultimately used for the advertisement on Qutoutiao , we refund the advance payment back to advertising customers through this advertising agent.
In February 2018, we acquired 100% equity interests of this advertising agent. After the acquisition, we effectively provide advertising services to these advertising customers directly and continue to recognize revenue on a gross basis as impressions or clicks are delivered.
We also engaged advertising customers through other third-party advertising agents where revenue was accounted for on a gross basis in 2017. Those arrangements have been terminated as of December 31, 2017.
In addition, we also provide advertising service to advertising customers directly and recognize revenue on a gross basis as impressions or clicks are delivered.
Net Advertising Revenue
We also provide advertising services to third-party advertising platforms. In the arrangement with these advertising platforms, they are our customers and our performance obligation is to provide traffic to these advertising platforms. Therefore, we recognize advertising revenue based on the net amount as impressions or clicks are delivered.
We reconcile and settle the advertising revenue with these advertising platforms on a monthly basis.
Other Revenue
We also provide agent and platform service by facilitating the advertising customers to select third-party advertising platforms to display their advertisements. We recognize revenue from the advertising customers based on the net amount equal to certain agreed percentage of the gross revenue earned by the third-party advertising platforms when impressions or clicks are successfully delivered.
Our Qutoutiao mobile application includes an online marketplace which users can access and purchase merchandise offered by third-party merchandise suppliers. The merchandise suppliers are our customers as these suppliers are the primary obligor to provide goods and delivery service to the users and our performance obligation is to provide matching service for the suppliers. A user pays the purchase price for a merchandise to us. We deduct our commission related to the merchandise and remit the remainder to the relevant merchandise supplier. We act as an agent in this transaction and recognize revenue when the matching service is completed. We settle the payment with suppliers on a monthly basis.
Loyalty Programs
We offer loyalty programs for registered users of our mobile applications Qutoutiao and Quduopai to enhance user engagement and loyalty and incentivize word-of-mouth referrals. Through the programs, we give
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users loyalty points and in certain cases cash credits for taking specific actions. Such actions primarily include referring new users to register on Qutoutiao or through the viewing or sharing of content, providing valuable comments and encourage inactive users to continue to use Qutoutiao . The cost of users loyalty points is recognized as sales and marketing expenses in the consolidated statements of operations and comprehensive loss.
On Qutoutiao , registered users can redeem earned loyalty points, which is in a form of cash credits reflecting the same amount of cash value, upon request. We offer our users the flexibility to choose a number of options to redeem loyalty points. The redemption options include (i) online cash out, when the cash credits balance exceeding a certain cash out threshold or at a lower cash out threshold if users logged onto Qutoutiao for a certain number of consecutive days and (ii) purchasing merchandise through the marketplace on Qutoutiao .
On Quduopai , users can also earn cash credits, reflecting the same amount of cash value, that they may cash out when the cash credits balance exceeds a certain threshold. Before April 9, 2018, users on Quduopai could also earn loyalty points, which could only be exchanged into coupons issued to us by a third-party that can then be used to purchase products or service on that third-partys group buying website. We do not recognize any expenses or liability for those loyalty points earned on Quduopai since we do not bear any additional cost to settle these loyalty points awarded to users before April 9, 2018. Starting from April 9, 2018, users on Qudoupai who are not content providers can earn and redeem earned loyalty points, which is in a form of cash credits reflecting the same amount of cash value, upon request. Users can cash out the loyalty points when the cash credits balance exceeds a certain cash out threshold. All the outstanding loyalty points granted to users on Quduopai were converted to cash credits upon the enacting of the revised loyalty program in April 2018. As a result, we recorded costs of RMB62.4 thousand in sales and marketing expenses in April 2018.
Our experience indicates that a certain portion of loyalty points is never redeemed by our registered users, which refers to as a breakage. The liability accrued for the loyalty point is reduced by the estimated breakage that is expected to occur. We estimate breakage based upon analysis of relevant loyalty point history and redemption pattern as well as considering the expiration period of the loyalty points under our user agreements. When assessing breakage, each users account is categorized into certain pools based on different ranges of outstanding loyalty points, and then further grouped into certain sub-groups on the basis of inactive days on our platform. The past loyalty point redemption pattern in those sub-groups was used to estimate the respective breakage for the outstanding loyalty points in each sub-group at each period end. For the years ended December 31, 2016 and 2017, total costs related to the users loyalty points granted amounted to RMB52.8 million and RMB527.8 million, respectively, and total loyalty points redeemed amounted to RMB13.9 million and RMB244.9 million, respectively. For the six months ended June 30, 2017 and 2018, total costs related to the users loyalty points granted amounted to RMB130.9 million and RMB707.1 million, respectively, and total loyalty points redeemed amounted to RMB48.3 million and RMB548.1 million, respectively. We also reversed the cleared rewards of users inactive for 90 consecutive days that amounted to RMB171.8 million in the six months ended June 30, 2018 which were recorded as a reduction of sales and marketing expenses. As of December 31, 2016 and 2017 and June 30, 2018, the total estimated breakage not accrued approximated to RMB13.3 million, RMB113.7 million and RMB22.8 million, respectively, and the decrease (which results in an increase in the overall accrued loyalty liability) was due to the lower cash out threshold and the reversal for the cleared rewards of the users inactive for 90 consecutive days.
Once the accumulated unredeemed loyalty points for an individual user exceeds the cash out threshold, we reclassify the balance into registered users loyalty payable in consolidated balance sheet as a monetary liability and reverses the amount of breakage originally assumed, if any. The registered users loyalty payable is derecognized only if (1) we pay the user and is relieved of our obligation for the liability by paying the users includes delivery of cash or (2) the user legally release us from the liability.
The users agreement provides the loyalty points expire after one month. However, we may, at our discretion, provide loyalty points to our users even after one month expiration period. Starting from May 2018, rewards to our users are cleared from their accounts and cannot be redeemed when users are inactive for 90 consecutive days.
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Share-based Compensation and Valuation of Our Ordinary Shares
We grant share options to eligible employees and account for these share-based awards in accordance with ASC 718 Compensation Stock Compensation.
Share-based awards are measured at the grant date fair value of the awards and recognized as expenses using straight-line vesting method, net of estimated forfeitures, if any, over the requisite service period, which is the vesting period. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the rate to reflect changes in facts and circumstances, if any. We revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates. Grant date fair values of the awards are calculated using the binomial option pricing model with the assistance from an independent appraiser. The binomial option pricing model is used to measure the value of the awards. The determination of the fair value is affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected volatility, risk-free interest rates, exercise multiple, expected dividend yield and expected term.
We also granted options under our share incentive plans to the employees of other companies controlled by one of our co-founders. Such companies have provided administrative services to us, and we pay a fee charged at market rate for the services received, so no compensation expense is recognized for these grants. The fair value of these options is recognized as dividends to the co-founder in full at grant date.
In addition, we grant share options to consultants and account for these share-based awards in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. We measure these options based on fair value of the options which are determined by using the binomial option pricing model. These options are measured as of the earlier of the date at which either: (1) commitment for performance by the non-employee has been reached; or (2) the non-employees performance is complete. Subsequent to the completion of the performance, the share-based award is assessed in accordance with ASC 815 to determine whether the award meets the definition of a derivative.
The binomial option pricing model is used to determine the fair value of the share options granted to employees and non-employees. The fair values of share options granted during the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018 were estimated using the following assumptions:
2016 | 2017 |
Six Months Ended
June 30, 2018 |
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Expected volatility (1) |
53.16% ~ 53.96% | 51.61% ~ 52.41% | 51.10% ~ 51.25% | |||||||||
Risk-free interest rate (2) |
2.74% ~ 3.02% | 3.28% ~ 3.62% | 2.85% ~ 3.00% | |||||||||
Exercise multiple |
2.8 | 2.8 | 2.8 | |||||||||
Expected dividend yield (3) |
0.00% | 0.00% | 0.00% | |||||||||
Contractual term |
10 | 10 | 10 | |||||||||
Expected forfeiture rate (post-vesting) |
0.00% | 0.00% | 0.00% ~ 20.00% | |||||||||
Fair value of the common share on the date of option grant (RMB) |
0.31 ~ 5.21 | 8.44 ~ 23.98 | 122.52 ~ 153.23 |
(1) |
Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation dates. |
(2) |
The risk-free interest rate of periods within the contractual life of the share option is based on the market yield of the Chinese sovereign bond/U.S. government bond with a maturity life equal to the expected life to expiration. |
(3) |
We have no history or expectation of paying dividends on our ordinary shares. |
Determining the fair value of the share options required us to make complex and subjective judgments, assumptions and estimates, which involved inherent uncertainty. Had we used different assumptions and estimates, the resulting fair value of the share options and the resulting share-based compensation expenses could
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have been different. Assumptions and estimates will not be necessary to determine the fair value of our ordinary shares upon the listing of our ADSs on the NASDAQ Global Market.
The following table sets forth the fair value of options and ordinary shares estimated at the dates of option grants indicated below with the assistance from an independent valuation firm:
Date of Options Grant |
Options/
Restricted Shares Granted |
Exercise
Price |
Fair Value of
Option/Restricted Shares |
Fair Value
of Ordinary Shares |
Discount for
Lack of Marketability |
Discount
Rate |
Type of
Valuations |
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June 30, 2016 |
7,994,923 | US$ | 0.0001 | US$ | 0.0460 | US$ | 0.0461 | 27.0 | % | 33.0 | % | Retrospective | ||||||||||||||||
September 30, 2016 |
92,168 | US$ | 0.0001 | US$ | 0.2960 | US$ | 0.2961 | 25.0 | % | 32.0 | % | Retrospective | ||||||||||||||||
December 31, 2016 |
36,418 | US$ | 0.0001 | US$ | 0.7503 | US$ | 0.7504 | 24.0 | % | 32.0 | % | Retrospective | ||||||||||||||||
March 31, 2017 |
187,837 | US$ | 0.0001 | US$ | 1.2241 | US$ | 1.2242 | 20.0 | % | 32.0 | % | Retrospective | ||||||||||||||||
June 30, 2017 |
636,277 | US$ | 0.0001 | US$ | 2.1158 | US$ | 2.1159 | 17.0 | % | 32.0 | % | Retrospective | ||||||||||||||||
September 30, 2017 |
1,052,377 | US$ | 0.0001 | US$ | 3.5987 | US$ | 3.5988 | 16.0 | % | 31.0 | % | Retrospective | ||||||||||||||||
January 3, 2018 |
15,937,500 | | US$ | 8.0401 | US$ | 8.0401 | 14.0 | % | 28.0 | % | Contemporaneous | |||||||||||||||||
February 28, 2018 |
2,004,725 | US$ | 0.0001 | US$ | 19.3517 | US$ | 19.3518 | 13.5 | % | 23.0 | % | Contemporaneous | ||||||||||||||||
March 31, 2018 |
137,685 | US$ | 0.0001 | US$ | 20.3320 | US$ | 20.3321 | 13.0 | % | 23.0 | % | Contemporaneous | ||||||||||||||||
June 30, 2018 |
750,610 | US$ | 0.0001 | US$ | 23.1428 | US$ | 23.1429 | 8.0 | % | 22.1 | % | Contemporaneous |
On January 3, 2018, 15,937,500 ordinary shares beneficially owned by certain of our co-founders became restricted shares and will vest over periods from 24 months to 34 months starting from January 2018. Prior to the end of the vesting periods, all the remaining restricted shares shall vest immediately and no longer constitute restricted shares upon a deemed liquidation event or our initial public offering. This transaction has been reflected retrospectively similar to a reverse stock split, with a grant of the 15,937,500 restricted shares recognized in January 2018 at their fair value. The grant was treated as share-based compensation over the vesting periods, and the estimated grant date fair value of the 15,937,500 ordinary shares approximated to RMB818.4 million (US$128.1 million). RMB158.6 million (US$24.8 million) were recorded as share-based compensation expense for the six months ended June 30, 2018. As of June 30, 2018, no restricted shares were vested, and the unrecognized share-based compensation expense of RMB683.5 million (US$103.3 million) was expected to be recognized over a periods from 18 to 28 months. If a deemed liquidation event or our initial public offering happens prior to the end of the vesting periods, the entire remaining unrecognized compensation expenses of RMB683.5 million (US$103.3 million) at June 30, 2018 will be expensed immediately in the quarter when such event or initial public offering happens.
Valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, and with the assistance of an independent appraisal firm from time to time. The assumptions we use in the valuation model are based on future expectations combined with management judgment, with inputs of numerous objective and subjective factors, to determine the fair value of our ordinary shares, including the following factors:
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our operating and financial performance; |
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current business conditions and projections; |
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our stage of development; |
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the prices, rights, preferences and privileges of our convertible preferred shares relative to our ordinary shares; |
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the likelihood of occurrence of liquidity event or redemption event; |
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any adjustment necessary to recognize a lack of marketability for our ordinary shares; and |
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the market performance of industry peers. |
In order to determine the fair value of our ordinary shares underlying each share-based award grant, we first determined our business enterprise value, or BEV, and then allocated the BEV to each element of our capital structure (convertible preferred shares and ordinary shares) using a hybrid method comprising the probability-weighted expected return method and the option pricing method. In our case, three scenarios were assumed, namely: (i) the liquidation scenario, in which the option pricing method was adopted to allocate the value
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between convertible preferred shares and ordinary shares, and (ii) the redemption scenario, in which the option pricing method was adopted to allocate the value between convertible preferred shares and ordinary shares, and (iii) the mandatory conversion scenario, in which equity value was allocated to convertible preferred shares and ordinary shares on an as-if converted basis. Increasing probability was assigned to the mandatory conversion scenario during 2017 and 2018 in light of preparations for our initial public offering.
In determining the fair value of our BEV, we applied the income approach/discounted cash flow, or DCF, analysis based on our projected cash flow using managements best estimate as of the valuation date. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.
Fair value of our ordinary shares increased from US$0.0461 in June 2016 to US$8.0401 in December 2017 primarily due to (i) the organic growth of our business, as measured in terms of MAUs and average DAUs; (ii) a review of our actual financial performance achieved in 2017, which made our projected financials less uncertain and decreased our discount rate from 33.0% in June 2016 to 28.0% in December 2017; (v) Series A and Series A1 convertible redeemable preferred shares invested by external investors in September 2017 and November 2017, respectively, which improved our financial condition and (vi) the marketability discount decreased from 27.0% in June 2016 to 14.0% in December 2017.
In November 2017, Innotech Group Holdings Ltd. sold certain ordinary shares to several investors at US$7.28 per share. The transaction price was negotiated in reference to the price of the Series A1 convertible redeemable preferred shares, and the investors were willing to pay the same price to purchase ordinary shares. In the first quarter of 2018, Innotech Group Holdings Ltd. and News Optimizer (BV) Ltd. sold certain ordinary shares to several investors at US$23.6 per share on average. The prices of these transactions were negotiated in reference to the prices of Series B financings being contemplated at the time and in each case the seller agreed to repurchase the ordinary shares or cancel the transaction if the Series B financings were not consummated at a certain valuation. Given such circumstances, the prices of these transactions are not representative of the fair value of our companys ordinary shares at the respective times.
The increase in the fair value of our ordinary shares from US$8.0401 per ordinary share as of January 1, 2018 to US$23.1429 per ordinary share as of June 30, 2018 was primarily attributable to the following factors:
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following Tencents investment in us in March 2018, we expect to cooperate with Tencent more closely in various areas which we believe will provide strategic benefits to us, leading to improved growth prospects. In thereby improving our access to capital; |
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we recorded strong business growth in the first half of 2018, as evidenced by an increase in the average DAUs to 12.3 million in the second quarter of 2018 from 9.5 million in the fourth quarter of 2017, and a significant increase in our net revenue from the fourth quarter of 2017 to the second quarter of 2018. As the length of our track record in successfully reaching revenue growth targets increased and we progressed further towards this offering in the capital market, we are able to reduce the cost of financing and hence our risk premium. In addition, upon receiving proceeds from this offering, we will become larger and the size premium component in the discount rate would be further reduced. In light of the foregoing, we further reduced our discount rate from 28.0% as of January 1, 2018 to 22.1% as of June 30, 2018; |
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the filing of the registration statement relating to this offering in March 2018 and the subsequent filings reduced the uncertainties associated with this offering, and significantly lowered the discount for lack of marketability from 14.0% as of January 1, 2018 to 8.0% as of June 30, 2018; and |
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as we progressed further towards this offering, we increased our estimated probability of a successful offering. As our preferred shares would be converted into ordinary shares upon the completion of this offering, the increase in the estimated probability of this offerings success results in an allocation of a higher portion of our business enterprise value to ordinary shares. |
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Fair value of our ordinary shares further increased from US$23.1429 as of June 30, 2018 to US$32.1192 as of September 4, 2018, the issue date of Series C1 preferred shares, primarily due to (i) strong business growth as evidenced by an increase in the average DAUs from approximately 14.1 million in June 2018 to approximately 17.1 million in July 2018 and further to approximately 21.1 million in August 2018, (ii) our discount rate and discount for lack of marketability further reduced from 22.1% and 8.0% as of June 30, 2018, respectively, to 20.0% and 7.0% as of the issue date of the Series C1 preferred shares, respectively, and (iii) our further progress towards this offering resulting in an increase of our estimated probability of a successful offering.
With the issuance of Series C1 preferred shares, the aggregate intrinsic value of the outstanding share options of 12,297,276 as of June 30, 2018, calculated as the difference between the exercise price of the options and the estimated fair value of the underlying shares of US$32.1192 (RMB220.6910) was RMB2,713.9 million.
Valuation of Preferred Shares
The valuations of our preferred shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Our equity interest comprised of both ordinary shares and preferred shares with different rights and preferences. According to the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, we adopted the equity allocation method, specifically the Option-Pricing Method, to determine the fair value of the preferred shares and has considered the different probability for three scenarios: conversion, redemption and liquidation.
The valuer considered objective and subjective factors and key assumptions to determine the best estimate of the fair value of the preferred shares, including the following:
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exit values of recent issuances of preferred shares adjusted by the specific rights, preferences, and privileges of the preferred shares; |
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our performance and market position relative to its competitors or similar publicly traded companies; |
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the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given internal company and external market conditions; |
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expected date of liquidation event; |
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probability of different scenarios; |
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risk free rate and volatility; and |
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our developments and milestones. |
On March 4, 2018, we issued 5,420,144 shares of Series B1 convertible redeemable preferred shares at US$19.3722 per share for cash of US$105,000,000 to Image Flag Investment (HK) Limited. The price for Series B1 convertible redeemable preferred shares issued to Image Flag Investment (HK) Limited differed from the price of US$23.62 for Series B2 convertible redeemable preferred shares issued on March 8, 2018, which was primarily due to the difference in the nature of the investments. Image Flag Investment (HK) Limited is a strategic investor affiliated with Tencent Holdings Limited, or Tencent, and we took into account the long-term value of our strategic cooperation with Image Flag Investment (HK) Limited when determining the issue price for Series B1 convertible redeemable preferred shares. On the other hand, purchasers of Series B2 convertible redeemable preferred shares were financial investors and did not offer similar business opportunities.
On September 4, 2018, we issued 1,595,572 shares of Series C1 convertible redeemable preferred shares at US$37.2280 per share for total consideration of US$59,400,000 to a fund managed by an affiliate of a leading real estate company in China (Series C1 investor A) and an indirect subsidiary of People.cn Co. Ltd. (Series C1 investor B). On the same date, Shanghai Jifen, our consolidated VIE, also entered into a cooperation agreement with an affiliate of the Series C1 investor A, pursuant to which Shanghai Jifen will provide advertising
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service to the investor. The cash consideration received from Series C1 investor B was US$37.2280; however, the cash consideration received from Series C1 investor A was US$34.4704 per preferred share. The difference between the fair value of US$37.2280 per preferred share and the cash consideration represents an incentive payment to this investor who is also our customer, to which we will provide advertising service under the cooperation agreement.
On August 27, 2018, we entered into a share purchase agreement with a subsidiary of The Paper, a leading online news service provider in China. Pursuant to the share subscription agreement, we agreed to issue 1,480,123 Series C2 preferred shares to The Paper. The transaction is subject to regulatory approvals from relevant PRC government authorities and we currently expect the transaction to close in the next 12 months. To the extent the closing of the share subscription is after the completion of this offering, the same number of Class A ordinary shares will be issued to The Paper in lieu of Series C2 preferred shares. The share purchase agreement also provides that The Paper will have the right to designate one director to our board of directors. In connection to the share purchase agreement, we entered into a strategic cooperation framework agreement with The Paper on the same date, pursuant to which the parties agree to cooperate in various areas of online news and content business, including content sourcing and management, marketing, traffic, data and technology. Upon government approval and issuance of the Series C2 preferred shares, we will receive cash consideration of US$13.7882 per preferred share. The difference between the fair value of the preferred share and the cash consideration to be received from The Paper represents the intangible assets obtained through the strategic business cooperation arrangement with The Paper.
Internal Control Over Financial Reporting
Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures and we were never required to evaluate our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2016 and 2017, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2017. In accordance with reporting requirements set forth by the SEC, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our companys annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize key controls over financial reporting and to prepare consolidated financial statements and related disclosures. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting. We and they are required to do so only after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control weaknesses may have been identified.
To remedy our identified material weakness subsequent to December 31, 2017, we plan to undertake steps to strengthen our internal control over financial reporting, including: (i) hiring more qualified resources including financial controller, equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, (iii) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with SEC reporting requirements, and (iv) enhancing an
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internal audit function as well as engaging an external consulting firm to help us assess our compliance readiness under rule 13a-15 of the Exchange Act and improve overall internal control.
However, we cannot assure you that we will remediate our material weakness in a timely manner. See Risk Factors Risks Related to Our Business If we fail to maintain proper and effective internal control, our ability to produce accurate financial statements on a timely basis could be impaired.
As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an emerging growth company pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, related to the assessment of the effectiveness of the emerging growth companys internal control over financial reporting.
Results of Operations
The following table sets forth a summary of our consolidated statements of comprehensive loss, both in absolute amount and as a percentage of our net revenues, for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
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RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | RMB | US$ | % | |||||||||||||||||||||||||||||||||||||
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Revenues (1) : |
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Advertising revenue |
57,880 | 8,747 | 99.9 | 512,883 | 77,509 | 99.2 | 106,348 | 16,072 | 99.1 | 669,871 | 101,233 | 93.3 | ||||||||||||||||||||||||||||||||||||
Other revenue |
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0.1 | 4,170 | 630 | 0.8 | 925 | 140 | 0.9 | 47,964 | 7,249 | 6.7 | ||||||||||||||||||||||||||||||||||
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Net revenues |
57,954 | 8,758 | 100.0 | 517,053 | 78,139 | 100.0 | 107,273 | 16,212 | 100.0 | 717,835 | 108,482 | 100.0 | ||||||||||||||||||||||||||||||||||||
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Cost of revenues (2) |
7,178 | 1,085 | 12.4 | 76,481 | 11,558 | 14.8 | 10,322 | 1,560 | 9.6 | 145,993 | 22,063 | 20.3 | ||||||||||||||||||||||||||||||||||||
Gross profit |
50,776 | 7,673 | 87.6 | 440,572 | 66,581 | 85.2 | 96,951 | 14,652 | 90.4 | 571,842 | 86,419 | 79.7 | ||||||||||||||||||||||||||||||||||||
Operating expenses (2) : |
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Research and development expenses |
2,627 | 397 | 4.5 | 15,317 | 2,315 | 3.0 | 2,974 | 450 | 2.8 | 62,912 | 9,508 | 8.8 | ||||||||||||||||||||||||||||||||||||
Sales and marketing expenses |
54,633 | 8,256 | 94.3 | 494,724 | 74,765 | 95.7 | 114,069 | 17,238 | 106.3 | 836,941 | 126,481 | 116.6 | ||||||||||||||||||||||||||||||||||||
General and administrative expenses |
4,427 | 669 | 7.6 | 25,947 | 3,921 | 5.0 | 8,885 | 1,343 | 8.3 | 193,886 | 29,301 | 27.0 | ||||||||||||||||||||||||||||||||||||
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Total operating expenses |
61,687 | 9,322 | 106.4 | 535,988 | 81,001 | 103.7 | 125,928 | 19,031 | 117.4 | 1,093,739 | 165,290 | 152.4 | ||||||||||||||||||||||||||||||||||||
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Loss from operations (3) |
(10,911 | ) | (1,649 | ) | (18.8 | ) | (95,416 | ) | (14,420 | ) | (18.5 | ) | (28,977 | ) | (4,379 | ) | (27.0 | ) | (521,897 | ) | (78,871 | ) | (72.7 | ) | ||||||||||||||||||||||||
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Interest income |
51 | 8 | 0.1 | 673 | 103 | 0.1 | 307 | 46 | 0.3 | 5,389 | 815 | 0.8 | ||||||||||||||||||||||||||||||||||||
Foreign exchange related gains, net |
| | | | | | | | | 2,098 | 317 | 0.3 | ||||||||||||||||||||||||||||||||||||
Others, net |
(2 | ) | (1 | ) | (0.0 | ) | (17 | ) | (3 | ) | (0.0 | ) | (5 | ) | (1 | ) | (0.0 | ) | (26 | ) | (4 | ) | 0.0 | |||||||||||||||||||||||||
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Loss before income tax expenses |
(10,862 | ) | (1,642 | ) | (18.7 | ) | (94,760 | ) | (14,320 | ) | (18.3 | ) | (28,675 | ) | (4,334 | ) | (26.7 | ) | (514,436 | ) | (77,743 | ) | (71.7 | ) | ||||||||||||||||||||||||
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Net loss |
(10,862 | ) | (1,642 | ) | (18.7 | ) | (94,760 | ) | (14,320 | ) | (18.3 | ) | (28,675 | ) | (4,334 | ) | (26.7 | ) | (514,436 | ) | (77,743 | ) | (71.7 | ) | ||||||||||||||||||||||||
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Accretion to convertible redeemable preferred shares redemption value |
| | | (6,012 | ) | (909 | ) | 1.2 | | | | (58,964 | ) | (8,911 | ) | (8.2 | ) | |||||||||||||||||||||||||||||||
Deemed dividend to preferred shareholders |
| | | | | | | | | (1,916 | ) | (290 | ) | (0.3 | ) | |||||||||||||||||||||||||||||||||
Net loss attributable to Qutoutiao Inc.s ordinary shareholders |
(10,862 | ) | (1,642 | ) | (18.7 | ) | (100,772 | ) | (15,229 | ) | (19.5 | ) | (28,675 | ) | (4,334 | ) | (26.7 | ) | (575,316 | ) | (86,944 | ) | (80.1 | ) | ||||||||||||||||||||||||
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Net loss |
(10,862 | ) | (1,642 | ) | (18.7 | ) | (94,760 | ) | (14,320 | ) | (18.3 | ) | (28,675 | ) | (4,334 | ) | (26.7 | ) | (514,436 | ) | (77,743 | ) | (71.7 | ) | ||||||||||||||||||||||||
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Foreign currency translation adjustment, net of nil tax |
| | | 25 | 3 | 0.0 | | | | (12,562 | ) | (1,899 | ) | (1.7 | ) | |||||||||||||||||||||||||||||||||
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Comprehensive loss attributable to Qutoutiao Inc. |
(10,862 | ) | (1,642 | ) | (18.7 | ) | (94,735 | ) | (14,317 | ) | (18.3 | ) | (28,675 | ) | (4,334 | ) | (26.7 | ) | (526,998 | ) | (79,642 | ) | (73.4 | ) | ||||||||||||||||||||||||
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(1) |
Revenue from transactions with related parties are set forth below for the periods indicated: |
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
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Advertising revenue |
| | | | | | 1,183 | 179 | ||||||||||||||||||||||||
Other revenue |
| | | | | | 5,293 | 800 |
(2) |
Cost of revenue and operating expenses from transactions with related parties are set forth below for the periods indicated: |
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Cost of revenue |
120 | 18 | 0.2 | 484 | 73 | 0.1 | 145 | 22 | 0.1 | 3,368 | 509 | 0.5 | ||||||||||||||||||||||||||||||||||||
Research and development expenses |
166 | 25 | 0.3 | 220 | 33 | 0.0 | 66 | 10 | 0.1 | | | | ||||||||||||||||||||||||||||||||||||
Sales and marketing expenses |
74 | 11 | 0.1 | 950 | 144 | 0.2 | 284 | 43 | 0.3 | 4,918 | 743 | 0.7 | ||||||||||||||||||||||||||||||||||||
General and administrative expenses |
2,664 | 403 | 4.6 | 15,134 | 2,287 | 2.9 | 6,401 | 967 | 6.0 | | | |
(3) |
We recognized share-based compensation expenses of RMB0.4 million (US$0.1 million) and RMB3.4 million (US$0.5 million) in 2016 and 2017, respectively. |
Non-GAAP Financial Measure
We use adjusted net loss, which is an non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net loss represents net loss before share-based compensation expenses. We believe that such non-GAAP financial measure help identify underlying trends in our business that could otherwise be distorted by the effect of such share-based compensation expenses that we include in cost of revenues, total operating expenses and net loss. In particular, share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018. We believe that such non-GAAP financial measure also provides useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.
The non-GAAP financial measure is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. It should not be considered in isolation or construed as alternatives to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measure in light of the most directly comparable GAAP measures, as shown below. The non-GAAP financial measure presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measure differently, limiting its usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
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The table below sets forth a reconciliation of the non-GAAP financial measure for the periods indicated:
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Net loss |
(10,862 | ) | (1,642 | ) | (94,760 | ) | (14,320 | ) | (28,675 | ) | (4,334 | ) | (514,436 | ) | (77,743 | ) | ||||||||||||||||
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Cost of revenues |
1 | 0 | 942 | 142 | 99 | 15 | 1,429 | 216 | ||||||||||||||||||||||||
Research and development |
149 | 23 | 1,317 | 200 | 140 | 21 | 6,720 | 1,016 | ||||||||||||||||||||||||
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35 | 5 | 939 | 142 | 99 | 15 | 3,394 | 513 | ||||||||||||||||||||||||
General and administrative |
209 | 32 | 181 | 27 | 19 | 3 | 173,840 | 26,271 | ||||||||||||||||||||||||
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Adjusted net loss |
(10,468 | ) | (1,582 | ) | (91,381 | ) | (13,809 | ) | (28,318 | ) | (4,280 | ) | (329,053 | ) | (49,727 | ) | ||||||||||||||||
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Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Revenues. Our net revenues increased from RMB107.2 million (US$16.2 million) in the six months ended June 30, 2017 to RMB717.8 million (US$108.5 million) in the same period in 2018 primarily due to an increase in our advertising revenue from RMB106.3 million (US$16.1 million) in the six months ended June 30, 2017 to RMB669.9 million (US$101.2 million) in the same period in 2018 and an increase in our other revenue from RMB0.9 million (US$0.1 million) in the six months ended June 30, 2017 to RMB48.0 million (US$7.2 million) in the same period in 2018. Increases in our advertising revenue and other revenue were a result of increases in our MAUs, DAUs and our ability to monetize. This has enabled us to increase clicks on advertisements on our platform from approximately 364.5 million in the six months ended June 30, 2017 to approximately 1,716.2 million in the same period in 2018. Revenue per click, calculated as our advertising revenue divided by clicks on advertisements on our platform, from approximately RMB0.29 (US$0.04) in the six months ended June 30, 2017 to approximately RMB0.39 (US$0.06) in the same period in 2018, primarily due to the higher prices for our advertising services provided through our proprietary programmatic advertising system in 2018 as compared to the prices for the advertising services provided to third-party advertising platforms in 2017 and the overall increase in market prices for mobile traffic.
Cost of Revenues. Our cost of revenues increased from RMB10.3 million (US$1.6 million) in the six months ended June 30, 2017 to RMB146.0 million (US$22.1 million) in the same period in 2018 primarily due to the continued growth of our business. Share-based compensation expenses recognized in cost of revenues increased from RMB99.4 thousand (US$15.0 thousand) in the six months ended June 30, 2017 to RMB1.5 million (US$0.2 million) in the same period in 2018. Cost of revenues as a percentage of our net revenues increased from 9.6% in the six months ended June 30, 2017 to 20.3% in the same period in 2018 primarily due to (i) increased content procurement costs in the six months ended June 30, 2018 as compared to when we primarily sourced content from publicly available sources in the same period in 2017, (ii) increased salaries and benefits paid associated with an increase in the number of employees responsible for content review and management in the six months ended June 30, 2018 and (iii) increased bandwidth costs due to increase in our MAUs and DAUs as well as our emphasis on short videos which consume more bandwidth than articles.
Gross Profit. Our gross profit increased from RMB97.0 million (US$14.7 million) in the six months ended June 30, 2017 to RMB571.8 million (US$86.4 million) in the same period in 2018. Gross margin decreased from 90.4% in the six months ended June 30, 2017 to 79.7% in the same period in 2018.
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Operating Expenses . Our total operating expenses increased from RMB125.9 million (US$19.0 million) in the six months ended June 30, 2017 to RMB1,093.7 million (US$165.3 million) in the same period in 2018.
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Research and development expenses. Our research and development expenses increased from RMB3.0 million (US$0.4 million) in the six months ended June 30, 2017 to RMB62.9 million (US$9.5 million) in the same period in 2018. The increase was primarily due to our increased research and development efforts to enhance the technological capability of our platform that has resulted in the number of our research and development personnel. Share-based compensation expenses recognized in research and development expenses increased from RMB139.5 thousand (US$21.0 thousand) in the six months ended June 30, 2017 to RMB6.7 million (US$1.0 million) in the same period in 2018. Research and development expenses as a percentage of our net revenues increased from 2.8% in the six months ended June 30, 2017 to 8.8% in the same period in 2018. |
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Sales and marketing expenses. Our sales and marketing expenses increased from RMB114.1 million (US$17.2 million) in the six months ended June 30, 2017 to RMB836.9 million (US$126.5 million) in the same period in 2018. This was primarily due to increase in cost of users loyalty points associated with our user loyalty programs from RMB105.4 million (US$15.9 million) in the six months ended June 30, 2017 to RMB611.9 million (US$92.5 million) in the same period in 2018, representing 98.2% and 85.3% of our net revenues in the six months ended June 30, 2017 and 2018, respectively. Decrease in cost of users loyalty points as a percentage of our net revenues was primarily due to enhanced efficiency in acquiring and engaging users through our user loyalty programs, increase in our ability to monetize our user base and the effect of the reversal for the cleared rewards of users inactive for 90 consecutive days amounted to RMB171.8 million (US$26.0 million) in our user loyalty program, which was partially offset by the decrease of breakage amounted to RMB90.9 million (US$13.7 million) due to the lower cash out threshold. Increase in our sales and marketing expenses was also due to increase in advertising and marketing expenses on other channels to acquire users and to promote brand awareness from RMB2.0 million (US$0.3 million) in the six months ended June 30, 2017 to RMB184.4 million (US$27.9 million) in the same period in 2018, representing 1.9% and 25.7% of our net revenues in the six months ended June 30, 2017 and 2018, respectively. Share-based compensation expenses recognized in sales and marketing expenses increased from RMB99.1 thousand (US$15.0 thousand) in the six months ended June 30, 2017 to RMB3.4 million (US$0.5 million) in the same period in 2018. The result of the foregoing contributed to an increase in sales and marketing expenses as a percentage of our net revenues from 106.3% in the six months ended June 30, 2017 to 116.6% in the same period in 2018. |
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General and administrative expenses. Our general and administrative expenses increased from RMB8.9 million (US$1.3 million) in the six months ended June 30, 2017 to RMB193.9 million (US$29.3 million) in the same period in 2018. This increase was primarily due to increase in share-based compensation expenses recognized from RMB19.1 thousand (US$2.9 thousand) in the six months ended June 30, 2017 to RMB173.8 million (US$26.3 million) in the same period in 2018, which was primarily due to RMB158.6 million (US$24.8 million) in share-based compensation expense recognized in the six months ended June 30, 2018 related to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018. This also primarily led to an increase in general and administrative expenses as a percentage of our net revenues from 8.3% in the six months ended June 30, 2017 to 27.0% in the same period in 2018. |
Interest income. Our interest income increased from RMB307.4 thousand (US$46.5 thousand) in the six months ended June 30, 2017 to RMB5.4 million (US$0.8 million) in the same period in 2018, primarily due to an increase in the average amount of our cash and cash equivalents as a result of the issuance of Series B1, B2 and B3 convertible redeemable preferred shares in the six months ended June 30, 2018 that increased our cash and cash equivalents.
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Foreign exchange related gains, net. We recognized foreign exchange related gains, net, of RMB2.1 million (US$0.3 million) in the six months ended June 30, 2018. We did not recognize such gain in the same period in 2017.
Other losses, net. Our other losses, net, increased from RMB5.6 thousand (US$0.9 thousand) in the six months ended June 30, 2017 to RMB25.6 thousand (US$3.9 thousand) in the same period in 2018.
Income tax expenses. We did not incur any income tax expenses in either of the six months ended June 30, 2017 or 2018 due to tax loss status.
Net loss . As a result of the foregoing, our net loss increased from RMB28.7 million (US$4.3 million) in the six months ended June 30, 2017 to RMB514.4 million (US$77.7 million) in the same period in 2018.
Adjusted net loss . Adjusted net loss, which represents net loss before share-based compensation expenses, increased from RMB28.3 million (US$4.3 million) in the six months ended June 30, 2017 to RMB329.1 million (US$49.7 million) in the same period in 2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenues. Our net revenues increased from RMB58.0 million (US$8.8 million) in 2016 to RMB517.1 million (US$78.1 million) in 2017 primarily due to an increase in our advertising revenue from RMB57.9 million (US$8.8 million) in 2016 to RMB512.9 million (US$77.5 million) in 2017 and an increase in our other revenue from RMB74.0 thousand (US$11.1 thousand) in 2016 to RMB4.2 million (US$0.6 million) in 2017. Increases in our advertising revenue and other revenue were a result of increases in our MAUs, DAUs and our ability to monetize. This has enabled us to increase clicks on advertisements on our platform from approximately 162.9 million in 2016 to approximately 1,506.1 million in 2017. On the other hand, revenue per click, calculated as our advertising revenue divided by clicks on advertisements on our platform, decreased from approximately RMB0.36 (US$0.05) in 2016 to approximately RMB0.34 (US$0.05) in 2017.
Cost of Revenues. Our cost of revenues increased from RMB7.2 million (US$1.1 million) in 2016 to RMB76.5 million (US$11.6 million) in 2017 primarily due to the continued growth of our business. Share-based compensation expenses recognized in cost of revenues increased from RMB1.0 thousand (US$0.2 thousand) in 2016 to RMB0.9 million (US$0.1 million) in 2017. Cost of revenues as a percentage of our net revenues increased from 12.4% in 2016 to 14.8% in 2017 primarily due to (i) increased content procurement costs in 2017 which we did not incur in 2016 as we primarily sourced content from publicly available sources at that time, and (ii) increased salaries and benefits paid associated with an increase in the number of employees responsible for content management in 2017.
Gross Profit. Our gross profit increased from RMB50.8 million (US$7.7 million) in 2016 to RMB440.6 million (US$66.6 million) in 2017. Gross margin decreased from 87.6% in 2016 to 85.2% in 2017.
Operating Expenses . Our total operating expenses increased from RMB61.7 million (US$9.3 million) in 2016 to RMB536.0 million (US$81.0 million) in 2017.
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Research and development expenses. Our research and development expenses increased from RMB2.6 million (US$0.4 million) in 2016 to RMB15.3 million (US$2.3 million) in 2017. The increase was primarily due to the continued growth of our business. Share-based compensation expenses recognized in research and development expenses increased from RMB149.1 thousand (US$22.7 thousand) in 2016 to RMB1.3 million (US$0.2 million) in 2017. Research and development expenses as a percentage of our net revenues decreased from 4.5% in 2016 to 3.0% in 2017. |
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Sales and marketing expenses . Our sales and marketing expenses increased from RMB54.6 million (US$8.3 million) in 2016 to RMB494.7 million (US$74.8 million) in 2017. This was primarily due to |
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increase in cost of users loyalty points associated with our user loyalty programs from RMB50.9 million (US$7.7 million) in 2016 to RMB419.6 million (US$63.4 million) in 2017, representing 87.8% and 81.2% of our net revenues in 2016 and 2017, respectively. Decrease in cost of users loyalty points as a percentage of our net revenues was primarily due to enhanced efficiency in acquiring and engaging users through our user loyalty programs and the increase in our ability to monetize our user base. Increase in our sales and marketing expenses was also due to increase in advertising and marketing expenses to promote brand awareness from RMB171.5 thousand (US$25.9 thousand) in 2016 to RMB41.9 million (US$6.3 million) in 2017, representing 0.3% and 8.1% of our net revenues in 2016 and 2017, respectively. Share-based compensation expenses recognized in sales and marketing expenses increased from RMB35.0 thousand (US$5.3 thousand) in 2016 to RMB0.9 million (US$0.1 million) in 2017. The result of the foregoing contributed to an increase in sales and marketing expenses as a percentage of our net revenues from 94.3% in 2016 to 95.7% in 2017. |
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General and administrative expenses. Our general and administrative expenses increased from RMB4.4 million (US$0.7 million) in 2016 to RMB25.9 million (US$3.9 million) in 2017. The increase was primarily due to continued growth of our business. Share-based compensation expenses recognized in general and administrative expenses decreased from RMB208.9 thousand (US$31.5 thousand) in 2016 to RMB181.3 thousand (US$27.4 thousand) in 2017. General and administrative expenses as a percentage of our net revenues decreased from 7.6% in 2016 to 5.0% in 2017. |
Interest income. Our interest income increased from RMB50.8 thousand (US$7.7 thousand) in 2016 to RMB0.7 million (US$0.1 million) in 2017, primarily due to an increase in the average amount of our cash and cash equivalents in 2017 as compared to 2016.
Income tax expenses. We did not incur any income tax expenses in either of 2016 or 2017 due to tax loss status.
Net loss . As a result of the foregoing, our net loss increased from RMB10.9 million (US$1.6 million) in 2016 to RMB94.8 million (US$14.3 million) in 2017.
Adjusted net loss . Adjusted net loss, which represents net loss before share-based compensation expenses, increased from RMB10.5 million (US$1.6 million) in 2016 to RMB91.4 million (US$13.8 million) in 2017.
Selected Quarterly Results of Operations
The following table sets forth our historical unaudited consolidated quarterly results of operations for the periods indicated:
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||||||||||||||||
Revenues (1) : |
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Advertising revenue |
11,154 | 22,401 | 36,109 | 70,239 | 156,653 | 249,882 | 230,664 | 439,207 | ||||||||||||||||||||||||
Other revenue |
| 74 | 232 | 693 | 907 | 2,338 | 5,730 | 42,234 | ||||||||||||||||||||||||
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Net revenues |
11,154 | 22,475 | 36,341 | 70,932 | 157,560 | 252,220 | 236,394 | 481,441 | ||||||||||||||||||||||||
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Cost of revenues (2) |
1,438 | 2,040 | 3,109 | 7,213 | 20,831 | 45,328 | 63,966 | 82,027 | ||||||||||||||||||||||||
Gross profit |
9,716 | 20,435 | 33,232 | 63,719 | 136,729 | 206,892 | 172,428 | 399,414 | ||||||||||||||||||||||||
Operating expenses (2) : |
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Research and development expenses |
730 | 898 | 927 | 2,047 | 3,943 | 8,400 | 19,696 | 43,216 | ||||||||||||||||||||||||
Sales and marketing expenses |
14,521 | 27,153 | 40,457 | 73,612 | 137,531 | 243,124 | 362,845 | 474,096 | ||||||||||||||||||||||||
General and administrative expenses |
1,029 | 1,601 | 4,196 | 4,689 | 6,789 | 10,273 | 92,343 | 101,543 | ||||||||||||||||||||||||
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Total operating expenses |
16,280 | 29,652 | 45,580 | 80,348 | 148,263 | 261,797 | 474,884 | 618,855 | ||||||||||||||||||||||||
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For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||||||||||||||||
Loss from Operations |
(6,564 | ) | (9,217 | ) | (12,348 | ) | (16,629 | ) | (11,534 | ) | (54,905 | ) | (302,456 | ) | (219,441 | ) | ||||||||||||||||
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Interest income |
7 | 16 | 200 | 107 | 77 | 289 | 657 | 4,732 | ||||||||||||||||||||||||
Foreign exchange related (losses) / gains, net |
| | | | | | (792 | ) | 2,890 | |||||||||||||||||||||||
Others, net |
(0 | ) | (1 | ) | (1 | ) | (4 | ) | (5 | ) | (7 | ) | (14 | ) | (12 | ) | ||||||||||||||||
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Loss before income tax expenses |
(6,557 | ) | (9,202 | ) | (12,149 | ) | (16,526 | ) | (11,462 | ) | (54,623 | ) | (302,605 | ) | (211,831 | ) | ||||||||||||||||
Income tax expenses |
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Net loss |
(6,557 | ) | (9,202 | ) | (12,149 | ) | (16,526 | ) | (11,462 | ) | (54,623 | ) | (302,605 | ) | (211,831 | ) | ||||||||||||||||
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Accretion to convertible redeemable preferred shares redemption value |
| | | | | (6,012 | ) | (14,960 | ) | (44,004 | ) | |||||||||||||||||||||
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Deemed dividend to preferred shareholders |
| | | | | | (1,916 | ) | | |||||||||||||||||||||||
Net loss attributable to Qutoutiao Inc.s ordinary shareholders |
(6,557 | ) | (9,202 | ) | (12,149 | ) | (16,526 | ) | (11,462 | ) | (60,635 | ) | (319,481 | ) | (255,835 | ) | ||||||||||||||||
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Net loss |
(6,557 | ) | (9,202 | ) | (12,149 | ) | (16,526 | ) | (11,462 | ) | (54,623 | ) | (302,605 | ) | (211,831 | ) | ||||||||||||||||
Other comprehensive income / (loss) |
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Foreign currency translation adjustment, net of nil tax |
| | | | | 25 | 1,501 | (14,063 | ) | |||||||||||||||||||||||
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Comprehensive loss attributable to Qutoutiao Inc. |
(6,557 | ) | (9,202 | ) | (12,149 | ) | (16,526 | ) | (11,462 | ) | (54,598 | ) | (301,104 | ) | (225,894 | ) | ||||||||||||||||
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(1) |
Revenue from transactions with related parties are set forth below for the periods indicated: |
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||||||||||||||||
Advertising revenue |
| | | | | | | 1,183 | ||||||||||||||||||||||||
Other revenue |
| | | | | | | 5,293 |
(2) |
Cost of revenues and operating expenses from transactions with related parties are set forth below for the periods indicated: |
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||||||||||||||||
Cost of revenues |
31 | 51 | 54 | 91 | 153 | 186 | 844 | 2,524 | ||||||||||||||||||||||||
Research and development expenses |
43 | 70 | 24 | 42 | 69 | 85 | | | ||||||||||||||||||||||||
Sales and marketing expenses |
19 | 31 | 105 | 179 | 300 | 366 | 675 | 4,243 | ||||||||||||||||||||||||
General and administrative expenses |
668 | 704 | 3,041 | 3,360 | 4,125 | 4,608 | | |
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The following table sets forth adjusted net loss, which is an non-GAAP financial measures, for the periods indicated:
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
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(in RMB thousands) | ||||||||||||||||||||||||||||||||
Net loss |
(6,557 | ) | (9,202 | ) | (12,149 | ) | (16,526 | ) | (11,462 | ) | (54,623 | ) | (302,605 | ) | (211,831 | ) | ||||||||||||||||
Add: share-based compensation expenses: |
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Cost of revenues |
| | 38 | 61 | 211 | 631 | 578 | 851 | ||||||||||||||||||||||||
Research and development |
44 | 46 | 54 | 86 | 295 | 883 | 1,308 | 5,412 | ||||||||||||||||||||||||
Sales and marketing |
10 | 11 | 38 | 61 | 211 | 629 | 1,227 | 2,167 | ||||||||||||||||||||||||
General and administrative |
62 | 63 | 7 | 12 | 41 | 121 | 83,208 | 90,632 | ||||||||||||||||||||||||
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Adjusted net loss |
(6,441 | ) | (9,082 | ) | (12,012 | ) | (16,306 | ) | (10,704 | ) | (52,359 | ) | (216,284 | ) | (112,769 | ) | ||||||||||||||||
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The following table sets forth our historical unaudited consolidated quarterly results of operations as a percentage of net revenues for the periods indicated:
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
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Revenues (1) : |
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Advertising revenue |
100.0 | 99.7 | 99.4 | 99.0 | 99.4 | 99.1 | 97.6 | 91.2 | ||||||||||||||||||||||||
Other revenue |
| 0.3 | 0.6 | 1.0 | 0.6 | 0.9 | 2.4 | 8.8 | ||||||||||||||||||||||||
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Net revenues |
100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||||||||||||||
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Cost of revenues (2) |
12.9 | 9.1 | 8.6 | 10.2 | 13.2 | 18.0 | 27.1 | 17.0 | ||||||||||||||||||||||||
Gross profit |
87.1 | 90.9 | 91.4 | 89.8 | 86.8 | 82.0 | 72.9 | 83.0 | ||||||||||||||||||||||||
Operating expenses (2) : |
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Research and development expenses |
6.6 | 4.0 | 2.6 | 2.9 | 2.5 | 3.3 | 8.3 | 9.0 | ||||||||||||||||||||||||
Sales and marketing expenses |
130.2 | 120.8 | 111.3 | 103.8 | 87.3 | 96.4 | 153.5 | 98.5 | ||||||||||||||||||||||||
General and administrative expenses |
9.2 | 7.1 | 11.5 | 6.6 | 4.3 | 4.1 | 39.1 | 21.1 | ||||||||||||||||||||||||
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Total operating expenses |
146.0 | 131.9 | 125.4 | 113.3 | 94.1 | 103.8 | 200.9 | 128.6 | ||||||||||||||||||||||||
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Loss from Operations |
(58.9 | ) | (41.0 | ) | (34.0 | ) | (23.5 | ) | (7.3 | ) | (21.8 | ) | (128.0 | ) | (45.6 | ) | ||||||||||||||||
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Interest income |
0.1 | 0.1 | 0.6 | 0.2 | 0.0 | 0.1 | 0.3 | 1.0 | ||||||||||||||||||||||||
Foreign exchange related (losses) / gains, net |
| | | | | | (0.3 | ) | 0.6 | |||||||||||||||||||||||
Others, net |
(0.0 | ) | (0.0 | ) | (0.0 | ) | (0.0 | ) | (0.0 | ) | (0.0 | ) | (0.0 | ) | (0.0 | ) | ||||||||||||||||
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Loss before income tax expenses |
(58.8 | ) | (40.9 | ) | (33.4 | ) | (23.3 | ) | (7.3 | ) | (21.7 | ) | (128.0 | ) | (44.0 | ) | ||||||||||||||||
Income tax expenses |
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Net loss |
(58.8 | ) | (40.9 | ) | (33.4 | ) | (23.3 | ) | (7.3 | ) | (21.7 | ) | (128.0 | ) | (44.0 | ) | ||||||||||||||||
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Accretion to convertible redeemable preferred shares redemption value |
| | | | | (2.4 | ) | (6.3 | ) | (9.1 | ) | |||||||||||||||||||||
Deemed dividend to preferred shareholders |
| | | | | | (0.8 | ) | |
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For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in percentages) | ||||||||||||||||||||||||||||||||
Net loss attributable to Qutoutiao Inc.s ordinary shareholders |
(58.8 | ) | (40.9 | ) | (33.4 | ) | (23.3 | ) | (7.3 | ) | (24.1 | ) | (135.1 | ) | (53.1 | ) | ||||||||||||||||
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Net loss |
(58.8 | ) | (40.9 | ) | (33.4 | ) | (23.3 | ) | (7.3 | ) | (21.7 | ) | (128.0 | ) | (44.0 | ) | ||||||||||||||||
Other comprehensive income / (loss) |
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Foreign currency translation adjustment, net of nil tax |
| | | | | 0.0 | 0.6 | (2.9 | ) | |||||||||||||||||||||||
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Comprehensive loss attributable to Qutoutiao Inc. |
(58.8 | ) | (40.9 | ) | (33.4 | ) | (23.3 | ) | (7.3 | ) | (21.7 | ) | (127.4 | ) | (46.9 | ) | ||||||||||||||||
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(1) |
Revenue from transactions with related parties as a percentage of net revenues are set forth below for the periods indicated: |
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in percentages) | ||||||||||||||||||||||||||||||||
Advertising revenue |
| | | | | | | 0.2 | ||||||||||||||||||||||||
Other revenue |
| | | | | | | 1.1 |
(2) |
Cost of revenues and operating expenses from transactions with related parties as a percentage of net revenues are set forth below for the periods indicated: |
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in percentages) | ||||||||||||||||||||||||||||||||
Cost of revenues |
0.3 | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | 0.4 | 0.5 | ||||||||||||||||||||||||
Research and development expenses |
0.4 | 0.3 | 0.1 | 0.1 | 0.0 | 0.0 | | | ||||||||||||||||||||||||
Sales and marketing expenses |
0.2 | 0.1 | 0.3 | 0.3 | 0.2 | 0.1 | 0.3 | 0.9 | ||||||||||||||||||||||||
General and administrative expenses |
6.0 | 3.1 | 8.4 | 4.7 | 2.6 | 1.8 | | |
Our revenues and results of operations normally fluctuate from quarter to quarter as a result of seasonal variations in our business. Historically, advertising spending and user activities on our platform tend to be the lowest in the first quarter of each calendar year due to long holidays around the Lunar New Year, during which users tend to spend more time with family and celebrations offline and less time online, including on our mobile applications. In addition, advertising customers, such as those in the e-commerce industry, may also reduce its advertising spending during the holidays around the Lunar New Year due to reduced consumer spending or reduced or suspended production and logistics activities by manufacturers or other service providers. Based on the foregoing, this seasonality has affected our quarterly results especially our results of operations in the first quarter of each year. For example, our net revenues in the first quarter were lower than those of other quarters, and have experienced slower rate of growth or even declined from the last quarter in the prior year. On the other hand, our cost of revenues and operating expenses as a percentage of our net revenues were higher in the first quarter as compare to other quarters, which has led to lower profit margin.
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Liquidity and Capital Resources
Our primary sources of liquidity have been issuance of equity securities and cash provided by operating activities, which have historically been sufficient to meet our working capital and capital expenditure requirements.
In 2016 and 2017, net cash provided by operating activities was RMB12.7 million (US$1.9 million) and RMB132.2 million (US$20.0 million), respectively.
In the six months ended June 30, 2017, net cash provided by operating activities was RMB2.0 million (US$0.3 million). In the same period in 2018, net cash used by operating activities was RMB141.7 million (US$21.4 million).
As of June 30, 2018, we had cash and cash equivalents of approximately RMB1,766.3 million (US$266.9 million), as compared to RMB278.5 million (US$42.1 million) as of December 31, 2017.
Through our user loyalty programs, we give users loyalty points and in certain cases cash credits for taking specific actions. We record registered users loyalty payable and accrued liabilities related to users loyalty programs on our consolidated balance sheets. For further information, see Critical Accounting Policies, Judgments and Estimates Loyalty Programs. Registered users loyalty payable was RMB1.0 million (US$0.2 million), RMB21.0 million (US$3.2 million) and RMB137.0 million (US$20.7 million) as of December 31, 2016 and 2017 and June 30, 2018, respectively. Accrued liabilities related to users loyalty programs were RMB24.5 million (US$3.7 million), RMB187.0 million (US$28.3 million) and RMB149.0 million (US$22.5 million) as of December 31, 2016 and 2017 and June 30, 2018, respectively.
We believe that our existing cash and cash equivalents and anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements, including liabilities related to our user loyalty programs, and capital expenditures in the ordinary course of business for the next 12 months from the completion of this offering. We may, however, need additional cash resources in the future if we experience changes in business condition or other developments, or if we find and wish to pursue opportunities for investments, acquisitions, capital expenditures or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Our ability to manage our working capital, including receivables and other assets and liabilities and accrued liabilities, may materially affect our financial condition and results of operations.
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The following table sets forth a summary of our cash flows for the periods indicated:
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||||||||||||||
RMB | US$ | RMB | US$ | RMB | RMB | US$ | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Selected Consolidated Cash Flows Data: |
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Net cash provided by/(used in) operating activities |
12,719 | 1,923 | 132,226 | 19,983 | 2,037 | (141,738 | ) | (21,420 | ) | |||||||||||||||||||
Net cash (used in)/provided by investing activities |
(12,523 | ) | (1,893 | ) | (121,919 | ) | (18,425 | ) | (1,700 | ) | 70,043 | 10,585 | ||||||||||||||||
Net cash provided by financing activities |
| | 272,121 | 41,124 | | 1,501,333 | 226,887 | |||||||||||||||||||||
Net increase in cash and cash equivalents |
196 | 30 | 282,428 | 42,682 | 337 | 1,429,638 | 216,052 | |||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (4,239 | ) | (641 | ) | | 58,203 | 8,796 | |||||||||||||||||||
Cash and cash equivalents at beginning of the year |
73 | 11 | 269 | 41 | 269 | 278,458 | 42,082 | |||||||||||||||||||||
Cash and cash equivalents at the end of the year |
269 | 41 | 278,458 | 42,082 | 606 | 1,766,299 | 266,930 |
Operating Activities
Net cash used in operating activities was RMB141.7 million (US$21.4 million) in the six months ended June 30, 2018, primarily due to net loss of RMB514.4 million (US$77.7 million), adjusted for (i) share-based compensation of RMB185.4 million (US$28.0 million) and (ii) depreciation of RMB1.5 million (US$0.2 million) and (iii) changes in working capital. Adjustment for changes in working capital primarily consisted of (i) a decrease in accrued liabilities related to user loyalty programs of RMB38.0 million (US$5.7 million) due to change in the threshold as to when registered users can redeem loyalty points to withdraw cash from his/her accounts, (ii) an increase in prepayment to a related party of RMB27.8 million (US$4.2 million) and (iii) an increase in prepayments and other current assets of RMB11.8 million (US$1.8 million), which was partially offset by (i) an increase in registered users loyalty payable of RMB116.1 million (US$17.5 million) due to our continued efforts to increase user acquisition and engagement and change in the threshold as to when registered users can redeem loyalty points to withdraw cash from his/her accounts, (ii) increase in advances from advertising customers of RMB72.5 million (US$11.0 million) due to an increase in advance payment by advertising customers for our advertising solution, (iii) an increase in accrued liabilities and other current liabilities of RMB42.5 million (US$6.4 million), (iv) an increase in tax payable of RMB1.2 million (US$0.2 million) and (v) a decrease in accounts receivables of RMB9.5 million (US$1.4 million).
Net cash provided by operating activities was RMB132.2 million (US$20.0 million) in 2017, primarily due to net loss of RMB94.8 million (US$14.3 million), adjusted for (i) share-based compensation of RMB3.4 million (US$0.5 million) and (ii) depreciation of RMB0.3 million (US$50 thousand) and (iii) changes in working capital. Adjustment for changes in working capital primarily consisted of (i) an increase in accrued liabilities related to user loyalty programs of RMB162.5 million (US$24.6 million) due to our continued efforts to increase user acquisition and engagement, (ii) an increase in advances from advertising customers of RMB39.1 million (US$5.9 million) due to an increase in advance payment by advertising customers for our advertising solution, (iii) an increase in registered users loyalty payable of RMB20.0 million (US$3.0 million), (iv) an increase in tax payable of RMB19.9 million (US$3.0 million) and (v) an increase in accrued liabilities and other current liabilities of RMB19.3 million (US$2.9 million), which was partially offset by (i) an increase in accounts receivables of RMB32.1 million (US$4.9 million) relating to the continued growth of our advertising services and (ii) an increase in prepayments and other current assets of RMB13.8 million (US$2.1 million).
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Net cash provided by operating activities was RMB12.7 million (US$1.9 million) in 2016, primarily due to net loss of RMB10.9 million (US$1.6 million), adjusted for (i) share-based compensation of RMB0.4 million (US$0.1 million) and (ii) depreciation of RMB21 thousand (US$3 thousand) and (iii) changes in working capital. Adjustment for changes in working capital primarily consisted of (i) an increase in accrued liabilities related to user loyalty programs of RMB24.5 million (US$3.7 million) and (ii) an increase in accounts payable of RMB5.1 million (US$0.8 million), which was partially offset by (i) an increase in accounts receivables of RMB9.7 million (US$1.5 million) and (ii) an increase in prepayment to a related party of RMB5.0 million (US$0.8 million).
Investing Activities
Net cash provided by investing activities was RMB70.0 million (US$10.6 million) in the six months ended June 30, 2018, which was primarily attributable to proceeds from maturity of short-term investments of RMB890.6 million (US$134.6 million), which was partially offset by (i) purchase of short-term investments of RMB761.2 million (US$115.0 million), (ii) prepayment made related to the purchase of online audio/video content platform of RMB43.0 million (US$6.5 million), (iii) cash paid for acquisition, net of cash acquired of RMB10.7 million (US$1.6 million) related to our acquisition of Shanghai Dianguan and (iv) purchase of property and equipment of RMB5.8 million (US$0.9 million).
Net cash used in investing activities was RMB121.9 million (US$18.4 million) in 2017, which was primarily attributable to (i) purchase of short-term investments of RMB539.4 million (US$81.5 million) in time deposits and money market funds and (ii) purchase of property and equipment and intangible assets of RMB4.5 million (US$0.7 million), which was partially offset by proceeds from maturity of short-term investments of RMB422.0 million (US$63.8 million).
Net cash used in investing activities was RMB12.5 million (US$1.9 million) in 2016, which was primarily attributable to purchase of short-term investments of RMB45.3 million (US$6.8 million), which was partially offset by proceeds from maturity of short-term investments of RMB32.9 million (US$5.0 million).
Financing Activities
Net cash provided by financing activities was RMB1,501.3 million (US$226.9 million) in the six months ended June 30, 2018, which was primarily attributable to proceeds from the issuance of Series B1, B2 and B3 convertible redeemable preferable shares, net of issuance costs, partially offset by cash paid for initial public offering related costs.
Net cash provided by financing activities was RMB272.1 million (US$41.1 million) in 2017, which was primarily attributable to proceeds from the issuance of Series A and Series A-1 convertible redeemable preferable shares, net of issuance costs.
We did not have any cash provided by or used in financing activities in 2016.
Effect of exchange rate changes on cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents was RMB58.2 million (US$8.8 million) in the six months ended June 30, 2018, which was primarily attributable to the significant increase in cash and cash equivalents held in U.S. dollar as a result of issuance of Series B1, B2 and B3 convertible redeemable preferred shares in the six months ended June 30, 2018. Due to the depreciation of the value of the Renminbi against the U.S. dollar in the six months ended June 30, 2018, the Renminbi equivalent amount of the U.S. dollar cash balance as of June 30, 2018 increased significantly.
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Capital Expenditures
We made capital expenditures of RMB4.8 million (US$0.7 million) and RMB5.8 million (US$0.9 million) in 2017 and the six months ended June 30, 2018, respectively. Our capital expenditures were mainly used for purchases of property and equipment. We will continue to make capital expenditures to meet the expected growth of our business.
Commitments
The following table sets forth our contractual obligations as of June 30, 2018:
Payment due by period | ||||||||||||||||||||||||
Total |
Less than
1 Year |
1 3 Years | 3 5 Years |
More than
5 Years |
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(in thousands) | ||||||||||||||||||||||||
Operating lease commitments |
12,213 | 1,846 | 4,291 | 7,922 | | | ||||||||||||||||||
Purchase of online audio/video content platform |
26,982 | 4,078 | 26,982 | | | | ||||||||||||||||||
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39,195 | 5,924 | 31,273 | 7,922 | | | ||||||||||||||||||
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Off-balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Holding Company Structure
Qutoutiao Inc. is a holding company with no material operations of its own. We conduct our operations through our subsidiaries, consolidated VIE and its subsidiaries in China. As a result, Qutoutiao Inc.s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiary in China is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries, our consolidated VIE and its subsidiaries in China are required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiary in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our consolidated VIE and its subsidiaries may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.
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Inflation
Since inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2015, December 2016 and September 2017 were increases of 1.6%, 1.9% and 1.6%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.
Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Risk
Substantially all of our revenues and substantially all of our expenses are denominated in Renminbi. The functional currency of our company and our Hong Kong subsidiary is the U.S. dollar. The functional currency of our subsidiaries in the PRC, the consolidated VIE and its subsidiaries is the Renminbi. We use Renminbi as our reporting currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of operations. We do not have a foreign currency translation adjustment, net, in 2016 but recorded a gain in foreign currency translation adjustment, net, of RMB25 thousand (US$4 thousand) in 2017.
We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the PBOC. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S. dollar had been stable and traded within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.
We estimate that we will receive net proceeds of approximately US$115.4 million from this offering if the underwriters do not exercise their option to purchase additional ADSs, after deducting underwriting discounts
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and commissions and the estimated offering expenses payable by us, based on the initial offering price of US$8.00 per ADS, the mid-point of the estimated range of the initial public offering price. Assuming that we convert the full amount of the net proceeds from this offering into Renminbi, a 10% appreciation of the U.S. dollar against the Renminbi, from the exchange rate of RMB6.6171 for US$1.00 as of June 29, 2018 to a rate of RMB7.2788 to US$1.00, will result in an increase of RMB76.4 million in our net proceeds from this offering. Conversely, a 10% depreciation of the U.S. dollar against the Renminbi, from the exchange rate of RMB7.2788 for US$1.00 as of June 29, 2018 to a rate of RMB5.9554 to US$1.00, will result in a decrease of RMB76.4 million in our net proceeds from this offering.
Interest Rate Risk
We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, we cannot provide assurance that we will not be exposed to material risks due to changes in market interest rate in the future.
After the completion of this offering, we may invest the net proceeds we receive from the offering in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a new standard on revenue which will supersede the revenue recognition requirements in ASC 605. The new standard, as amended, sets forth a single comprehensive model for recognizing and reporting revenues. The new guidance requires us to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires us to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy a performance obligation. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. The standard is effective for us for fiscal years, and interim periods within those years, beginning on or after January 1, 2018. Early adoption is permitted but not before the original effective date of January 1, 2017. We have adopted the standard using the full retrospective method.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The main objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. We will adopt ASU 2016-01 in the first quarter of year 2018 and does not believe the adoption will have material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02). Under the new guidance, lessees will be required to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after
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December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. We expect to adopt the new standard in the first quarter of 2019 on a modified retrospective basis and is currently in the process of evaluating the impact of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (ASU 2016-13), which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact of ASU 2016-13 on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASBs Emerging Issues Task Force (ASU 2016-15). The new guidance is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. We have early adopted ASU 2016-15 in the current year and the adoption had no material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (ASU 2016-18). This ASU affects all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update will become effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and early adoption is permitted in any interim or annual period. We have early adopted ASU 2016-18 in the current year and the adoption had no material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. We adopted the new standard effective January 1, 2018 on a prospective basis.
In May 2017, the FASB issued ASU No. 2017-09, Compensation Stock compensation (Topic 718): Scope of modification accounting (ASU 2017-09), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 is effective prospectively for all companies for annual periods beginning on or after December 15, 2017, and early adoption is permitted. We have early adopted ASU 2017-05 in the current year and the adoption had no material impact on our consolidated financial statements.
In February 2018, the Financial Accounting Standard Board (FASB) issued ASU 2018-02. Income Statement Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , to allow entities to reclassify the income tax effects of tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act) on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2018-02 will have on our consolidated financial statements and associated disclosures.
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Growth of Mobile Internet Market in China
The mobile Internet population in China has experienced substantial growth. According to the Analysys Report, the number of mobile Internet users in China grew from 652.0 million in 2013 to 970.6 million in 2017, representing a CAGR of 10.5%, and is projected to further increase to 1,104.2 million in 2020, representing a CAGR of 4.4%.
Mobile Internet Users in China
(1) |
Calculated as the number of mobile Internet users as percentage of total population. |
Source: The Analysys Report
According to the Analysys Report, as of December 31, 2017, the number of mobile Internet users in tier-3 and below cities reached 495.8 million, representing 51.1% of the total number of mobile Internet users in China. The number of mobile Internet users in tier-3 and below cities has grown and is expected to continue to grow at a faster rate than those in tier-1 and tier-2 cities. This growth is largely attributable to the relatively low mobile Internet penetration rate in Chinas tier-3 and below cities.
Mobile Internet Users by City Tiers in China
Source: The Analysys Report
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The below chart sets forth information as to mobile internet penetration in different tier cities in China. Mobile internet penetration in tier-3 and below cities is significantly lower than that in tier-1 and tier-2 cities, suggesting significant potential for further penetration and user growth. In contrast, populations of tier-1 and tier-2 cities already have 1.3 mobile devices per person on average, suggesting comparatively limited room for further penetration.
Mobile Internet Penetration
Source: The Analysys Report
According to the Analysys Report, mobile Internet users in tier-3 and below cities tend to have a slower pace of life and spend more time on the Internet given limited offline entertainment venues. Moreover, people in tier-3 and below cities often enjoy rapidly increasing disposable incomes and lower financial pressures due to lower housing prices. These factors contribute to strong demand for mobile entertainment content and present significant opportunities for monetization.
Mobile Content Feed Platform Market in China
As the capabilities of mobile devices and speed of mobile networks have continued to improve, mobile devices have become the primary channel for many in China to access Internet content. However, early mobile content applications were often designed and premised upon personal computer programs or websites, which led to suboptimal experience on mobile devices. The ubiquitous nature of mobile Internet also means users need short content during brief and fragmented moments of personal time when they are otherwise idle. Lastly, the explosion in the volume and diversity of content available on the Internet calls for services that discover and deliver relevant content to users.
Mobile content feed platforms emerged as an answer to these needs. A mobile content feed application typically employs a single-column, waterfall like presentation with endless streams of consecutive content. This presentation is particularly suitable for mobile devices because the user interface is intuitive and designed to conveniently access and view short content during brief and fragmented time periods. Mobile content feed platforms often leverage artificial intelligence to recommend content to users based on their profiles and behaviors, fulfilling the need for personalized content.
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These features contributed to the rapid growth and popularity of mobile content feed platforms. Formation of the value chain associated with such platforms has also progressed rapidly. Given the need for personalized content, many mobile content feed platforms have developed the ability to analyze and understand users behaviors. Such capabilities enable these platforms to provide targeted and effective advertising solutions, creating significant monetization opportunities. On the content supply side, mobile content feed platforms source content from traditional and Internet media outlets, freelancers as well as users, and these content providers are compensated based on content views relating to the content they have contributed, forming an inter-dependent relationship.
After years of evolution, mobile content feed platforms can be roughly divided into three main categories: content aggregators, news portals and others.
Content Aggregators
As forerunners of the mobile content feed platform market in China, content aggregators utilize content recommendation technology powered by big data and artificial intelligence to deliver personalized content to users. Instead of producing content in-house, content aggregators source content from third parties and distribute such content to users based on their profiles and behaviors. According to the Analysys Report, MAUs and average DAUs of Chinas content aggregators increased by 58.4% and 55.4%, respectively, from 194.7 million and 90.5 million in December 2016, respectively, to 308.3 million and 140.6 million in December 2017, respectively. Content aggregators were able to enjoy significant growth due to the overwhelmingly massive amount of content that is available and users desire to quickly discover and access content that interests them, especially content that can satisfy their niche interests.
The below table sets forth information as to the competitive landscape of Chinas content aggregator market.
Content Aggregator |
DAU Penetration Rate (1) |
Application Launches
per DAU per Day (2) |
||||||||
Jan-17 | Jul-17 | Jan-18 | Jul-18 | |||||||
Jinritoutiao |
13.22% | 15.10% | 18.20% | 20.33% | 8.9 | |||||
Qutoutiao |
0.50% | 1.11% | 2.17% | 4.16% | 10.2 | |||||
Kuaibao |
4.61% | 5.46% | 3.90% | 3.44% | 5.6 | |||||
Yidianzixun |
1.20% | 1.35% | 1.04% | 1.00% | 6.5 | |||||
Aikan |
| | 0.18% | 0.76% | 9.6 |
Source: The Analysys Report
Notes:
(1) |
Calculated as the content aggregators average DAU as a percentage of overall mobile Internet average DAUs. |
(2) |
For the month ended July 31, 2018. |
As Chinas mobile aggregator market is new and evolving, information regarding the market, our competitors and their respective market position involves a number of assumptions, estimates and limitations. We have not independently verified the accuracy or incompleteness of the data contained in the table above.
According to the Analysys Report, the current and expected trends and growth drivers in Chinas content aggregator market include:
|
Popularity of short videos . Content aggregators started out by distributing articles and pictures only. Most of them have started to distribute, and increased the proportion of, short videos due to the popularity of such content format among users. |
|
Inclination towards user generated content . Content aggregators previously shifted their content sources slowly from professional media publishers to freelancers, and now are shifting towards content |
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generated by users. User generated content has demonstrated ability to enhance stickiness and social connection among users and has become increasingly popular. |
|
Demand for entertainment content . Most content aggregators initially distributed news only, but they have started to distribute an increasing proportion of entertainment content to meet users demand for easy-to-digest content during brief and fragmented time periods. |
|
Penetration into tier-3 and below cities . Given the saturation of the content aggregator market in tier-1 and tier-2 cities, tier-3 and below cities are becoming an important growth driver. |
News Portals
News portals are the mobile equivalent to traditional web portals and most such mobile applications originated from web portal companies. News portals originally produced their content in-house, and later supplemented their in-house content with third-party content. Content recommendations on news portals are also increasingly conducted automatically with the aid of algorithms, rather than manually by editors. According to the Analysys Report, MAUs and average DAUs of Chinas news portals increased by 33.2% and 10.0%, respectively, from 280.1 million and 125.4 million in December 2016, respectively, to 373.2 million and 138.0 million in December 2017, respectively. According to the Analysys Report, news portals are expected to face continued fierce competitive pressure from content aggregators and short video platforms, and their user growth is expected to lag behind the overall growth rate of the mobile content feed platform market.
The below table sets forth information as to the competitive landscape of Chinas news portal market.
News Portal |
DAU Penetration Rate (1) |
Application Launches
per DAU per Day (2) |
||||
Tencent News |
19.64% | 3.8 | ||||
NetEase News |
3.83% | 4.8 | ||||
Sohu News |
3.23% | 5.3 | ||||
SINA News |
2.76% | 6.7 | ||||
Phoenix News |
2.64% | 2.7 |
Source: The Analysys Report
Notes:
(1) |
In July 2018. Calculated as the content aggregators average DAU as a percentage of overall mobile Internet average DAUs. |
(2) |
For the month ended July 31, 2018. |
Other Mobile Content Feed Platforms
In addition to content aggregators and news portals, many other mobile content feed platforms have emerged, including short video platforms and applications with embedded content feed modules.
Short video platforms focus purely on videos that are less than five minutes in length and require shorter time commitments in creation and consumption. Popularity of short videos among mobile users has increased significantly since 2017, with notable examples such as Kuaishou and Douyin. Since short video platforms have only one content format (video), users generally do not view them as directly competing with content aggregators and news portals, which provide content in multiple formats.
Recognizing the monetization potential of content feeds, many mobile applications have added content feed modules, such as mobile Baidu, UC Browser and Wi-Fi Master. The content feed modules in these applications are similar in function to content aggregators and news portals. However, each of Baidu, UC Browser and Wi-Fi Master has a primary function (search engine, web browser and managing wi-fi connections, respectively) apart from its content feed. Users mainly recognize such applications for its primary function, and not for its content feed features.
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Monetization Opportunities for Content Aggregators
The size of the mobile Internet advertising market in China grew from RMB13.4 billion in 2013 to RMB247.1 billion in 2017, representing a CAGR of 107.1%, and is projected to further increase to RMB407.8 billion in 2020, representing a CAGR of 18.2%, according to the Analysys Report.
Mobile Internet Advertising Market Size in China
Source: The Analysys Report
According to the Analysys Report, the size of the content aggregator market in China grew from RMB0.2 billion in 2013 to RMB26.2 billion in 2017, representing a CAGR of 221.8%, and is projected to further increase to RMB56.5 billion in 2020, representing a CAGR of 29.2%, offering significant opportunity for growth.
Content Aggregator Market Size in China
Source: The Analysys Report
In addition to advertising, content aggregators have other significant monetization opportunities, including mobile entertainment. Spending on education, culture and entertainment is growing rapidly in China, and has increased from approximately 10.6% of per capita total consumption expenditure in 2013 to 11.4% in 2017. The size of the mobile entertainment market in China grew from RMB23.7 billion in 2013 to RMB120.6 billion in 2016, representing a CAGR of 71.9%, and is projected to further increase to RMB234.4 billion in 2020, representing a CAGR of 18.1%, according to the Analysys Report. As content aggregators continue to expand their content offerings, they will be able to leverage on their understanding of users behaviors to offer content and other products and services that will capture the entertainment spending of users.
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Our Mission
Bring fun and value to users through content.
Overview
We are the No. 2 mobile content aggregator in China in terms of MAUs and average DAUs in July 2018, according to the Analysys Report. Our flagship mobile application, Qutoutiao , meaning fun headlines in Chinese, aggregates articles and short videos from professional media and freelancers and presents customized feeds to users. These feeds are optimized in real time based on each users profile, behavior and social relationships through our proprietary AI-powered content recommendation engine. Since its launch in June 2016, Qutoutiao has rapidly gained popularity, reaching MAUs of approximately 62.0 million, average DAUs of approximately 21.1 million and average daily time spent per DAU of approximately 55.4 minutes in August 2018.
We believe we represent a new generation of technology-driven content platforms. Historically, users are accustomed to consume content passively as media dictate content curation with little or no personalization. However, as the volume and diversity of content available on the Internet grow exponentially, users demand, at scale, content personalization, which is only achievable through technology. We believe our technology brings relevant information and entertainment to users, stimulates users desire to read, and ultimately improves the knowledge exchange in society.
Since our inception, we have strategically targeted users from tier-3 and below cities in China because of the enormous opportunities in this underserved market. As of the end of 2017, tier-3 and below cities had a population of 1,027 million each owning 0.5 mobile device on average (compared to a population of 363 million each owning 1.3 mobile devices on average in tier-1 and 2 cities), suggesting significant potential for further mobile penetration, according to the Analysys Report. Mobile users in tier-3 and below cities tend to have a slower pace of life and spend more time on the Internet given limited offline entertainment venues. Moreover, they often enjoy fast increasing disposable income and lower financial pressures thanks to lower housing prices. These factors contribute to a significant need for mobile entertainment content while also create strong monetization potential. Users from tier-3 and below cities tend to have different interests and preferences than users from tier-1 and tier-2 cities. Qutoutiao s light entertainment-oriented and easily digestible content is designed to resonate with such users and provides us with a significant advantage to capture this underserved market.
Our rapid growth since the launch of Qutoutiao is in large part due to our innovative user account system and gamified user loyalty program. We believe we are a pioneer in the mobile content industry in applying such a loyalty program. Registered users can earn loyalty points by referring new users to register on Qutoutiao , by consuming content or by engaging on Qutoutiao . Although loyalty points only translate into trivial monetary amounts, we believe they foster users loyalty and emotional connection to Qutoutiao as compared to other platforms. The loyalty programs create a strong viral effect, which we believe enables us to enjoy lower user acquisition cost compared to acquiring users through other means. The gamified loyalty point system not only helps us keep users more engaged and enhance user stickiness, but also enables us to track users long-term behavior and optimize content recommendation, as almost all of our DAUs are logged-on users.
Covering a broad range of topics, Qutoutiao is focused on humor, stories and other light entertainment content that delight and inspire. Our content is generally sourced from professional media under a licensing arrangement or uploaded by the more than 230,000 freelancers registered on our platform. In June 2018, there were approximately 5.9 million pieces of content added to Qutoutiao , out of which approximately 2.9 million were videos. We also introduced a separate mobile application in May 2017 that allows users to create and upload videos. In addition to articles and short videos, we plan to diversify our content offerings into literature,
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casual games, live streaming, animations and comics, creating a comprehensive light entertainment content ecosystem.
We currently generate revenue primarily by providing advertising services. We plan to explore additional monetization opportunities as we grow our user base and introduce additional content formats, such as literatures, casual games and live streaming.
Our net revenues have increased rapidly from RMB58.0 million (US$8.8 million) in 2016 to RMB517.1 million (US$78.1 million) in 2017, and further from RMB107.3 million (US$16.2 million) in the six months ended June 30, 2017 to RMB717.8 million (US$108.5 million) in the same period in 2018. As we focused on growing our user base and enhancing our services, we have incurred net losses of RMB10.9 million (US$1.6 million) in 2016, RMB94.8 million (US$14.3 million) in 2017, RMB28.7 million (US$4.3 million) in the six months ended June 30, 2017 and RMB514.4 million (US$77.7 million) in the same period in 2018. Adjusted net losses, which represented net losses before share-based compensation expenses, were RMB10.5 million (US$1.6 million) in 2016, RMB91.4 million (US$13.8 million) in 2017, RMB28.3 million (US$4.3 million) in the six months ended June 30, 2017 and RMB329.1 million (US$49.7 million) in the same period in 2018. Share-based compensation expenses in the six months ended June 30, 2018 included RMB158.6 million (US$24.8 million) that relates to certain ordinary shares beneficially owned by certain of our co-founders that became restricted pursuant to share restriction deeds entered into by them in January 2018 and vested in the six months ended June 30, 2018.
Our Strengths
We believe our success to date is largely attributable to the following key competitive strengths.
Leading Mobile Content Aggregator
We operate a leading mobile platform that intelligently delivers personalized light entertainment content to users in China. We are the No. 2 mobile content aggregator in China in terms of MAUs and average DAUs in July 2018, according to the Analysys Report. As of June 30, 2018, Qutoutiao had approximately 133.0 million total installed users, representing more than 13 times increase from approximately 9.7 million as of December 31, 2016. Average MAUs for Qutoutiao reached approximately 32.1 million in the three months ended June 30, 2018, representing more than eight times increase from average MAUs of approximately 3.9 million in the three months ended December 31, 2016. Average DAUs for Qutoutiao reached approximately 12.3 million in the three months ended June 30, 2018, representing more than eight times increase from the average DAUs of approximately 1.5 million in the three months ended December 31, 2016.
Since our inception, we have strategically targeted users from tier-3 and below cities in China. According to the Analysys Report, the number of mobile Internet users in tier-3 and below cities has grown and is expected to continue to grow at a faster rate than those in tier-1 and tier-2 cities in China. By leveraging our market leadership and our platforms light entertainment-oriented and easily digestible content, we believe that we are uniquely positioned to capture such opportunity in this enormous yet underserved market.
Social-based User Loyalty Programs Promoting Effective User Acquisition
We believe we are a pioneer in the mobile content feed industry in applying gamified user loyalty programs. Similar programs have proved to be very successful in other industries in enhancing user loyalties, such as in the airline, hospitality and credit card industries in China and around the world. We incentivize our users to voluntarily invite their families and friends to become our registered users by providing both existing and new registered users with loyalty points. Such word-of-mouth referral approach creates a strong viral effect, which we believe enables us to enjoy lower user acquisition cost compared to acquiring users through other means. Amongst our approximately 133.0 million installed users as of June 30, 2018, approximately 75.0% were referred by registered users. As of June 30, 2018, approximately 25 million registered users have successfully referred new users.
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We believe as a first mover, we have established highly sophisticated programs refined through extensive experience that are difficult to successfully replicate. Our programs strike a careful balance between its efficacy in user acquisition and impeding those users that are merely registering on and referring our mobile applications to obtain loyalty points. Such programs also serve to imprint increased desire for users to further engage with our mobile applications after they become our registered users. We believe our user acquisition approach has enabled, and will continue to enable, us to effectively and efficiently strengthen our market presence and attract users.
Powerful Account System Driving High User Engagement
We enjoy high user engagement, as represented by average daily time spent per DAU of approximately 55.4 minutes in August 2018, partly thanks to our user account system and gamified user experience. Users can earn loyalty points for viewing and sharing content, posting comments, as well as by engaging in various other activities, such as encouraging inactive users in their social circle to re-engage with Qutoutiao . We also create fun tasks such as daily missions to further enhance user engagement. Since loyalty points can only be earned while logged on, we enjoy high logged-on rate among our users as almost all of our DAUs are logged-on users as compared to other mobile content feed platforms where many users are not registered or not logged on. This gives us the ability to track users long-term behaviors overtime and on different devices, as well as users profile and social data, based on which we can improve content recommendation and introduce new features and services effectively.
Our user account system also results in users becoming accustomed to spending cash credits in their accounts to purchase merchandise on our online marketplace, as well as linking their mobile payment accounts with Qutoutiao account. We believe such users are more inclined to supplement their spending on our platform with additional funds, creating enhanced monetization opportunities for content and other products and services we aim to provide in the future.
Differentiated and Extensive Content Offerings
We primarily focus on providing light entertainment content that will most resonate with our target users, who live in tier-3 and below cities in China. We provide content that covers topics such as entertainment, humor, anecdote, relationship, family, health, food and pets to capture the interests of our users. Such approach contrasts with many other content feed platforms in China that design their content for users from tier-1 and tier-2 cities and concentrate on current affairs such as political and economic news.
Our content is generally sourced from professional media under a licensing arrangement or uploaded by the more than 230,000 freelancers registered on our platform. In addition, the users of Quduopai also upload short videos onto our platform. This enables us to provide an extensive and comprehensive range of content, including long-tail content appealing to various niche interests of users, further spearing user engagement. Increased user engagement serves to further drive content providers to become even more active in uploading content, including more long-tail content, as well as attract more content providers, creating a virtuous cycle.
Intelligent Content Delivery Supported by Artificial Intelligence and Data Capabilities
Our strong data analytics capabilities propelled by robust technology infrastructure have enabled us to effectively and efficiently discover and deliver content to users. Through the collection of an extensive amount of user data as to their profiles, behaviors and social relationships, we can develop a highly pertinent interest and social graphs for each user. Based on our deep understanding of users interests, we are able to continuously refine content feeds in real time to deliver content that is most likely of interest to each user, thereby increasing user stickiness. In August 2018, the average daily time spent per DAU was approximately 55.4 minutes. Our content recommendation engine is designed to understand users interests and recommend content to advance such interest or for users to discover innate interests that they may not have previously identified, rather than
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converge recommendation into a repeated static set of content with the same issues or topics based on similar content users already viewed. As our user base grows, increasingly larger volume of data will further augment the accuracy and capability of our content recommendation engine.
Visionary and Experienced Management Team with Track Record of Success
Our visionary and experienced management team has been essential in driving the growth of our business. Our co-founder and executive chairman, Mr. Eric Siliang Tan, together with our co-founder, director and chief executive officer, Mr. Lei Li, are the foundational pillars of our company and have delivered strong business results leveraging their over 20 years of combined Internet industry experience. Other members of our senior management team are also instrumental in growing our business with their proven track record in their areas of expertise. Co-founders and majority of the senior management team members have worked together previously, further enhancing the stability and consistency of our vision.
Our Strategies
Our long-term vision is to create a leading global online content ecosystem. To achieve this vision, we plan to pursue the following growth strategies.
Expand Our User Base
The entertainment needs of users from tier-3 and below cities in China represent enormous yet underserved opportunities, according to the Analysys Report. These users represent the largest yet underpenetrated mobile Internet user base in China with fast increasing disposable income and a high propensity to spend on entertainment. As such, we will continue to enhance our gamified referral-based viral user acquisition strategy focusing on users from tier-3 and below cities to rapidly grow our user base. Furthermore, we will adopt additional channels to acquire users and promote brand awareness, including through offline channels, and develop other measures to complement existing user acquisition efforts to penetrate additional market segments.
Enrich Our Content Offerings
We plan to build a comprehensive light entertainment ecosystem in China to fulfill users diversified entertainment needs. We aim to increase our content provider base, refine our content provider incentive system and optimize our content distribution algorithm. We will continue to improve the breadth and quality of short videos on our platform given videos increasing popularity among our users. We will also enrich our content offerings by diversifying into literature, casual games, live streaming, animations and comics to further enhance user experience and engagement.
Strengthen Social Features and Promote User Generated Content
Social relationships of users have underpinned the rapid growth of our business and will continue to be critical going forward. Through our user loyalty programs that encourage registered users to refer their friends and families to use our mobile applications, we possess extensive information as to the social relationships of our registered users. We believe this will serve as an invaluable foundation as to the additional social features and functions that we intent to introduce on our platform. For example, we plan to enhance content recommendation based on pages viewed by friends on the platform. We also plan to enhance the commenting and discussion features on our platform. Such efforts will enable us to further engage our users and create stronger social bonding and communications amongst them. Furthermore, we believe increased social feature will make it easier to drive user generated content. At the same time, we aim to promote our users to generate more short videos. This will serve not only as a supplementary content source to further increase content richness, but will also serve to enhance user interactions and stickiness.
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Invest in Technology and Innovation
Based on big data analysis of our extensive user information, including users social relationships, we will further enhance our content recommendation engine. We will also optimize our advertising solution by improving our real-time predictive click-through rate model and offering superior user targeting. In addition, we will focus on enhancing our content management and delivery capabilities through increased adoption of artificial intelligence based technology and greater level of automation to achieve higher operational efficiency and scalability.
Enhance Monetization Capabilities
We currently generate most of our revenues from advertising. We intend to enhance our advertising solutions by strengthening the performance of our proprietary programmatic advertising system. We believe our strategic move to reduce the utilization of third-party advertising platforms and focus on expanding our advertising customer base and advertising agents directly will further boost our advertising revenue.
We plan to capture additional monetization opportunities by introducing new content formats. These opportunities include paid content such as literature, casual games, animation and comics, as well as content-driven e-commerce and live streaming products. In addition, we intend to increase the number of our paying users by raising their awareness of our paid content and other products and services.
Selectively Pursue Acquisition and Investment Opportunities
We plan to strengthen our platform around our light entertainment theme through selective strategic acquisitions and investments in the future. Such potential opportunities include those involving content, technology and other strategic resources to complement our platform that will provide users with an even greater entertainment experience. Moreover, we will leverage our large user base and the ecosystem surrounding our platform to cradle other complementary initiatives and mobile applications to foster our business expansion and enhance our competitiveness.
Our Mobile Applications
We primarily deliver content through Qutoutiao , which is our flagship mobile application and means fun headlines in Chinese. Qutoutiao aggregates articles and videos uploaded from content providers and presents real-time customized feeds to users based on each users profile, behavior and social relationships.
The table below sets forth key operating metrics relating to the Qutoutiao mobile application.
For the Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||
(in millions, except for daily time spent data) | ||||||||||||||||||||||||||||||||
Installed users as of the end of the period |
3.7 | 9.7 | 16.3 | 26.4 | 46.3 | 73.1 | 97.9 | 133.0 | ||||||||||||||||||||||||
Average MAUs during the period |
1.7 | 3.9 | 5.7 | 8.8 | 16.0 | 24.2 | 27.8 | 32.1 | ||||||||||||||||||||||||
Average DAUs during the period |
0.5 | 1.5 | 2.5 | 3.9 | 6.4 | 9.5 | 11.3 | 12.3 | ||||||||||||||||||||||||
Average daily time spent per DAU during the period (minutes) |
27.2 | 29.0 | 31.3 | 33.7 | 34.0 | 32.3 | 32.5 | 47.3 |
In June 2018, our MAUs were approximately 39.3 million, average DAUs were approximately 14.1 million and average daily time spent per DAU was approximately 56.0 minutes. In July 2018, our MAUs were
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approximately 48.8 million, average DAUs were approximately 17.1 million and average daily time spent per DAU was approximately 55.6 minutes. In August 2018, our MAUs were approximately 62.0 million, average DAUs were approximately 21.1 million and average daily time spent per DAU was approximately 55.4 minutes. As of August 31, 2018, the total installed users was approximately 181.1 million.
Feeds are presented to users on both the main page of Qutoutiao and topic pages. Both the main page and topic pages are customized for each user using our content recommendation engine. Topic pages include, among others, videos, entertainment, humor, anecdote, relationship, family, health, food and pets. A user may also search content or follow specific content providers. Users may save their favorite content pages as well as indicate the content pages that they dislike.
We promote social interaction among users to engage them more closely with the content they have viewed as well as with each other. Users may post comments and engage in discussions with other users by responding to comments. A user can also share content through a variety of means, including emails, messaging applications or social networks.
We also offer Quduopai , which is a separate mobile application from Qutoutiao and allows users to create, upload and view videos. User generated videos can be viewed by other users of Quduopai after being screened by our content management system for quality and appropriateness. We also selectively deliver popular videos from Quduopai through Qutoutiao , which enables such videos to reach a broader audience and further enriches the content offerings on Qutoutiao . In July 2018, approximately 30% of page views and approximately 50% of users time spent were on videos.
Furthermore, we launched a mobile application similar to Qutoutiao but targeted towards the Southeast Asia market in late 2017.
Our mobile applications include an online marketplace in which users can purchase merchandise offered by third-party merchandise suppliers. This allows us to enhance user stickiness and benefits users by enabling them to spend cash credits earned in their accounts, while also encourage users to supplement their spending on our platform with additional funds and thus creating additional monetization opportunities for us. We select competitively-priced merchandise that we expect will be of interest to our users based on users purchasing power and preferences. Each merchandise supplier is responsible for shipping the merchandise directly to users. Popular offerings on our platform include consumer electronics, home appliances, cosmetics and accessories.
User Account Systems and Loyalty Programs
Our rapid growth since the launch of Qutoutiao was in large part due to our innovative user account system and gamified user loyalty program. Registered users can earn loyalty points and in certain cases cash credits by referring other users to register on Qutoutiao or by engaging in various activities on Qutoutiao while logged on to their accounts.
Loyalty points are automatically exchanged into cash credits at the end of each day based on an exchange rate determined by us. As stated in our user agreement, we have the sole discretion in determining such exchange rate. A user can only withdraw cash credits from the users account after the balance exceeds a minimum amount, which is determined at our sole discretion and adjusted by us from time to time. Similar programs have proved to be very successful in other industries in enhancing user loyalty, such as in the airline, hospitality and credit card industries in China and around the world. We believe our loyalty programs serve similar functions as those other programs to foster users loyalty and emotional connection to Qutoutiao while using the application and enhance the attractiveness of our platform over others. We believe consuming content, rather than earning loyalty points, is the main purpose for our registered users to use Qutoutiao , similar to how users in airline, hospitality and credit card industries in which earning rewards is not the main purpose as compared to the services they intent to receive in the first place. However, we have nonetheless implemented mechanisms aimed to determine if users actually viewed the relevant content and anti-fraud system to prevent potential abuse.
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Referral-based Loyalty Points
Our registered users earn loyalty points when they invite others to download and register on our Qutoutiao mobile application. After an invited user registers with us, the existing registered user is eligible to receive loyalty points or cash credits. Based on our policy in the second quarter of 2018, referral reward generally ranged from RMB3 - RMB8 in terms of cash credits (or equivalent loyalty points) per referral. We are thus able to leverage the embedded social relationships of each user and prompt our users to voluntarily invite their families and friends to become our registered users.
Engagement-based Loyalty Points
A user is eligible to receive loyalty points for engaging in various activities on our Qutoutiao mobile application. Such activities include viewing and sharing content, providing valuable comments and encourage inactive users to continuously re-engage with Qutoutiao . Based on our policy in the second quarter of 2018, a typical loyalty point for viewing content translates into approximately RMB0.002 to RMB0.006 of cash credits per minute spent in viewing content. We also create fun tasks such as daily missions to tap into the competitive reward psyche of users.
User Account System and Loyalty Program for Quduopai
We offer a separate user account system and loyalty program for Quduopai . Users can earn cash credits that they can withdraw after the balance exceeds a minimum amount, which is determined at our sole discretion and adjusted by us from time to time. Users can also earn loyalty points, which can only be exchanged into coupons issued to us by a third-party that can then be used to purchase products or service on that third-partys e-commerce website.
Our Content
We strive to become the light entertainment content platform of choice for a growing base of users. We believe that light entertainment-oriented and easily digestible content resonates with mobile users, and we primarily deliver content that can be viewed by users during a short period of time. The articles on our platform generally contain both images and short texts and can be read within one minute; and more than half of the videos on our platform run less than two minutes. In August 2018, the average daily time spent per DAU was approximately 55.4 minutes. We aim to deliver quality and relevant content to users, and content sourcing, management and recommendation are among core focuses of our operations.
Content Sourcing
We source content from over 200 professional media outlets under a licensing arrangement and from more than 230,000 freelancers registered on our platform. In June 2018, the average daily pieces of content uploaded was approximately 280,000 and the average daily pieces of content passed screening and presented to users was approximately 200,000. We operate an online content upload system and the Quduopai mobile application for content providers to prepare and upload content. Fees paid to content providers relates to the amount of views associated with such content.
A content provider that is new to our online content upload system is required to go through a registration and approval process. Each content provider is required to sign an agreement electronically in the registration process. The agreement provides, among other things, that (i) we are authorized to deliver content submitted by the content provider free of charge; (ii) the content provider acknowledges that it will not deliver illegal or inappropriate content through our platform; and (iii) we have the right to screen, sort and monitor content, and we may remove any illegal or inappropriate content without notifying the content provider. We have the right to freeze an account for any violations of the rules, such as plagiarism or submission of inappropriate content.
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After its registration with us, a content provider can prepare and upload content electronically through the online content upload system. The system also allows each content provider to track its performance on a real time basis, including information such as the number of views, comments, shares and saves for its content.
In addition, our mobile application Quduopai allows users to create, upload and view video content through their mobile phones. For further information, see Our Mobile Applications.
Content Management
As a gatekeeper for our platform, our content management system is designed to ensure both the quality and appropriateness of information presented to users, which include content and comment postings. Content may be declined for quality reasons, such as videos or pictures of low resolution or duplicative content. We also decline content and comment postings that appear to violate relevant laws and regulations or are otherwise inappropriate for our platform. We undertake an efficient and thorough screening process that involves both algorithm-based screening and manual review. We have also implemented a complaint procedure that enables us to identify inappropriate content utilizing our users feedback.
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Algorithm-based Screening . We apply algorithms to screen texts as well as images and videos. Our system screens texts based on pre-set keywords, and we utilize artificial intelligence to identify inappropriate images and videos. The screening system automatically declines content that did not meet the standards of our platform and flags suspicious content for manual review by our content management team. |
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Manual Review . Our content management team, which consisted of 566 employees as of June 30, 2018, is responsible for monitoring all information before delivery through our platform. The content management team reviews suspicious content identified in the algorithm-based screening process and makes the final decision as to whether to decline such content. Given the complexity and diversity of information submitted to our platform, our content management team also reviews all content that were not earlier flagged in the algorithm-based screening process. |
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Complaint Procedure . A user may submit a complaint about a specific content through our mobile applications. The user is prompted to identify the basis for the complaint, such as duplication to pre-existing content, violation of law, factual mistake, low quality or plagiarism. The user also needs to provide a written commentary to support the complaint. We remove the relevant content if we conclude that the complaint is valid. In addition, while the complaint is under review, we may also temporarily block the relevant content from being further delivered until we can investigate the complaint and reach a conclusion. |
Content Recommendation
Our platform intelligently delivers personalized light entertainment content to users. The content recommendation process involves the following components.
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Content Tagging . Each content piece is labeled with tags that are associated with its topics. Before submitting an article or video, the content provider may provide up to six tags. Such tags range from general topics such as entertainment news to specific topics such as the name of an actor. We utilize both algorithm-based screening and manual review to further refine such tags. Furthermore, our smart video tagging technology uses deep learning that further increases the accuracy of tags. Our technology also automatically selects and displays to users the most appropriate cover images for videos. We believe our technology greatly improves the quality and relevance of video content shown to our users, thereby enhancing user experience. |
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Interest and Social Graphs . Through an automated process, we develop interests and social graphs for each user based on such persons profile, behavior and social relationships. User profile data are |
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provided by users when registering for an account on our mobile applications. In addition, we are also able to gain a fairly accurate picture of a users profile, including age, gender and location, based on the users behavior on our platform. Users behavior also provides us with a granular view of the topics and content characteristics that likely are of interest to the user. In addition, the interest and social graphs take into account the users social relationships with other users and such other users interests and behaviors. |
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Recommendation . Our content recommendation engine suggests content based on each users interest and social graphs, and continuously receives behavioral data inputs to update and refine its recommendations in real time to identify content that is most likely of interest to each user. |
Monetization
We place advertisements on our main pages, topic pages as well as content pages. We believe that our differentiated user base represents an attractive demographic target for businesses.
When we first commenced our business, we collaborated with various third-party advertising platforms to fill advertisement spaces on our mobile applications. We later engaged advertising agents to serve as our sales agents in selling our advertising solutions to other advertising agents and end advertisers. To enhance our platforms monetization capabilities, we acquired an advertising agent in February 2018 that operates a programmatic advertising system. This system will serve to power our advertising solutions while reducing the use of third-party advertising platforms.
Our programmatic advertising system utilizes a bidding system for advertising customers to bid for the targeted audience on our platform. Our programmatic advertising system considers a wide range of parameters to determine which advertisement to show, including price bid, predicted click-through rate and content relevance, to dynamically maximize our revenue potential. Our advertising technology aims to maximize our revenue potential by rewarding the more relevant advertisement with a more prominent position, despite the potentially lower price bid of such advertisement. We actively monitor the advertisements placed to help ensure their relevance.
Customers for our programmatic advertising system are comprised of advertising agents and end advertisers. We have our own sales personnel who are responsible to support and monitor the performances of advertising agents and to attract advertising customers to use our programmatic advertising system directly. We enter into standard agreements with advertising agents generally for a term of one year. Our advertising agents are responsible for identifying end advertisers, confirming payments and setting up accounts on our programmatic advertising system for advertising customers. We provide ongoing training to advertising agents to familiarize them with the functionalities and capabilities of our programmatic advertising system. These advertising agents are responsible for collecting and submitting the relevant documentation and licenses from advertising customers for our approval to open an account on our programmatic advertising system, and are also liable for any infringement of third-party rights or violation of regulatory requirements caused by advertisements placed by their end advertisers.
Baidu, which is our largest customer and operates a third-party advertising platform, contributed 69.9%, 43.7%, 75.8% and 12.1% of our net revenues in 2016, 2017 and the six months ended June 30, 2017 and 2018, respectively. Baidu also accounted for 92.6%, 59.8% and 30.5% of our accounts receivable as of December 31, 2016 and 2017 and June 30, 2018, respectively. We supply traffic to the customers platform through advertisements placed on our mobile applications. We have entered into a membership registration agreement with Baidu, which contains standard terms and conditions generally applicable to companies that utilize Baidus advertising platform. Pursuant to the agreement, we are required to comply with the relevant laws and regulations as well as Baidus guidelines for its platform participants, including prohibitions on fraudulent clicks and other improper means to generate online traffic. Baidu has the right to terminate the agreement at any time.
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Through collaboration with third-party merchandise suppliers, Qutoutiao include an online marketplace which users can access and purchase merchandise offered by third-party merchandise suppliers. We do not carry any inventory, and each merchandise supplier is responsible for shipping the merchandise directly to users. A user pays the purchase price for a merchandise to us. We deduct our commission related to the merchandise and remit the remainder to the relevant merchandise supplier.
Technology
We have focused on and will continue to invest in our technological infrastructure. Our business is supported by the following key technologies.
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Interest and Social Graphing . Through an automated process, we develop interests and social graphs for each user based on such persons profile, behavior and social relationships. We assess the users desired content characteristics through technologies including natural language processing, image analysis, and content tagging. The interest and social graphs take into account the users social relationships with other users and such other users interests, including their behaviors. We continuously refine each users graphs based on the users behavior over time through artificial intelligence. |
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Content Recommendation Engine . Our content recommendation engine recommends content based on user behavior, and continuously receives behavioral data inputs to update and refine its recommendations in real time to identify content that is most likely of interest to each user. Our content recommendation engine is capable of processing large quantities of data, and currently can handle several billion inputs per day. In addition, new content is aggregated and recommended in real time from among millions of new content added, ensuring that our users will not miss content that may interest them when they next update their view in our mobile application. |
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Advertising . Our advertising technology enables advertising customers to bid for audience and automatically deliver relevant, targeted promotional links to users. Our system rewards more relevant advertisements with more prominent positions, despite the potentially lower priced bids of such advertisements. Our audience segmentation technology helps ensure the relevance of advertisements shown to users by analyzing their interests through browsing activity, viewed content and commenting history. In addition, we have the ability to predict click-through rates for advertisements using logistic regression, gradient boosting decision tree and linear and nonlinear modeling algorithms. Enhanced precision of these click-through rate projections can help maximize the cost effectiveness of customers advertising budgets. |
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Content Screening Technology . Our text screening system screens information based on pre-set keywords. We utilize artificial intelligence to identify inappropriate or objectionable content from images, speeches and videos, significantly increasing efficiency over manual review. We also apply deep learning methods to analyze complex visual content. Through big data and continuous training, our system is able to monitor and identify objectionable visual content with a high degree of accuracy. The screening system automatically declines content that did not meet the standards of our platform and flags suspicious content for manual review by our content management team. |
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Fraud Detection . Our fraud detection technology focuses on ensuring that our user loyalty programs are not abused by fraudulent users or activities. Our anti-fraud system employs self-encoding and deep learning methods such as convolutional neural networks in analyzing users behavior as well as the location of and data from their devices to detect fraud. Our anti-fraud system assigns a fraud score to users based on the inputs it receives, with higher scores signifying a greater suspicion of fraudulent activity. We also utilize artificial intelligence methods including decision trees, random decision forests, naive Bayes classifier, Gaussian mixed model, and logistic regression to maximize the predictive accuracy of our anti-fraud system while minimizing the need for manual review. |
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Marketing and Promotion
We have historically expanded our user base primarily through word-of-mouth referrals by existing users, which is mainly driven by our user loyalty programs, light entertainment-oriented content and content recommendation technology. The loyalty programs create a strong viral effect, which we believe enables us to enjoy lower user acquisition cost compared to acquiring users through online advertising. Amongst our approximately 133.0 million installed users as of June 30, 2018, approximately 75.0% were referred by registered users. For more information on our user loyalty programs, see User Account Systems and Loyalty Programs Referral-based Loyalty Points. We intend to continue to implement innovative and cost-effective marketing initiatives. We will also explore additional channels to grow our user base, such as through advertisements on mobile channels, and further enhance our brand awareness through offline channels.
Competition
The industry we operate in is highly competitive and rapidly changing due to the fast growing market and technological developments. Our ability to compete successfully depends on many factors, including the quality and relevance of our content, the robustness of our technology platform, user experience, brand recognition and reputation, the value of our services to advertising customers and our relationship with content providers.
We compete with other mobile content feed platforms for user traffic. Our primary competitors include content aggregators such as Jinritoutiao, Kuaibao (operated by Tencent) and Yidianzixun (an affiliate of Phoenix News). We are the No. 2 mobile content aggregator in China in terms of MAUs and average DAUs in July 2018, according to the Analysys Report. We believe we have differentiated ourselves from other content aggregators because of our focus on light entertainment content and users from tier-3 and below cities. To a lesser extent, we also compete with mobile news portals such as Tencent News, SINA News, Sohu News, NetEase News and Phoenix News. We believe such mobile news portals tend to concentrate on current affairs such as political and economic news. As such, their content offerings tend to differ from ours.
Employees
As of December 31, 2016 and 2017 and June 30, 2018, we had a total of 41, 502 and 1,302 employees, respectively. The following table sets forth the breakdown of our employees as of June 30, 2018 by function:
Function |
Number of Employees | % of Total | ||||||
Content management |
566 | 43.5 | ||||||
Technology and product development |
562 | 43.2 | ||||||
Sales, customer service and marketing |
98 | 7.5 | ||||||
General administration |
76 | 5.8 | ||||||
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Total |
1,302 | 100.0 | ||||||
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Our employees are based in Shanghai, Beijing and Wuhu City in Anhui Province, respectively.
We believe we offer our employees competitive compensation packages and a dynamic work environment that encourages initiative and meritocracy. As a result, we have generally been able to attract and retain qualified personnel and maintain a stable core management team. We plan to hire additional experienced and talented employees in areas such as content management and research and development as we expand our business.
As required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund. In addition, we purchased employers liability insurance and additional commercial health insurance to increase insurance coverage of our employees. We enter into standard labor, confidentiality
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and non-compete agreements with our employees. The non-compete restricted period typically expires two years after the termination of employment, and we agree to compensate the employee with a certain percentage of his or her pre-departure salary during the restricted period.
We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes.
Facilities
Our corporate headquarters are located in Shanghai, China, where we lease approximately 4,811 square meters of office space. We also maintain other leased offices in Beijing, Wuhu in Anhui Province and Guangzhou in Guangdong Province totaling approximately 5,960 square meters. We believe that we will be able to obtain adequate facilities, principally by lease, to accommodate our future expansion plans.
Intellectual Property
We regard our intellectual property as critical to our success. Such intellectual properties include trademarks, domain names, copyrights, know-how and proprietary technologies. We currently rely on trademarks, copyrights, trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights.
As of June 30, 2018, we have registered 12 trademarks in the PRC. As of June 30, 2018, we have filed 149 trademark applications in the PRC. We have not completed the trademark registration for Qutoutiao, the name of our flagship mobile application. After we submitted our application material with the relevant authorities, one of our competitors filed an objection on the ground that Qutoutiao is similar to a trademark registered by such competitor. We believe such objection is meritless and we have contested the objection and submitted the written defense to the Trademark Office in February 2018. However, there can be no assurance that we will be able to prevail and register Qutoutiao as a trademark. For additional information, see Risk Factors Risks Relating to Our Industry and Business If we do not continue to increase the strength of our brand, we may not be able to maintain current or attract new users and customers for our products and services.
As of June 30, 2018, we are the registered holder of 106 domain names in the PRC.
As of June 30, 2018, we have been granted 49 software copyrights and nine artwork copyrights.
Insurance
We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We also purchased employers liability insurance and additional commercial health insurance to increase insurance coverage of our employees. We do not maintain property insurance policies covering our equipment and other property that are essential to our business operation to safeguard against risks and unexpected events. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations in China.
Legal and Other Proceedings
We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising from the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our managements time and attention.
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This section sets forth a summary of the principal PRC laws and regulations relevant to our business and operations in the PRC.
Regulations on Value-added Telecommunications Services
The Telecommunications Regulations of the PRC , or the Telecom Regulations, implemented on September 25, 2000 and amended on July 29, 2014 and February 6, 2016, are the primary PRC law governing telecommunication services and set out the general framework for the provision of both basic telecommunication services and value-added telecommunication services by domestic PRC companies. value-added telecommunication services is defined as telecommunications and information services provided through public networks, and, according to the Telecom Regulations, operators of value-added telecommunications services shall obtain operating licenses prior to commencing operations from the Ministry of Industry and Information Technology, or the MIIT, or its provincial level counterparts.
The Catalogue of Telecommunications Business , or the Catalogue, which was issued as an attachment to the Telecom Regulations and recently revised and promulgated on December 28, 2015, further identifies information services as value-added telecommunications services. We engage in business activities that are value-added telecommunications services as defined and described by the Telecom Regulations and the Catalogue.
On March 5, 2009, the MIIT issued the Measures on the Administration of Telecommunications Business Operating Permits , or the Telecom License Measures, which initially became effective on April 10, 2009 and was amended on July 3, 2017, effective on September 1, 2017, to supplement the Telecom Regulations. The Telecom License Measures provide that there are two types of telecommunications operating licenses, or the ICP Licenses for operators in China, one for basic telecommunications services and one for value-added telecommunications services. A distinction is also made to licenses for value-added telecommunications services as to whether a license is granted for intra-provincial or trans-regional (inter-provincial) activities. An appendix to each license granted will detail the permitted activities of the enterprise to which it was granted. An approved telecommunication services operator must conduct its business (whether basic or value-added) in accordance with the specifications recorded in its ICP License.
Our business activities include providing information services and content to users through our mobile application Qutoutiao , which will be regarded as information services under the Catalogue. Shanghai Jifen and Anhui Zhangduan have been granted the ICP Licenses which authorize relevant companies provision of information services via Internet. The ICP Licenses of Shanghai Jifen and Anhui Zhangduan will remain effective until September 25, 2022 and June 20, 2022 respectively, and both of the licenses are also subject to annual inspection.
Regulations on Foreign Direct Investment in Value-Added Telecommunications Companies
Foreign direct investment in telecommunications companies in China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises , or the FITE Regulations, which were issued by the State Council on December 11, 2001, became effective on January 1, 2002 and recently amended and issued on February 6, 2016, and the Catalogue of Industries for Guiding Foreign Investment , or the Foreign Investment Catalogue, which was recently revised and promulgated by the National Development and Reform Commission, or the NDRC, and the MOFCOM, on June 28, 2017. Under the aforesaid regulations, foreign invested telecommunications enterprises in the PRC, or FITEs, must be established as Sino-foreign equity joint ventures. The foreign party to a FITE engaging in value-added telecommunications services may hold up to 50% of the equity of the FITE, of which the geographical area it may conduct telecommunications services is provided by the MIIT in accordance with relevant provisions as mentioned above. In addition, the major foreign investor in a value-added telecommunications business in China must satisfy a number of stringent performance and
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operational experience requirements, including demonstrating a good track record and experience in operating a value-added telecommunications business. Moreover, approvals from the MIIT and the MOFCOM or their authorized local counterparts must be obtained prior to the operation of the FITE and the MIIT and the MOFCOM retain considerable discretion in granting such approvals.
On June 30, 2016, the MIIT issued an Announcement of the Ministry of Industry and Information Technology on Issues concerning the Provision of Telecommunication Services in Mainland China by Service Providers from Hong Kong and Macau , or the MIIT Announcement, which provides that investors from Hong Kong and Macau may hold no more than 50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications services.
On July 13, 2006, the MIIT issued the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services, or the MIIT Notice, which reiterates certain provisions of the FITE Regulations. In addition to the provisions stated in FITE Regulations, the MIIT Notice further provide that a domestic company that holds a license for the provision of Internet information services, or an ICP license, is prohibited from leasing, transferring or selling the ICP license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses illegally in China. The MIIT Notice also requires each ICP license holder to have appropriate facilities for its approved business operations and to maintain such facilities in the regions covered by its license, and specifically, with regard to the domain names and trademarks, the MIIT Notice required that trademarks and domain names that are used in the provision of Internet content services must be owned by the ICP license holder or its shareholders. Our Consolidated VIE, Shanghai Jifen, which holds the ICP license, owns our major domain names, and holds or has applied for registration in the PRC of trademarks related to our business and owns and maintains facilities that we believe are appropriate for our business operations.
In view of these restrictions on foreign direct investment in the value-added telecommunications sector, we established various domestic consolidated affiliated entities which are all subsidiaries to Shanghai Jifen, to engage in value-added telecommunications services. For a detailed discussion of our Consolidated VIE and its subsidiaries, please refer to Our History and Corporate Structure of this Prospectus. Due to a lack of interpretative materials from the relevant PRC governmental authorities, there are uncertainties regarding whether PRC governmental authorities would consider our corporate structure and contractual arrangements to constitute foreign ownership of a value-added telecommunications business. For details, please refer to Risk Factors Risks Relating to Our Industry and Business We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of Internet businesses and companies, including limitations on our ability to own key assets such as our mobile applications. In order to comply with PRC regulatory requirements, we operate a portion of our business through our Consolidated VIE and its subsidiaries, with which we have contractual relationships but in which we do not have an actual ownership interest. If our current ownership structure is found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC Internet sector, we could be subject to severe penalties.
Regulations on the Provision of Internet Content
Regulation on Internet Information Services
The Administrative Measures on Internet Information Services , or the Internet Content Measures, which was promulgated by the State Council on September 25, 2000 and amended on January 8, 2011, set out guidelines on the provision of Internet information services. The Internet Content Measures classifies Internet information services into commercial Internet information services and non-commercial Internet information services, and commercial Internet information services refer to services that provide information or services to Internet users with charge. A provider of commercial Internet information services must obtain an ICP License, and, prior to the application for such ICP License from the MIIT or its local branch at the provincial or municipal level,
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entities providing online information services regarding news, publishing, education, medicine, health, pharmaceuticals and medical equipment must procure the consent of the national authorities responsible for such areas. As a provider of commercial Internet information services, Shanghai Jifen and Anhui Zhangduan have been granted the ICP Licenses as mentioned above, which authorize relevant companies provision of information services via the Internet.
In addition to the above, the ICP Measures further specifies a list of prohibited content. Internet information providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the legal rights of others. Internet information providers that violate such prohibition may face criminal charges or administrative sanctions. Internet information providers must monitor and control the information posted on their websites. If any prohibited content is found, they must remove the content immediately, keep a record of such content and report to the relevant authorities.
Regulation on Internet News Dissemination
Pursuant to the Provisions for the Administration of Internet News Information Services promulgated by the Cyberspace Administration of China, or CAOC, which was issued on May 2, 2017 and became effective on June 1, 2017, an Internet news license shall be obtained from CAOC by the service provider for the provision of internet news information services to the public in a variety of ways, including offering platforms for such dissemination. News information as mentioned therein includes reports and comments relating to social and public affairs such as politics, economy, military affairs and foreign affairs, as well as relevant reports and comments on social emergencies. The service providers shall meet various qualifications and requirements as listed in such regulation, and further, to provide Internet-based news information services, the service providers are also required to complete formalities for ICP License or filing with the competent telecommunications authorities in accordance with the law. In practice, Internet news information service providers that are not state-owned, such as our company, are required to introduce a state-owned shareholder in order to apply for the Internet news license.
In addition to the above, such regulation also stipulates that no organization may establish Internet-based news information service agencies in the form of Sino-foreign joint ventures, Sino-foreign cooperative ventures or wholly foreign-owned enterprises. Any cooperation involving Internet-based news information services and between Internet-based news information service agencies and foreign-invested enterprises, or FIEs, shall be reported to the national CAOC for security assessment.
We are required to obtain an Internet news license from CAOC for the dissemination of news through our mobile application. We are in the process of preparing an application for an Internet news license and have agreed to introduce The Paper as a state-owned shareholder. However, there can be no assurance that our application will be accepted or approved by the regulatory authorities. See Risk Factors Risks Relating to Our Industry and Business Our lack of an Internet news license may expose us to administrative sanctions, including an order to cease our Internet information services that provide news or to cease the Internet access services provided by third parties to us.
Regulation on Online Transmission of Audio-visual Programs
On December 20, 2007, the General Administration of Press and Publication, Radio, Film and Television, or GAPPRFT, and MIIT jointly issued the Administrative Provisions for the Internet Audio-Video Program Service , or the Audio-visual Program Provisions, which came into effect on January 31, 2008 and was amended on August 28, 2015. The Audio-visual Program Provisions define Internet audio-visual programs services as the production, edition and integration of audio-video programs, the supply of audio-video programs to the public via the Internet, and the provision of upload and audio-video programs transmission services to a third party. Entities engaging in Internet audio-visual programs services must obtain an internet audio-visual program transmission license, which will only be issued to state-owned or state-controlled entities. According to
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the Categories of the Internet Audio-Video Program Services modified by GAPPRFT on March 10, 2017, aggregation of Internet audio-visual programs, which means editing and arranging the Internet audio-visual programs on the same website and providing searching and watching services to public users, falls into the definition of the aforementioned Internet audio-visual programs services.
As of the date of this Prospectus, we do not possess an Internet audio-visual program transmission license and we cannot assure you that we will be able to obtain one. See Risk Factors Risks Relating to Our Industry and Business Our lack of an Internet audio-visual program transmission license may expose us to administrative sanctions, which would materially and adversely affect our business, results of operations and financial condition.
Regulations on Internet Publishing
On February 4, 2016, the SAPPRFT and MIIT jointly issued the Internet Publishing Rules, which took effect on March 10, 2016. Online publications is defined, under the Internet Publishing Rules, as digital works that are edited, produced, or processed to be published and provided to the public through the Internet, including (a) original digital works, such as articles, pictures, maps, games, and comics; (b) digital works with content that is consistent with the type of content that, prior to the Internet age, typically was published in media such as books, newspapers, periodicals, audio-visual products, and electronic publications; (c) digital works in the form of online databases compiled by selecting, arranging, and compiling other types of digital works; and (d) other types of digital works identified by the SAPPRFT. Under the Internet Publishing Rules, Internet operators distributing such online publications through information network are required to obtain an Internet publishing license from SAPPRFT. Wholly foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign cooperative enterprises are prohibited from engaging in the provision of Internet publishing services. In addition, project cooperation between an Internet publishing service provider and a wholly foreign-owned enterprise, Sino-foreign equity joint venture, or Sino-foreign cooperative enterprise within China or an overseas organization or individual involving Internet publishing services shall be subject to examination and approval by the GAPPRFT in advance. A company that fails to comply with these rules may be ordered to close the website or pay fines or be subject to other penalties imposed by relevant authorities.
Uncertainty remains as to the interpretation of the Internet Publishing Rules which may require us to take further actions and/or subject us to penalties. See Risk Factors Risks Relating to Our Industry and Business We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of Internet businesses and companies, including limitations on our ability to own key assets such as our mobile applications.
Regulations on Online Advertising Services
On April 24, 2015, the Standing Committee of the National Peoples Congress, or the SCNPC, enacted the Advertising Law of the PRC , which took effect on September 1, 2015, or the New Advertising Law, to increase the potential legal liability of providers of advertising services, and to include provisions intended to strengthen identification of false advertising and the power of regulatory authorities. On July 4, 2016, the SAIC issued the Interim Measures of the Administration of Online Advertising , or the SAIC Interim Measures, which took effect on September 1, 2016, to further regulate Internet advertising activities.
The New Advertising Law and the SAIC Interim Measures both provide that advertisements posted or published through the Internet may not affect users normal usage of a network, and advertisements published in the form of pop-up windows on the Internet must display a close sign prominently and ensure one-key closing of the pop-up windows. The SAIC Interim Measures provide that all online advertisements must be marked Advertisement so that viewers can easily identify them as such.
With regard to the content of the advertisement, according to the above laws and regulations, any advertisement that contains false or misleading information to deceive or mislead consumers shall be deemed
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false advertising. The New Advertisement Law explicitly stipulates detailed requirements for the content of several different kinds of advertisement, including advertisements for medical treatment, pharmaceuticals, medical instruments, health food, alcoholic drinks, education or training, products or services having an expected return on investment, real estate, pesticides, feed and feed additives, and some other agriculture-related advertisement. Also, according to the SAIC Interim Measures, no advertisement of such special products or services which are subject to examination by an advertising examination authority shall be published unless it has passed such examination.
The New Advertising Law and SAIC Interim Measures require us to monitor the advertising content shown on our mobile applications to ensure that such content is true, accurate and in full compliance with applicable laws and regulations. However, we cannot assure you that all of the content contained in such advertisements is true and accurate as required by the advertising laws and regulations. For details, please see Risk Factors Risks Relating to Our Industry and Business Advertisements on our mobile applications may subject us to penalties and other administrative actions.
Regulation on Mobile Internet Applications Information Services
On June 28, 2016, the CAOC issued the Provisions on the Administration of Mobile Internet Applications Information Services , or the APP Provisions, which became effective on August 1, 2016. Under the APP Provisions, mobile application providers and application store service providers are prohibited from engaging in any activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties, and may not produce, copy, issue or disseminate through mobile applications any content prohibited by laws and regulations. The APP Provisions also require application providers to procure relevant approval to provide services through such applications, and shall strictly fulfill their responsibilities of information security management, including (i) verifying real identities with the registered users through mobile phone numbers; (ii) establishing and improving the verification and management mechanism for the information content, adopting proper sanctions and measures such as warning, limiting functions, suspending updates, and closing accounts for releasing illegal information content; (iii) keeping records and report to competent authorities; (iv) protecting and safeguarding users rights to know and rights to choose during installation or use; (v) protecting intellectual property rights concerned and (vi) keeping records of user log information for 60 days.
Regulation on Online Cultural Products
On February 17, 2011, the MOC issued the new Provisional Regulations for the Administration of Online Culture, or the New Online Culture Regulations, which took effect on April 1, 2011 and was recently amended on December 15, 2017, to replace the previous regulations which were issued by MOC on May 10, 2003. The New Online Culture Regulations apply to entities engaging in activities related to Internet cultural products, which include those cultural products that are produced specially for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web animations, and those cultural products that, through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination.
Pursuant to the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MOC for an Online Culture Operating Permit if they engage in any of the following types of activities:
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the production, duplication, importation, release or broadcasting of Internet cultural products; |
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the dissemination of online cultural products on the Internet or transmission thereof via Internet or mobile phone networks to users terminals such as computers, fixed-line or mobile phones, television sets, gaming consoles and Internet surfing service sites such as Internet cafés for the purpose of browsing, using or downloading such products; or |
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the exhibition or holding of contests related to Internet cultural products. |
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The New Online Culture Regulations further classifies Internet cultural activities into commercial Internet cultural activities and non-commercial Internet cultural activities. Entities engaging in commercial Internet cultural activities must apply to the relevant authorities for a Network Cultural Business Permit, while non-commercial cultural entities are only required to report to related culture administration authorities within 60 days of the establishment of such entity. Our Consolidated VIE, Shanghai Jifen, as well as one of its subsidiary Anhui Zhangduan, have obtained the Network Cultural Business Permits with the business scope of operating game products (including issuance of virtual currencies in online games) and the permits will remain effective until November 2, 2019 and May 21, 2020, respectively.
Regulation on Information Security and Censorship
The SCNPC enacted the Decisions on the Maintenance of Internet Security on December 28, 2000, which was amended in August 27, 2009. Such decision makes it unlawful to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak State secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The Ministry of Public Security has promulgated measures as below that prohibit the use of the Internet in ways which, among other things, result in a leakage of State secrets or distribution of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.
On December 16, 1997, the Ministry of Public Security issued the Administration Measures on the Security Protection of Computer Information Network with International Connections which prohibits using the Internet to leak state secrets or to spread socially destabilizing materials. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites. Pursuant to the Ninth Amendment to the Criminal Law issued by the SCNPC on August 29, 2015 and becoming effective on November 1, 2015, any ICP provider that fails to fulfill the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon orders, will be subject to criminal liability for (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of the clients information; (iii) any serious loss of evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (i) sells or provides personal information to others unlawfully, or (ii) steals or illegally obtains any personal information, will be subject to criminal liability in severe situations.
On November 7, 2016, the SCNPC promulgated the PRC Cybersecurity Law , which took effect on June 1, 2017. The PRC Cybersecurity Law applies to the construction, operation, maintenance, and use of networks as well as the supervision and administration of Internet security in the PRC. The PRC Cybersecurity Law defines networks as systems that are composed of computers or other information terminals and relevant facilities used for the purpose of collecting, storing, transmitting, exchanging, and processing information in accordance with certain rules and procedures. Network operators, who are broadly defined as owners and administrator of networks and network service providers, shall meet their cyber security obligations and shall take technical measures and other necessary measures to protect the safety and stability of their networks. Under the Cybersecurity Law, network operators are subject to various security protection-related obligations, including:
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complying with security protection obligations in accordance with tiered requirements with respect to maintenance of the security of Internet systems, which include formulating internal security management rules and developing manuals, appointing personnel who will be responsible for Internet security, adopting technical measures to prevent computer viruses and activities that threaten Internet security, adopting technical measures to monitor and record status of network operations, holding Internet security training events, retaining user logs for at least six months, and adopting measures such as data classification, key data backup, and encryption for the purpose of securing networks from interference, vandalism, or unauthorized visits, and preventing network data from leakage, theft, or tampering; |
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verifying users identities before signing agreements or providing services such as network access, domain name registration, landline telephone or mobile phone access, information publishing, or real-time communication services; |
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clearly indicating the purposes, methods and scope of the information collection, the use of information collection, and obtain the consent of those from whom the information is collected when collecting or using personal information; |
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strictly preserving the privacy of user information they collect, and establish and maintain systems to protect user privacy; |
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strengthening management of information published by users. When the network operators discover information prohibited by laws and regulations from publication or dissemination, they shall immediately stop dissemination of that information, including taking measures such as deleting the information, preventing the information from spreading, saving relevant records, and reporting to the relevant governmental agencies |
On May 2, 2017, the CAOC issued the Measures for Security Review of Cyber Products and Services (for Trial Implementation) , or the Cybersecurity Review Measures, which came into effect on June 1, 2017. Under the Cybersecurity Review Measures, the following cyber products and services will be subject to cybersecurity review:
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important cyber products and services purchased by networks, and information systems related to national security; and |
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the purchase of cyber products and services by operators of critical information infrastructure in key industries and fields, such as public communications and information services, energy, transportation, water resources, finance, public service, and electronic administration, and other critical information infrastructure, that may affect national security. |
The CAOC is responsible for organizing and implementing cybersecurity reviews, while the competent departments in key industries such as finance, telecommunications, energy, and transport are responsible for organizing and implementing security review of cyber products and services in their respective industries and fields.
To comply with the above PRC laws and regulations, we have adopted internal procedures to monitor content displayed on our website and application. However, due to the large amount of user uploaded content, we may not be able to identify all the content that may violate relevant laws and regulations. See Risk Factors Risks Relating to Our Industry and Business The Chinese government may prevent us from distributing content that it believes is inappropriate and we may be subject to penalties for such content or we may have to interrupt or stop the operation of our platform.
Regulation on Privacy Protection
On December 28, 2012, the SCNPC enacted the Decision to Enhance the Protection of Network Information , or the Information Protection Decision, to enhance the protection of User Personal Information in electronic form. The Information Protection Decision provides that Internet services providers must expressly inform their users of the purpose, manner and scope of the Internet services providers collection and use of User Personal Information, publish the Internet services providers standards for their collection and use of User Personal Information, and collect and use User Personal Information only with the consent of the users and only within the scope of such consent. The Information Protection Decision also mandates that Internet services providers and their employees must keep strictly confidential User Personal Information that they collect, and that Internet services providers must take such technical and other measures as are necessary to safeguard the information against disclosure.
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On July 16, 2013, the MIIT issued the Order for the Protection of Telecommunication and Internet User Personal Information, or the Order. Most of the requirements under the Order that are relevant to Internet services providers are consistent with the requirements already established under the MIIT provisions discussed above, except that under the Order the requirements are often more strict and have a wider scope. If an Internet services provider wishes to collect or use personal information, it may do so only if such collection is necessary for the services it provides. Further, it must disclose to its users the purpose, method and scope of any such collection or use, and must obtain consent from the users whose information is being collected or used. Internet services providers are also required to establish and publish their protocols relating to personal information collection or use, keep any collected information strictly confidential, and take technological and other measures to maintain the security of such information. Internet services providers are also required to cease any collection or use of the user personal information, and de-register the relevant user account, when a given user stops using the relevant Internet service. Internet services providers are further prohibited from divulging, distorting or destroying any such personal information, or selling or providing such information unlawfully to other parties. The Order states, in broad terms, that violators may face warnings, fines, and disclosure to the public and, in the most severe cases, criminal liability.
On January 5, 2015, the SAIC promulgated the Measures on Punishment for Infringement of Consumer Rights , pursuant to which business operators collecting and using personal information of consumers must comply with the principles of legitimacy, propriety and necessity, specify the purpose, method and scope of collection and use of the information, and obtain the consent of the consumers whose personal information is to be collected. Business operators may not: (i) collect or use personal information of consumers without their consent; (ii) unlawfully divulge, sell or provide personal information of consumers to others; (iii) send commercial information to consumers without their consent or request, or when a consumer has explicitly declined to receive such information.
Regulations Related to Intellectual Property Rights
Trademark
On August 23, 1982, the SCNPC promulgated the Trademark Law of the PRC , or the Trademark Law, which was amended in 1993, 2001 and 2013. On September 15, 2002, the State Council promulgated the Implementation Regulation for the Trademark Law , which was amended on April 29, 2014.
Under the Trademark Law and the implementing regulation, the Trademark Office of the State Administration for Market Regulation, or the Trademark Office, is responsible for the registration and administration of trademarks. The Trademark Office handles trademark registrations. As with patents, China has adopted a first-to-file principle for trademark registration. If two or more applicants apply for registration of identical or similar trademarks for the same or similar commodities, the application that was filed first will receive preliminary approval and will be publicly announced. Registered trademarks are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six additional months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for ten years.
In addition to the above, the SAIC has established a Trademark Review and Adjudication Board for resolving trademark disputes. According to the Trademark Law, within three months since the date of the announcement of a preliminarily validated trademark, if a titleholder is of the view that is such trademark in application is identical or similar to its registered trademark for the same type of commodities or similar commodities which violates relevant provisions of the Trademark Law, such titleholder may raise an objection to the Trademark Office within the aforesaid period. In such event, the Trademark Office shall consider the facts and grounds submitted by both the dissenting party and the party being challenged and shall decide on whether the registration is allowed within 12 months upon the expiration of the announcement after investigation and verification, and notify the dissenting party and the person challenged in writing.
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We have not completed the trademark registration for Qutoutiao, the name of our flagship mobile application. After we submitted our application material with the Trademark Office and received the announcement of our preliminarily validated trademarks concerned in June 2017, one of our competitors filed an objection on the ground that Qutoutiao is similar to certain trademarks registered by such competitor. We believe such objection is meritless and we have contested the objection and submitted the written defense to the Trademark Office in February 2018. However, there can be no assurance that we will be able to prevail and register Qutoutiao as a trademark. See Risk Factors Risks Relating to Our Industry and Business If we do not continue to increase the strength of our brand, we may not be able to maintain current or attract new users and customers for our products and services.
As of June 30, 2018, we have registered 12 trademarks in the PRC. Including the above mentioned trademark application for Qutoutiao, we have filed 149 trademark applications in the PRC as of the same date.
Copyrights
On September 7, 1990, The National Peoples Congress promulgated the Copyright Law , which took effect on June 1, 1991 and was amended in 2001 and in 2010. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center.
In order to further implement the Computer Software Protection Regulations , promulgated by the State Council on December 20, 2001 and amended on January 30, 2013, the National Copyright Administration, or the NCA, issued the Computer Software Copyright Registration Procedures on February 20, 2002, which specify detailed procedures and requirements with respect to the registration of software copyrights. The China Copyright Protection Center shall grant registration certificates to the Computer Software Copyrights applicants which meet the requirements of both the Software Copyright Registration Procedures and the Computer Software Protection Regulations.
As of June 30, 2018, we have been granted 49 software copyrights and nine artwork copyrights in the PRC.
Domain Names
The MIIT promulgated the Measures on Administration of Internet Domain Names , or the Domain Name Measures, on August 24, 2017, which took effect on November 1, 2017 and replaced the Administrative Measures on China Internet Domain Name promulgated by MIIT on November 5, 2004. According to the Domain Name Measures, the MIIT is in charge of the administration of PRC Internet domain names. The domain name registration follows a first-to-file principle. Applicants for registration of domain names shall provide the true, accurate and complete information of their identifications to domain name registration service institutions. The applicants will become the holder of such domain names upon the completion of the registration procedure.
As of June 30, 2018, we are the registered holder of 106 domain names in the PRC.
Regulations on Foreign Exchange
Under the Foreign Currency Administration Rules of the PRC promulgated on January 29, 1996 and most recently amended on August 5, 2008 and various regulations issued by the State Administration of Foreign Exchange, or the SAFE, and other relevant PRC government authorities, Renminbi is convertible into other currencies for current account items, such as trade-related receipts and payments and payment of interest and dividends. The conversion of Renminbi into other currencies and remittance of the converted foreign currency outside the PRC for of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval from the SAFE or its local office. Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies may not repatriate
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foreign currency payments received from abroad or retain the same abroad. FIEs may retain foreign exchange in accounts with designated foreign exchange banks under the current account items subject to a cap set by the SAFE or its local office. Foreign exchange proceeds under the current accounts may be either retained or sold to a financial institution engaged in settlement and sale of foreign exchange pursuant to relevant SAFE rules and regulations. For foreign exchange proceeds under the capital accounts, approval from the SAFE is generally required for the retention or sale of such proceeds to a financial institution engaged in settlement and sale of foreign exchange.
Pursuant to the Circular of the SAFE on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment , or the SAFE Circular 59 promulgated by SAFE on November 19, 2012, which became effective on December 17, 2012 and was further amended on May 4, 2015, approval is not required for opening a foreign exchange account and depositing foreign exchange into the accounts relating to the direct investments. SAFE Circular 59 also simplified foreign exchange-related registration required for the foreign investors to acquire the equity interests of PRC companies and further improve the administration on foreign exchange settlement for FIEs.
On February 13, 2015, the SAFE promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment , or the SAFE Circular 13, effective from June 1, 2015, which cancels the administrative approvals of foreign exchange registration of direct domestic investment and direct overseas investment. In addition, SAFE Circular 13 simplifies the procedure of foreign exchange-related registration, under which investors shall register with banks for direct domestic investment and direct overseas investment.
Regulations on Dividend Distribution
The principal laws and regulations regulating the dividend distribution of dividends by FIEs in the PRC include the Company Law of the PRC , as recently amended in 2013, the Wholly Foreign-owned Enterprise Law promulgated recently amended in 2016 and its implementation regulations, the Equity Joint Venture Law of the PRC recently amended in 2016 and its implementation regulations, and the Cooperative Joint Venture Law of the PRC recently amended in 2017 and its implementation regulations.
Under the current regulatory regime in the PRC, FIEs in the PRC may pay dividends only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations. A PRC company is required to set aside as statutory reserve funds at least 10% of its after-tax profit, until the cumulative amount of such reserve funds reaches 50% of its registered capital unless laws regarding foreign investment provide otherwise. A PRC company shall not distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
As of June 30, 2018, our wholly foreign-owned subsidiary, Shanghai Quyun, has not made any profits and will not be able to pay dividends to our offshore entities until they generate accumulated profits and meet the requirements for statutory reserve funds.
Regulations on Taxation
Enterprise Income Tax
On March 16, 2007, the SCNPC promulgated the Law of the PRC on Enterprise Income Tax which was amended on February 24, 2017 and on December 6, 2007, the State Council enacted the Regulations for the Implementation of the Law on Enterprise Income Tax (collectively, the EIT Law). Under the EIT Law, both resident enterprises and non-resident enterprises are subject to tax in the PRC. Resident enterprises are defined as enterprises that are established in China in accordance with PRC laws, or that are established in accordance with
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the laws of foreign countries but are actually or in effect controlled from within the PRC. Non-resident enterprises are defined as enterprises that are organized under the laws of foreign countries and whose actual management is conducted outside the PRC, but have established institutions or premises in the PRC, or have no such established institutions or premises but have income generated from inside the PRC. Under the EIT Law and relevant implementing regulations, a uniform corporate income tax rate of 25% is applied. However, if non-resident enterprises have not formed permanent establishments or premises in the PRC, or if they have formed permanent establishment or premises in the PRC but there is no actual relationship between the relevant income derived in the PRC and the established institutions or premises set up by them, enterprise income tax is set at the rate of 20% with respect to their income sourced from inside the PRC.
Value-added Tax
The Provisional Regulations of the PRC on Value-added Tax , or the VAT Regulations, were promulgated by the State Council on December 13, 1993 and were most recently amended on November 19, 2017. The Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (Revised in 2011) were promulgated by the Ministry of Finance on December 25, 1993 which was recently amended on October 28, 2011 (collectively with the VAT Regulations, the VAT Law). According to the VAT Law, all enterprises and individuals engaged in the sale of goods, the provision of processing, repair and replacement services, and the importation of goods within the territory of the PRC must pay value-added tax. For taxpayers selling or importing goods other than those specifically listed in the VAT Law, the value-added tax rate is 17%.
On November 16, 2011, the Ministry of Finance, or the MOF, and the State Administration of Taxation, or the SAT, promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax , to lay out main content of the pilot scheme for the reform of levying value-added tax in place of business tax. Further on March 23, 2016, the MOF and the SAT jointly promulgated the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax , which became effective on May 1, 2016. Pursuant to the above mentioned notices, VAT is generally imposed in lieu of business tax in the modern service industries, including the VATS, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision of some modern services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided.
On November 19, 2017, the State Council promulgated the Decision of State Council on Abolition of the Provisional Regulations of the PRC on Business Tax and Revision of the Provisional Regulations of the PRC on Value-added Tax , which took effective on the same date, to formally abolish the Provisional Regulations of the Peoples Republic of China on Business Tax and amend the VAT Regulations accordingly.
As of June 30, 2018, our PRC subsidiaries, consolidated VIE and its subsidiaries are generally subject to the VAT rates of 6%.
Withholding Tax
The EIT Law provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-PRC resident investors which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC.
Pursuant to an Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes , or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding
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tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties , or the SAT Circular 81, issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment.
Regulations on Employment
Labor Contract Law
The Labor Contract Law of the PRC , or the Labor Contract Law, which was promulgated on January 1, 2008 and amended on December 28, 2012, is primarily regulating rights and obligations of employer and employee relationships, including the establishment, performance and termination of labor contracts. Pursuant to the Labor Contract Law, labor contracts shall be concluded in writing if labor relationships are to be or have been established between employers and the employees. Employers are prohibited from forcing employees to work above certain time limit and employers shall pay employees for overtime work in accordance to national regulations. In addition, employee wages shall be no lower than local standards on minimum wages and shall be paid to employees timely.
Regulations on Social Insurance and Housing Fund
Under the Social Insurance Law of the PRC that was promulgated by the SCNPC on October 28, 2010 and came into force as of July 1, 2011 and the Interim Regulations on the Collection and Payment of Social Insurance Premiums that was promulgated by the State Council on and came into force as of January 22, 1999, employers are required to pay basic endowment insurance, unemployment insurance, basic medical insurance, employment injury insurance, maternity insurance and other social insurance for its employees at specified percentages of the salaries of the employees, up to a maximum amount specified by the local government regulations from time to time. Where an employer fails to fully pay social insurance premiums, relevant social insurance collection agency shall order it to make up for any shortfall within a prescribed time limit, and may impose a late payment fee at the rate of 0.05% per day of the outstanding amount from the due date. If such employer still fails to make up for the shortfalls within the prescribed time limit, the relevant administrative authorities shall impose a fine of 1 to 3 times the outstanding amount upon such employer.
In accordance with the Regulations on the Management of Housing Fund which was promulgated by the State Council in 1999 and amended in 2002, employers must register at the designated administrative centers and open bank accounts for depositing employees housing funds. Employer and employee are also required to pay and deposit housing funds, with an amount no less than 5% of the monthly average salary of the employee in the preceding year in full and on time.
Regulations on Employee Share Incentive Plans
Pursuant to the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company , or SAFE Circular 7, which was issued by the SAFE on February 15, 2012, employees, directors, supervisors, and other senior management participating in any share incentive plan of an overseas publicly-listed company who are PRC citizens or who are non-PRC citizens residing in China for a continuous period of not less than one year, subject to a few exceptions, are required to register with SAFE through a domestic agency as regulated in SAFE Circular 7.
In addition, the SAT has issued certain circulars concerning employee stock options and restricted shares, including the Circular on Issues Concerning the Individual Income Tax on Share-option Incentives , or the Circular 461, which was promulgated and took effective on August 24, 2009. Under Circular 461 and other
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relevant laws and regulations, employees working in the PRC who exercise stock options or are granted restricted shares will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company are required to file documents related to employee stock options and restricted shares with relevant tax authorities and to withhold individual income taxes of employees who exercise their stock option or purchase restricted shares. If the employees fail to pay or the PRC subsidiaries fail to withhold income tax in accordance with relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Regulations Related to Mergers and Acquisitions and Overseas Listings
M&A Rules
On August 8, 2006, six PRC governmental and regulatory agencies, including MOFCOM and the China Securities Regulatory Commission, or the CSRC, promulgated the Rules on Acquisition of Domestic Enterprises by Foreign Investors , or the M&A Rules, governing the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006 and was revised on June 22, 2009. The M&A Rules, among other things, requires that offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic interest held by such PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
In our case, the CSRC approval is considered not required in the context of this offering because (i) our wholly-owned PRC subsidiary, Shanghai Quyun, was incorporated as a foreign-invested enterprise by means of foreign direct investments rather than by merger with or acquisition of any PRC domestic companies as defined under the M&A Rules, and (ii) there is no statutory provision that clearly classifies the contractual arrangement among Shanghai Quyun and our consolidated VIE and its shareholders as transactions regulated by the M&A Rules. However, there can be no assurance that the relevant PRC government agencies, including the CSRC, would reach the same conclusion. See Risk Factors Risks Relating to Our Industry and Business The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.
SAFE Circular 37
Under the Circular of the State Administration of Foreign Exchange on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles , or the SAFE Circular 37, issued by the SAFE and effective on July 4, 2014, PRC residents are required to register with the local SAFE branch prior to the establishment or control of an offshore special purpose vehicle, or the SPV, which is defined as offshore enterprises directly established or indirectly controlled by PRC residents for offshore equity financing of the enterprise assets or interests they hold in China. An amendment to registration or subsequent filing with the local SAFE branch by such PRC resident is also required if there is any change in basic information of the offshore company or any material change with respect to the capital of the offshore company. At the same time, the SAFE has issued the Operation Guidance for the Issues Concerning Foreign Exchange Administration over Round-trip Investment regarding the procedures for SAFE registration under the SAFE Circular 37, which became effective on July 4, 2014 as an attachment of Circular 37.
Under the relevant rules, failure to comply with the registration procedures set forth in the SAFE Circular 37 may result in bans on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliates, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.
Mr. Eric Siliang Tan and Mr. Lei Li have completed the SAFE registration pursuant to SAFE Circular 37 in 2017, with Innotech Group Holdings Ltd. and News Optimizer (BV) Ltd. being separately registered as the
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respective special purpose vehicle. After transferring all shares in Innotech Group Holdings Ltd. to the trust of which himself is also a beneficiary, Mr. Eric Siliang Tan, as well as all the other beneficiaries of the trust who are PRC residents are required to complete relevant registrations pursuant to SAFE Circular 37. We have notified substantial beneficial owners of our ordinary shares and the beneficiaries of the trust who we know are PRC residents of their filing obligation, including the obligation to make updates under SAFE Circular 37, and the beneficial owners have undertaken to complete relevant registrations as soon as such registration is practical with local SAFE. Nevertheless, we may not be aware of the identities of all of our beneficial owners who are PRC residents, and we do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. See Risk Factors Risks Relating to Our Industry and Business PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries ability to increase their registered capital or distribute profits.
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Directors and Executive Officers
The following table sets forth certain information relating to our directors and executive officers upon closing of this offering.
Name |
Age |
Position/Title |
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Eric Siliang Tan |
38 | Co-founder and executive chairman | ||||
Lei Li |
35 | Co-founder, director and chief executive officer | ||||
Zhiliang Wang |
34 | Co-founder and chief technology officer | ||||
Sihui Chen |
33 | Co-founder and chief operating officer | ||||
Shaoqing Jiang |
44 | Director | ||||
James Jun Peng* |
44 | Independent director appointee | ||||
Feng Li* |
42 | Independent director appointee | ||||
Jianfei Dong |
37 | Director and co-president | ||||
Guanqiang Feng |
30 | Co-president | ||||
Jingbo Wang |
37 | Director and chief financial officer | ||||
Oliver Yucheng Chen |
39 | Director and chief strategy officer | ||||
Binjie Zhu |
33 | Vice president |
* |
Has accepted appointment as our independent director, effective upon the SECs declaration of effectiveness of our registration statement on Form F-1, of which this prospectus is a part. |
Mr. Eric Siliang Tan is our co-founder and executive chairman of board of directors. Mr. Tan has more than 12 years of experience in the Internet industry and serial entrepreneurship experiences. Mr. Tan concurrently serves as chief executive officer of AdIn Media (Shanghai) Co., Ltd., an advertising technology company he founded in 2013, which was acquired in 2015 by Wutong Holding Group Co., Ltd., a company listed on Shenzhen Stock Exchange. Prior to that, Mr. Tan was head of advertising solutions of Shanghai Shengyue Advertising Co., Ltd., a subsidiary of SNDA Interactive Entertainment Limited from 2010 to 2013, in charge of developing open Internet advertising platform. Previously, Mr. Tan served at Wealink.com, an Internet recruiting company, as chief technology officer from 2008 to 2009, and at 51.com, an online game company, as engineering manager in 2008. Mr. Tan worked at Yahoo! China, with his last position as senior engineer, from 2006 to 2008. Mr. Tan graduated from Tsinghua University with a bachelor of engineering degree in automation in 2002. Mr. Tan graduated from Chinese Academy of Sciences with master of engineering degree in artificial intelligence in 2006.
Mr. Lei Li is our co-founder, director and chief executive officer. Mr. Li has over ten years of product experience in the Internet industry. Prior to co-founding our company, Mr. Li worked at Anhui Aoding Information Technology Co., Ltd., a subsidiary of AdIn Media (Shanghai) Co., Ltd., from 2013 to 2015, with his last position as director of product engineering. Prior to that, Mr. Li served as director of advertising solutions of Shanghai Shengyue Advertising Co., Ltd., a subsidiary of SNDA Interactive Entertainment Limited from 2010 to 2013. Previously, Mr. Li worked at 51.com, an online game company, from 2007 to 2010, with his last position as manager of research and development. Mr. Li graduated from Open University of China with an associate degree in law in 2014 and a bachelor degree in law in 2017.
Mr. Zhiliang Wang is our co-founder and chief technology officer. Prior to joining our company in March 2016, Mr. Wang had over ten years of experience in the Internet industry focusing on advertising and mobile applications. He worked at Baidu, Inc. as an engineering manager responsible for the mobile browser division from 2013 to 2015. Previously, Mr. Wang was a senior manager of programmatic advertising platform solutions at Shanghai Shengyue Advertising Co., Ltd., a subsidiary of SNDA Interactive Entertainment Limited from 2010 to 2013. Prior to that, Mr. Wang worked at PPLive, an online video company, as a research and development supervisor of online video from 2007 to 2010. Mr. Wang graduated from Southwestern University with a bachelor degree in information management and information systems in 2007.
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Ms. Sihui Chen is our co-founder and chief operating officer. Prior to joining our company in January 2016, Ms. Chen worked at Shanghai Qingyuan Lvwang Co., Ltd., an Internet gaming company, as head of project management responsible for product development. Previously, Ms. Chen held several positions at SNDA Interactive Entertainment Limited, including executive assistant to the chief executive officer of literature division from 2012 to 2014, and corporate human resource business partner from 2007 to 2012. Ms. Chen graduated from Zhongnan University of Economics and Law with a bachelor degree in management and a bachelor degree in finance in 2007.
Mr. Shaoqing Jiang is an operational director of Chengwei Capital. Prior to joining Chengwei Capital, Mr. Jiang served at Renaissance Environmental Investment as a director from 2007 to 2012. Previously, Mr. Jiang worked at Walden International as an investment director and Cummings-Goldman Capital Partners as a vice president from 2006 to 2007. Prior to that, Mr. Jiang worked at Chengwei Ventures as an associate from 1999 to 2003. Mr. Jiang holds a bachelor degree in English from Fudan University and a master of business administration degree from Leonard Stern School of Business, New York University.
Mr. James Jun Peng will serve as our independent director upon the SECs declaration of effectiveness of our registration statement on Form F-1, of which this prospectus is a part. Mr. Peng is the co-founder and CEO of Pony.ai Inc. Prior to co-founding Pony.ai Inc. in 2016, Mr. Peng served as a chief architect of the autonomous driving division, leading the overall strategy and development of Baidus autonomous vehicle from 2011 to 2016. Mr. Peng began his career as a software engineer at Google in 2005, specializing in backend and frontend advertising systems. Mr. Peng obtained a bachelor of civil engineering degree from Tsinghua University in 1996, a master of civil engineering degree from SUNY-Buffalo in 1998 and a doctor of philosophy degree from Stanford University in 2002.
Mr. Feng Li will serve as our independent director upon the SECs declaration of effectiveness of our registration statement on Form F-1, of which this prospectus is a part. Mr. Li has approximately 19 years of experience in business management and financial education. At the University of Michigan Stephen M. Ross School of Business, he was an Assistant Professor from July 2004 to July 2011 and the Harry Jones Associate Professor with tenure from July 2011 to June 2015. Since July 2015, Mr. Li has been a professor of accounting at Shanghai Advanced Institute of Finance of Shanghai Jiao Tong University, where he served as the Faculty Director of the Finance MBA Program and Deputy Dean for Non-Executive Programs. Mr. Li has also been an independent director and the audit committee financial expert for Sungy Mobile Limited, a company listed on the NASDAQ (NASDAQ: GOMO) and Yintech Investment Holdings Limited, a company listed on the NASDAQ (NASDAQ: YIN). Mr. Li is a member of the American Accounting Association and received the Distinguished Contribution to the Accounting Literature Award from the Association in 2018. Mr. Li graduated from Fudan University with a bachelor degree in economics in July 1996 and a master degree in economics in July 1998. He received his master degree in business administration from the University of Chicago in June 2004 and obtained a doctor of philosophy degree in accounting from the University of Chicago in June 2005.
Mr. Jianfei Dong is our director and co-president. Prior to joining our company in May 2018, Mr. Dong served as the co-chief operating officer of Inke, a mobile live streaming platform, from 2017 to 2018. Prior to that, he served as the director of technology and general manager of the mobile applications development department of Baidu from 2008 to 2017. Previously, Mr. Dong worked as a senior research and development engineer on Internet search engine at Kuxun, a travel services and search website, from 2007 to 2008. Mr. Dong graduated from Tsinghua University with a bachelor degree in control science and engineering in automation in 2005 and a master degree in control science and engineering in automation in 2007.
Mr. Guanqiang Feng is our co-president. Prior to joining our company in February 2018, he worked at a subsidiary of Reatch, an advertising technology company listed on the National Equities Exchange and Quotations in China, as the vice president of product from 2014 to 2017. Previously, Mr. Feng was a senior product manager of mobile advertising solutions at Baidu from 2012 to 2014. Mr. Feng graduated from Tongji University with a master degree in software engineering in 2013, and he graduated from Wuhan University with a bachelor degree in software engineering and economics in 2010.
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Mr. Jingbo Wang is our director and chief financial officer. Prior to joining our company in February 2018, Mr. Wang served as the chief financial officer of Yintech Investment Holdings Limited since October 2014, a company listed on NASDAQ since April 2016. Prior to that, Mr. Wang worked at Deutsche Bank from 2009 to 2014, with his last position being vice president in the Corporate Finance Division. Mr. Wang graduated from Tsinghua University with a bachelor degree of engineering in automation in 2003. Mr. Wang graduated from the University of Hong Kong with a master of philosophy degree in computer science in 2005 and was awarded a doctor of philosophy degree in management studies from Saïd Business School, University of Oxford, in 2010.
Mr. Oliver Yucheng Chen is our director and chief strategy officer. Prior to joining our company in February 2018, Mr. Chen was a co-founding partner of Innotech Capitals from 2015 to 2018. Prior to that he was chief financial officer at AdIn Media (Shanghai) Co., Ltd. from 2014 to 2015, SNDA Interactive Entertainment Limited SDO division from 2012 to 2014 and Sohu.com video division from 2011 to 2012. Previously, Mr. Chen worked as Asia audit director of PepsiCo from 2009 to 2011. He also worked in the U.S. from 2001 to 2009 at KPMG and at Deloitte. Mr. Chen graduated from University of Michigan with a bachelor degree in economics and a master degree in accounting in 2001. He is a U.S. certified public accountant with inactive status.
Mr. Binjie Zhu is our vice president. Prior to joining our company in August 2017, Mr. Zhu was the president of VivaVideo, a leading global short video platform from 2016 to 2017. Prior to that, Mr. Zhu founded a financial technology start-up in 2015. Mr. Zhu worked at Deutsche Bank from 2010 to 2015, with his last position being vice president in the Technology, Media and Telecommunication Investment Banking Division. Mr. Zhu graduated from Tsinghua University with a bachelor degree in electronic engineering in 2007.
Board of Directors
Our board of directors will consist of eight directors upon the SECs declaration of effectiveness of our registration statement on Form F-1, of which this prospectus is a part. A director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract or any proposed contract or arrangement in which he is interested, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered, provided (a) such director has declared the nature of his interest at the meeting of the board at which the question of entering into the contract or arrangement is first considered if he knows his interest then exists, or in any other case at the first meeting of the board after he knows he is or has become so interested, either specifically or by way of a general notice and (b) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
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conducting and managing the business of our company; |
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representing our company in contracts and deals; |
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appointing attorneys for our company; |
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select senior management; |
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providing employee benefits and pension; |
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managing our companys finance and bank accounts; |
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exercising the borrowing powers of our company and mortgaging the property of our company; and |
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exercising any other powers conferred by the shareholders meetings or under our amended and restated memorandum and articles of association. |
Terms of Directors and Executive Officers
Our directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders, pursuant to our amended and restated memorandum and articles of association. Each of our directors will hold office until his or her successor takes office or until his or her earlier death, resignation or removal or the expiration of his or her term as provided in the written agreement with our company, if any. A director will cease to be a director if, among other things, the director (i) dies, or becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at the discretion of the board of directors.
Pursuant to our shareholders agreement dated September 4, 2018 and our fifth amended and restated memorandum and articles of associations dated September 4, 2018, we have granted certain shareholders the right to elect, remove and replace one director on our board of directors, or the board representation rights. The shareholders agreement and the board presentation rights are expected to be terminated upon completion of this offering. We also expect to adopt our amended and restated memorandum and articles of associations upon the completion of this offering. Pursuant to the share purchase agreement dated August 27, 2018, The Paper will have the right to designate one director to our board of directors. The Paper is expected to retain such right after the completion of this offering.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. We will adopt a charter for each of the committees. Each committees members and functions are described below.
Audit Committee
Our audit committee will initially consist of Mr. Shaoqing Jiang, Mr. James Jun Peng and Mr. Feng Li. Mr. Feng Li will be the chairperson of our audit committee. Mr. Feng Li satisfy the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Each of Mr. James Jun Peng and Mr. Feng Li satisfies the requirements for an independent director within the meaning of Rule 5605(a)(2) of the Listing Rules of the NASDAQ Global Market and will meet the criteria for independence set forth in Rule 10A-3 of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Our audit committee will consist solely of independent directors within one year of this offering.
The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our audit committee is responsible for, among other things:
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selecting the independent auditor; |
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pre-approving auditing and non-auditing services permitted to be performed by the independent auditor; |
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annually reviewing the independent auditors report describing the auditing firms internal quality control procedures, any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent auditor and our company; |
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setting clear hiring policies for employees and former employees of the independent auditors; |
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reviewing with the independent auditor any audit problems or difficulties and managements response; |
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reviewing and, if material, approving all related party transactions on an ongoing basis; |
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reviewing and discussing the annual audited financial statements with management and the independent auditor; |
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reviewing and discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations; |
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reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments; |
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discussing earnings press releases with management, as well as financial information and earnings guidance provided to analysts and rating agencies; |
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reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on our financial statements; |
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discussing policies with respect to risk assessment and risk management with management, internal auditors and the independent auditor; |
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timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management and all other material written communications between the independent auditor and management; |
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establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; |
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annually reviewing and reassessing the adequacy of our audit committee charter; |
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such other matters that are specifically delegated to our audit committee by our board of directors from time to time; |
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meeting separately, periodically, with management, internal auditors and the independent auditor; and |
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reporting regularly to the full board of directors. |
Compensation Committee
Our compensation committee will initially consist of Mr. Shaoqing Jiang, Mr. James Jun Peng and Mr. Feng Li. Mr. James Jun Peng will be the chairperson of our compensation committee. Each of Mr. James Jun Peng and Mr. Feng Li satisfies the requirements for an independent director within the meaning of Rule 5605(a)(2) of the Listing Rules of the NASDAQ Global Market.
Our compensation committee is responsible for, among other things:
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reviewing, evaluating and, if necessary, revising our overall compensation policies; |
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reviewing and evaluating the performance of our directors and senior officers and determining the compensation of our senior officers; |
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reviewing and approving our senior officers employment agreements with us; |
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setting performance targets for our senior officers with respect to our incentivecompensation plan and equity-based compensation plans; |
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administering our equity-based compensation plans in accordance with the terms thereof; and such other matters that are specifically delegated to the remuneration committee by our board of directors from time to time. |
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee will initially consist of Mr. Eric Siliang Tan, Mr. James Jun Peng and Mr. Feng Li. Mr. Eric Siliang Tan will be the chairperson of our nominating and corporate governance committee. Each of Mr. James Jun Peng and Mr. Feng Li satisfies the requirements for an independent director within the meaning of Rule 5605 (a)(2) of the Listing Rules of the NASDAQ Global Market. The nominating and corporate governance committee will assist the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee will be responsible for, among other things:
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selecting and recommending to the board nominees for election by the shareholders or appointment by the board; |
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reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; |
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making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and |
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advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken. |
Compensation of Directors and Executive Officers
In 2017, we paid aggregate cash compensation of approximately RMB1.0 million (US$0.2 million) to our directors and executive officers as a group. We did not pay any other cash compensation or benefits in kind to our directors and executive officers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our directors and executive officers. Our PRC subsidiaries and consolidated VIE are required by law to make contributions equal to certain percentages of each employees salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund. Our board of directors may determine compensation to be paid to the directors and the executive officers. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors and the executive officers.
For information regarding share awards granted to our directors and executive officers, see Equity Incentive Plans.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, wilful misconduct or gross negligence to our detriment, or serious breach of duty of loyalty to us. We may also terminate an executive officers employment without cause
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upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-month advance written notice.
Each executive officer has agreed to hold, both during and within two years after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our business partners, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officers employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets.
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach financial institutions, dealers or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officers termination, or in the year preceding such termination, without our express consent.
We intend to enter into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
Equity Incentive Plans
2017 Equity Incentive Plan
After our company was incorporated in July 2017, we agreed to assume obligations and duties under pre-existing share options that were granted by Shanghai Jifen from 2016 to 2017, and we determined to do so pursuant to an equity incentive plan in order to preserve the interests of the holders of such existing options. For this purpose, our board of directors adopted our 2017 equity incentive plan in February 2018. The purpose of the 2017 equity incentive plan is to attract and retain the services of key personnel and to provide means for directors, officers, employees, consultants and other service providers to acquire and maintain an interest in us, which interest may be measured by reference to the value of ordinary shares.
The 2017 equity incentive plan provides for an aggregate amount of no more than 10,000,000 ordinary shares to be issued pursuant to share options granted under the plan. No more than 10,000,000 ordinary shares may be issued upon the exercise of incentive stock options. Generally, if any share option (or portion thereof) under the 2017 equity incentive plan terminates, expires, lapses, or is canceled for any reason without being vested or exercised, or is settled in cash or other property, as applicable, the ordinary shares subject to such share option will again be available for future grant, unless the plan has expired.
As of the date of this prospectus, options to purchase all the 10,000,000 ordinary shares have been granted under the 2017 equity incentive plan.
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Administration
The 2017 equity incentive plan will be administered by our board of directors or any other committee of board of directors or any member(s) of the board of directors or officer(s) who have been delegated any authority pursuant to the 2017 equity incentive plan. The plan administrator is authorized to interpret the plan and to determine the provisions of each share option including the number of shares covered, the exercise price, and the vesting schedule. In addition, the plan administrator may (i) select the recipients of share options, (ii) prescribe the forms of share option agreements and amend any share option agreement (subject to certain limitations), (iii) allow a participant to satisfy minimum tax withholding obligations by withholding shares to be issued pursuant to a share option and (iv) make other decisions and determinations as provided in the 2017 equity incentive plan.
Types of Awards
The 2017 equity incentive plan permits awards of options.
Change in Control
In the event of a change in control, the plan administrator may, in its sole discretion, (i) adjust the number and kind of shares and prices subject to share options then held by a participant in the 2017 equity incentive plan to provide the assumption or substitution of any share option or provide for the assumption, conversion or replacement of any option with other rights (including cash) or property (as the plan administrator selects or determines to be reasonable, equitable and appropriate) (ii) accelerate the vesting, in whole or in part, of any share option, or (iii) purchase any share option for an amount of cash or shares (in accordance with the terms of the 2017 equity incentive plan). In the event a successor or surviving company refuses to assume, convert or replace a share option, then the outstanding share options shall fully vest. A change of control under the 2017 equity incentive plan is defined as (i) an amalgamation, arrangement, merger, consolidation or scheme of arrangement in which our company is not the surviving entity, except for a transaction the principal purpose of which is to change the jurisdiction in which our company is incorporated or which following such transaction the holders of our companys voting shares immediately prior to such transaction own more than fifty percent (50%) of the voting shares of the surviving entity; (ii) the sale, transfer or other disposition of all or substantially all of the assets of our company (other than to one of our subsidiaries); (iii) the completion of a voluntary or insolvent liquidation or dissolution of our company; (iv) any takeover, reverse takeover, scheme of arrangement, or series of related transactions culminating in a reverse takeover or scheme of arrangement (including, but not limited to, a tender offer followed by a takeover or reverse takeover) in which our company survives but (A) the shares of our company outstanding immediately prior to such transaction are converted or exchanged by virtue of the transaction into other property, whether in the form of shares, securities, cash or otherwise, or (B) the shares carrying more than 50% of the total combined voting power of our companys then issued and outstanding shares are transferred to a person or persons different from those who held such shares immediately prior to such transaction culminating in such takeover, reverse takeover or scheme of arrangement, or (C) our company issues new voting shares in connection with any such transaction such that holders of the our companys voting shares immediately prior to the transaction no longer hold more than 50% of the voting shares of our company after the transaction; or (v) the acquisition in a single or series of related transactions by any person or related group of persons (other than employees of our company, our subsidiaries or any other person in or of which our company or subsidiaries holds a substantial economic interest or possesses the power to direct or cause the direction of the management policies or entities established for the benefit of the employees of our company, our subsidiaries or any other person in or of which our company or subsidiaries holds a substantial economic interest or possesses the power to direct or cause the direction of the management policies) of (A) control of our board of directors or the ability to appoint a majority of the members of our board of directors, or (B) beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of shares carrying more than 50% of the total combined voting power of the our companys then issued and outstanding shares.
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Term
Unless terminated earlier, the 2017 equity incentive plan will expire ten years from the date the 2017 equity incentive plan becomes effective. Options granted or issued under the 2017 equity incentive plan on or prior to the date of its termination will continue in effect subject to the terms of the 2017 equity incentive plan and the applicable option agreement.
Vesting Schedule
In general, the plan administrator determines the vesting schedule of each share option as evidenced by an option agreement. The plan administrator may accelerate the vesting of any share option.
Amendment and Termination of Plan
Our board of directors, in its sole discretion, may at any time amend, alter or discontinue the 2017 equity incentive plan, subject to certain exceptions.
Granted Options
Name |
Position |
Ordinary
Shares Underlying Options Awarded |
Option
Exercise Price |
Grant Date |
Option
Expiration Date |
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Zhiliang Wang |
Chief technology
officer |
2,372,965 | US$ | 0.0001 | June 30, 2016 | June 30, 2026 | ||||||||
Sihui Chen |
Chief operating
officer |
957,655 | US$ | 0.0001 | June 30, 2016 | June 30, 2026 | ||||||||
Binjie Zhu |
Vice president of
growth |
* | US$ | 0.0001 | September 30, 2017 | September 30, 2027 |
* |
Less than 1% of our outstanding shares assuming conversion of all convertible redeemable preferred shares into ordinary shares. |
Share Restriction Deeds
On January 3, 2018, entities respectively controlled by our co-founders Mr. Eric Siliang Tan and Mr. Lei Li entered into share restriction deeds with us, pursuant to which a total of 15,937,500 ordinary shares beneficially owned by such co-founders became restricted shares. 12,187,500 of such restricted shares are beneficially owned by Mr. Eric Siliang Tan and will be vested in a period over 34 months. 3,750,000 of such restricted shares are beneficially owned by Mr. Lei Li and will be vested in a period over 24 months. At the end of the vesting periods, all such shares will have vested and will no longer constitute restricted shares. In the event that a co-founder voluntarily and unilaterally terminates his employment or service contract with us or his employment or service relationship is terminated by us for cause as specified in the applicable deed, the entity controlled by such co-founder is obligated to sell to us all of the restricted shares (but excluding vested shares as of such time) held by it at a price of US$0.0001 per share. These share restriction deeds will be terminated, and any remaining restricted shares will be vested, upon the completion of this offering. For accounting purposes, this transaction has been reflected retrospectively similar to a reverse stock split, with a grant of 15,937,500 restricted shares to be recognized in January 2018 at their then fair value of approximately US$128.1 million and recognized as compensation expense over the vesting periods.
2018 Equity Incentive Plan
In February 2018, our board of directors adopted our 2018 equity incentive plan pursuant to which equity-based awards may be granted to eligible participants. The purpose of the 2018 equity incentive plan is to attract
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and retain the services of key personnel by providing additional incentive to promote the business of our company.
The 2018 equity incentive plan provides for an aggregate amount of no more than 2,964,141 ordinary shares to be issued pursuant to equity-based awards granted under the plan. No more than 2,964,141 ordinary shares may be issued upon the exercise of incentive stock options. Generally, if any award (or portion thereof) under the 2018 equity incentive plan terminates, expires, lapses, is canceled for any reason without being vested or exercised, or is settled in cash or other property, as applicable, the ordinary shares subject to such award will again be available for future grant.
As of the date of this prospectus, equity-based awards with respect to 2,873,598 ordinary shares have been granted under the 2018 equity incentive plan.
Administration
The 2018 equity incentive plan will be administered by our board of directors or any other committee of board of directors or any member(s) of the board of directors or officer(s) who have been delegated any authority pursuant to the 2018 equity incentive plan. The plan administrator is authorized to interpret the plan and to determine the provisions of each award including the number of shares covered, the type of award, the exercise price, if applicable, and the vesting schedule. In addition, the plan administrator may (i) select the recipients of awards, (ii) prescribe the forms of award agreements and amend any award agreement (subject to certain limitations), (iii) allow a participant to satisfy minimum tax withholding obligations by withholding shares to be issued pursuant to an award and (iv) make other decisions and determinations as provided in the 2018 equity incentive plan.
Types of Awards
The 2018 equity incentive plan permits awards of, among others, options, restricted shares and restricted share units.
Change in Control
In the event of a change in control, the plan administrator may, in its sole discretion, (i) adjust the number and kind of shares and prices subject to awards then held by a participant in the 2018 equity incentive plan to provide the assumption or substitution of any award or provide for the assumption, conversion or replacement of any option with other rights (including cash) or property (as the plan administrator selects or determines to be reasonable, equitable and appropriate) (ii) accelerate the vesting, in whole or in part, of any award, or (iii) purchase any award for an amount of cash or shares (in accordance with the terms of the 2018 equity incentive plan). In the event a successor or surviving company refuses to assume, convert or replace an award, then the outstanding awards shall fully vest. A change of control under the 2018 equity incentive plan is defined as (i) an amalgamation, arrangement, merger, consolidation or scheme of arrangement in which our company is not the surviving entity, except for a transaction the principal purpose of which is to change the jurisdiction in which our company is incorporated or which following such transaction the holders of our companys voting shares immediately prior to such transaction own more than fifty percent (50%) of the voting shares of the surviving entity; (ii) the sale, transfer or other disposition of all or substantially all of the assets of our company (other than to one of our subsidiaries); (iii) the completion of a voluntary or insolvent liquidation or dissolution of our company; (iv) any takeover, reverse takeover, scheme of arrangement, or series of related transactions culminating in a reverse takeover or scheme of arrangement (including, but not limited to, a tender offer followed by a takeover or reverse takeover) in which our company survives but (A) the shares of our company outstanding immediately prior to such transaction are converted or exchanged by virtue of the transaction into other property, whether in the form of shares, securities, cash or otherwise, or (B) the shares carrying more than 50% of the total combined voting power of our companys then issued and outstanding shares
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are transferred to a person or persons different from those who held such shares immediately prior to such transaction culminating in such takeover, reverse takeover or scheme of arrangement, or (C) our company issues new voting shares in connection with any such transaction such that holders of the our companys voting shares immediately prior to the transaction no longer hold more than 50% of the voting shares of our company after the transaction; or (v) the acquisition in a single or series of related transactions by any person or related group of persons (other than employees of our company, our subsidiaries or any other person in or of which our company or subsidiaries holds a substantial economic interest or possesses the power to direct or cause the direction of the management policies or entities established for the benefit of the employees of our company, our subsidiaries or any other person in or of which our company or subsidiaries holds a substantial economic interest or possesses the power to direct or cause the direction of the management policies ) of (A) control of our board of directors or the ability to appoint a majority of the members of our board of directors, or (B) beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of shares carrying more than 50% of the total combined voting power of the our companys then issued and outstanding shares.
Term
Unless terminated earlier, the 2018 equity incentive plan will expire ten years from the date the 2018 equity incentive plan becomes effective. Awards made under the 2018 equity incentive plan on or prior to the date of its termination will continue in effect subject to the terms of the 2018 equity incentive plan and the applicable award agreement.
Vesting Schedule
In general, the plan administrator determines the vesting schedule of each award as evidenced by an award agreement. The plan administrator may accelerate the vesting of any award.
Amendment and Termination of Plan
Our board of directors, in its sole discretion, may at any time amend, alter or discontinue the 2018 equity incentive plan, subject to certain exceptions.
Granted Options
Name |
Position |
Ordinary
Shares Underlying Options Awarded |
Option
Exercise Price |
Grant Date |
Option
Expiration Date |
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Jianfei Dong |
Director and co-president | * | US$ | 0.0001 | June 30, 2018 | June 30, 2028 | ||||||||
Guanqiang Feng |
Co-president | * | US$ | 0.0001 | February 28, 2018 | February 28, 2028 | ||||||||
Jingbo Wang |
Director and chief financial
officer |
* | US$ | 0.0001 | February 28, 2018 | February 28, 2028 |
* |
Less than 1% of our outstanding shares assuming conversion of all convertible redeemable preferred shares into ordinary shares. |
As of the date of this prospectus, aside from grants of options, no other awards have been granted under our 2018 equity incentive plan.
Equity Incentive Trust
An equity incentive trust was established pursuant to a deed dated February 26, 2018 among us, The Core Trust Company Limited, as the trustee, and Qu World Limited, as a nominee. Through such trust, our ordinary shares underlying equity awards granted pursuant to our 2017 and 2018 equity incentive plans may be provided
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to certain of recipients of such equity awards. As of the date hereof, Qu World Limited holds 9,500,000 ordinary shares pursuant to our 2017 equity incentive plan. As of the date hereof, 4,477,377 of such ordinary shares are underlying shares of vested options, and 4,946,301 of such ordinary shares are underlying shares of unvested options. Upon satisfaction of vesting conditions and exercise by a grant recipient, the trustee will transfer the ordinary shares underlying the relevant equity awards to such grant recipient.
The trust deed provides that the trustee shall not have any voting power in relation to the 9,500,000 ordinary shares held by Qu World Limited.
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The following table sets forth information as of the date of this prospectus with respect to the beneficial ownership of our ordinary shares by:
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each of our directors and executive officers; and |
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each person known to us to own beneficially 5.0% or more of our ordinary shares. |
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to, or the power to receive the economic benefit of ownership of, the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option or other right or the conversion of any other security.
The total number of ordinary shares issued and outstanding on an as-converted basis as of the date of this prospectus is 68,981,664, including (i) 9,500,000 ordinary shares held by a nominee of our equity incentive trust, of which 4,477,377 are underlying shares of vested options as of the date hereof and (ii) 15,937,500 ordinary shares which are restricted shares beneficially owned by certain of our co-founders and are expected to be fully vested upon the completion of this offering, and assuming conversion of all convertible redeemable preferred shares into ordinary shares.
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For the purpose of the table below that sets forth information as to the beneficial ownership of our ordinary shares, the total number of ordinary shares issued and outstanding after completion of this offering will be 72,981,664, comprising 38,733,222 Class A ordinary shares and 34,248,442 Class B ordinary shares, which is based upon (i) the designation of all ordinary shares held by Innotech Group Holdings Ltd. and News Optimizer (BV) Ltd. into 27,123,442 Class B ordinary shares and 7,125,000 Class B ordinary shares, respectively, on a one-for-one basis upon the completion of this offering; (ii) the designation of all of the remaining outstanding ordinary shares (including the 9,500,000 ordinary shares held by a nominee of our equity incentive trust, of which 4,477,377 are underlying shares of vested options as of the date hereof) and the automatic conversion of all issued and outstanding convertible preferred shares into 34,733,222 Class A ordinary shares on an one-for-one basis upon the completion of this offering; and (iii) 4,000,000 Class A ordinary shares issued in connection with this offering (assuming the underwriters do not exercise their option to purchase additional ADSs), but excludes (i) 1,480,123 Class A ordinary shares issuable to The Paper or convertible from the Series C2 preferred shares issuable to The Paper, as the case may be; (ii) 2,873,598 ordinary shares issuable upon the exercise of outstanding share options under our 2018 equity incentive plan; and (iii) 90,543 ordinary shares reserved for future issuance under our 2018 equity incentive plan. The underwriters may choose to exercise the over-allotment option in full, in part or not at all.
Ordinary Shares
Beneficially Owned Prior to This Offering |
Ordinary Shares Beneficially
Owned After This Offering |
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Number | Percent |
Class A
Ordinary Shares |
Class B
Ordinary Shares |
Percentage of
total ordinary shares on an as-converted basis |
Percentage of
aggregate voting power ** |
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Directors and Executive Officers: * |
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Eric Siliang Tan (1) |
27,123,442 | 39.3 | % | | 27,123,442 | 37.2 | % | 73.0 | % | |||||||||||||||
Lei Li (2) |
7,125,000 | 10.3 | % | | 7,125,000 | 9.8 | % | 19.2 | % | |||||||||||||||
Zhiliang Wang |
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Sihui Chen |
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Shaoqing Jiang |
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James Jun Peng |
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Feng Li |
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Jianfei Dong |
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Guanqiang Feng |
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Jingbo Wang |
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Oliver Yucheng Chen |
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Binjie Zhu |
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Directors and Executive Officers as a Group |
34,248,442 | 49.6 | % | | 34,248,442 | 46.9 | % | 92.1 | % | |||||||||||||||
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Principal Shareholders |
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Innotech Group Holdings Ltd. (1) |
27,123,442 | 39.3 | % | | 27,123,442 | 37.2 | % | 73.0 | % | |||||||||||||||
Qu World Limited (3) |
9,500,000 | 13.8 | % | 9,500,000 | | 13.0 | % | | ||||||||||||||||
News Optimizer (BV) Ltd. (2) |
7,125,000 | 10.3 | % | | 7,125,000 | 9.8 | % | 19.2 | % | |||||||||||||||
Image Flag Investment (HK) Limited (4) |
5,420,144 | 7.9 | % | 5,420,144 | | 7.4 | % | 1.5 | % |
* |
The business address for our directors and executive officers is 11/F, Block 3, XingChuang Technology Center, Shen Jiang Road 5005, Pudong New Area, Shanghai 200120, Peoples Republic of China. |
** |
For each person and group included in this column, the percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. In respect of all matters upon which the ordinary shares are entitled to vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten (10) votes, voting together as one class. Each Class B ordinary share is convertible into one |
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Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. |
(1) |
Represents 27,123,442 ordinary shares that are held by Innotech Group Holdings Ltd., a limited liability company established in the Cayman Islands. All such ordinary shares will be designated into Class B ordinary shares on a one-for-one basis upon the completion of this offering. Innotech Group Holdings Ltd. is indirectly wholly owned by a trust of which Mr. Eric Siliang Tan and his family are beneficiaries. The registered address of Innotech Group Holdings Ltd. is P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands |
In January 2018, Innotech Group Holdings Ltd. entered into a share restriction deed with us, pursuant to which 12,187,500 of ordinary shares held by Innotech Group Holdings Ltd. became restricted shares. Innotech Group Holdings Ltd. holds voting power associated with such restricted shares, and the restricted shares are included in the total number of ordinary shares held by Innotech Group Holdings Ltd. For further information, see Management Equity Incentive Plans Share Restriction Deeds.
(2) |
Represents 7,125,000 ordinary shares that are held by News Optimizer (BV) Ltd., a limited liability company established in the British Virgin Islands that is wholly owned by Mr. Lei Li. All such ordinary shares will be designated into Class B ordinary shares on a one-for-one basis upon the completion of this offering. The registered address of News Optimizer (BV) Ltd. is OMC Chambers, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. |
In January 2018, News Optimizer (BV) Ltd. entered into a share restriction deed with us, pursuant to which 3,750,000 of ordinary shares held by News Optimizer (BV) Ltd. became restricted shares. News Optimizer (BV) Ltd. holds voting power associated with such restricted shares, and the restricted shares are included in the total number of ordinary shares held by News Optimizer (BV) Ltd. For further information, see Management Equity Incentive Plans Share Restriction Deeds.
(3) |
Represents 9,500,000 ordinary shares held by Qu World Limited, a limited liability company established in the British Virgin Islands, as a nominee of our equity incentive trust. All such ordinary shares will be designated into Class A ordinary shares on a one-for-one basis upon the completion of this offering. Qu World Limited is wholly owned by The Core Trust Company Limited, a trust company established in Hong Kong that acts as the trustee of our equity incentive trust. Registered address of Qu World Limited is Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands. |
The trust deed for our equity incentive trust provides that the trustee shall not have any voting power in relation to the 9,500,000 ordinary shares held by Qu World Limited.
(4) |
Represents 5,420,144 Class A ordinary shares upon conversion of 5,420,144 Series B1 convertible redeemable preferred shares held by Image Flag Investment (HK) Limited, a limited liability company incorporated in Hong Kong. Image Flag Investment (HK) Limited is wholly owned by Tencent, a company incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange. The registered address of Image Flag Investment (HK) Limited is 29/F., Three Pacific Place, No. 1 Queens Road East, Wanchai, Hong Kong. The registered address of Tencent is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. |
The trustee of our equity incentive trust does not have any voting power in relation to the 9,500,000 ordinary shares held by Qu World Limited. As such, 57,886,092 of the 67,386,092 ordinary shares issued and outstanding as of the date of this prospectus have voting power.
Pursuant to power of attorney by several shareholders, Innotech Group Holdings Ltd. has the right to exercise the voting power associated with 1,931,265 ordinary shares held by such shareholders. As a result, Innotech Group Holdings Ltd. has the voting power over 29,054,707 ordinary shares, or 50.2% of the aggregate voting power of our issued and outstanding share capital as of the date of this prospectus. The power of attorney will be terminated upon the completion of this offering, and the table above assumes such termination.
Pursuant to a share purchase agreement dated August 27, 2018, we agreed to issue 1,480,123 Series C2 preferred shares to The Paper. The transactions with The Paper are subject to regulatory approvals from relevant PRC government authorities and we currently expect the transactions to close in the next 12 months. To the
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extent the closing of the share purchase is after the completion of this offering, the same number of Class A ordinary shares will be issued to The Paper in lieu of Series C2 preferred shares. Upon the issuance of Series C2 preferred shares or the Class A ordinary shares, as the case may be, The Paper will own approximately 2.1% of our total issued and outstanding share capital as of the date of this prospectus prior to the completion of this offering or 2.0% upon the completion of this offering (assuming the underwriters do not exercise their option to purchase additional ADSs).
As of the date of this prospectus, none of our outstanding ordinary shares or convertible redeemable preferred shares is held by record holders in the United States. We are not aware of any of our shareholders being affiliated with a registered broker-dealer or being in the business of underwriting securities.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Historical Changes in Our Shareholding
See Description of Share Capital History of Securities Issuances for historical changes in our shareholding.
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Transactions with Companies Controlled by or Affiliated with Mr. Tan
In 2016, we paid RMB5.0 million (US$0.8 million) to Youxuan Information Technology (Shanghai) Co., Ltd., a company controlled by Mr. Eric Siliang Tan, our co-founder and executive chairman, to cooperate on a potential business project. Such project was subsequently canceled and the entire amount was refunded back to us in 2017.
We paid Shanghai Yinnuo Management Consulting Co., Ltd., or Yinuo Management, a company controlled by Mr. Eric Siliang Tan, service fees in the amount of RMB3.0 million (US$0.5 million), RMB16.8 million (US$2.5 million) and RMB6.9 million (US$1.0 million) in 2016, 2017 and the six months ended June 30, 2017, respectively. Such service fees relate to costs charged by Yinuo Management to provide us with financial accounting support, office space and certain other administrative support. Amounts due to Yinuo Management in connection with these service fees as of December 31, 2016 was RMB3.0 million (US$0.5 million). No amount was due to Yinuo Management in connection with these service fees as of December 31, 2017. We have since developed all relevant functions internally and leased office space for our operations that were previously provided by Yinnuo Management and we currently do not expect to pay service fees to Yinuo Management for such functions or office space in the future.
We received RMB5.3 million (US$0.8 million) in service fees from AdIn Media (Shanghai) Co., Ltd., or AdIn Media, a company in which Mr. Eric Siliang Tan indirectly owns a minority interest and in which he is a key management personnel, in the six months ended June 30, 2018. Such fees related to agent and platform service provided to AdIn Media by facilitating advertising customers to display advertisements with AdIn Media. As of June 30, 2018, an amount of RMB6.7 million (US$1.0 million) was due to AdIn Media in connection with such services provided, which represent the service fee collected from advertising customers but not yet paid to AdIn Media.
We also received RMB1.2 million (US$0.2 million) in service fees from AdIn Media in the six months ended June 30, 2018 relating to advertising serviced provided by us to AdIn Media. As of June 30, 2018, the remaining balance of such service fees was RMB0.9 million (US$0.1 million).
Transaction with Tencent
We entered into a cooperation agreement with an affiliate of Tencent in March 2018 to promote our mobile application and such agreement required us to prepay a total service fee of RMB31.5 million (US$4.8 million). In the six months ended June 30, 2018, we paid RMB2.8 million (US$0.4 million) in such service fee. As of June 30, 2018, the remaining balance of such service fees was RMB26.9 million (US$4.1 million).
In the six months ended June 30, 2018, we paid an affiliate of Tencent RMB5.5 million (US$0.8 million) for cloud computing services and short messaging services. As of June 30, 2018, the remaining payable balance was RMB0.9 million (US$0.1 million).
Contractual Arrangements with Our Consolidated VIE and Its Shareholders
PRC laws and regulations place certain restrictions on foreign investment in and ownership of internet-based businesses. Accordingly, we conduct our operations mainly through our consolidated VIE and its subsidiaries. We effectively control the consolidated VIE through a series of contractual arrangements with the consolidated VIE, its shareholders and Shanghai Quyun. As a result, we operate our relevant business through contractual arrangements among Shanghai Quyun, our wholly-owned PRC subsidiary, Shanghai Jifen, our consolidated VIE, and its shareholders. For a description of these contractual arrangements, see Our History and Corporate Structure Contractual Arrangements among Shanghai Quyun and Shanghai Jifen and its Shareholders.
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Private Placements
See Description of Share Capital History of Securities Issuances.
Shareholders Agreement
See Description of Share Capital Registration Rights.
Employment Agreements and Indemnification Agreements
See Management Employment Agreements and Indemnification Agreements.
Equity Incentive Plans
See Management Equity Incentive Plans.
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We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised), as amended, of the Cayman Islands, which is referred to as the Companies Law below, and the common law of the Cayman Islands.
As of the date of this prospectus, our authorized share capital was US$50,000 divided into (i) 479,538,213 ordinary shares of par value US$0.0001 each, (ii) 4,945,055 Series A convertible redeemable preferred shares of par value US$0.0001 each, (iii) 1,373,626 Series A1 convertible redeemable preferred shares of par value US$0.0001 each, (iv) 5,420,144 Series B1 convertible redeemable preferred shares of par value US$0.0001 each, (v) 3,895,728 Series B2 convertible redeemable preferred shares of par value US$0.0001 each, (vi) 1,751,539 Series B3 convertible redeemable preferred shares of par value US$0.0001 each, (vii) 1,595,572 Series C1 preferred shares of par value US$0.001 each and (viii) 1,480,123 Series C2 preferred shares of par value US$0.0001 each.
As of the date of this prospectus, there were 50,000,000 ordinary shares and 18,981,664 convertible redeemable preferred shares issued and outstanding. On August 27, 2018, we have entered into a share purchase agreement for the issuance of 1,480,123 Series C2 preferred shares.
Upon the closing of this offering, we will have 38,733,222 Class A ordinary shares and 34,248,442 Class B ordinary shares issued and outstanding (or 39,333,222 Class A ordinary shares and 34,248,442 Class B ordinary shares if the underwriters exercise in full the over-allotment option), including 9,500,000 Class A ordinary shares held by a nominee of our equity incentive trust, of which 4,477,377 are underlying shares of vested options as of the date hereof but excluding (a) 1,480,123 Class A ordinary shares issuable to The Paper or convertible from the Series C2 preferred shares issuable to The Paper, as the case may be, (b) 2,873,598 ordinary shares issuable upon the exercise of outstanding options under our 2018 equity incentive plan and (c) 90,543 ordinary shares reserved for future issuance under our 2018 equity incentive plan as of the closing of this offering. All of our ordinary shares issued and outstanding prior to the completion of the offering are and will be fully paid, and all of our Class A ordinary shares to be issued in the offering will be issued as fully paid. Our authorized share capital post-offering will be US$50,000 divided into 50,000,000 Class A ordinary shares, 34,248,442 Class B ordinary shares and 415,751,558 shares of such class or classes (however designated) as our board of directors may determine in accordance with the sixth amended and restated memorandum and articles of association with a par value of US$0.0001 each.
Our amended and restated memorandum and articles of association will become effective upon completion of this offering. The following are summaries of material provisions of our amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our Class A and Class B ordinary shares.
Ordinary Shares
General
All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares.
Dividends
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law, our articles of association and the common law of the Cayman Islands.
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Voting Rights
In respect of all matters upon which the ordinary shares are entitled to vote, each ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten (10) votes, voting together as one class. Voting at any meeting of shareholders is by show of hands unless a poll is demanded.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of votes attached to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of votes cast attached to the ordinary shares. A special resolution will be required for important matters such as a change of name or making changes to our amended and restated memorandum and articles of association.
Conversion
Each Class B ordinary share is convertible into one Class A ordinary share at any time at the option of the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity which is not an affiliate of such holder, each of such Class B ordinary shares shall be converted into one Class A ordinary share in accordance with our amended and restated memorandum and articles of association.
Transfer of Ordinary Shares
Subject to the restrictions contained in our amended and restated articles of association, as applicable, ordinary shares in our company are subject to transfer restrictions as set forth in the right of first refusal and co-sale agreement by and among our company and certain of our shareholders. Our company will only register transfers of ordinary shares that are made in accordance with such agreement and will not register transfers of ordinary shares that are made in violation of such agreement. The right of first refusal and co-sale agreement will terminate upon the closing of this offering.
Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary Shares
Subject to the provisions of the Companies Law and other applicable law, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner, including out of capital, as may be determined by the board of directors.
Variations of Rights of Shares
If at any time, our share capital is divided into different classes of shares, the rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied with the consent in writing of the holders
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of not less than two-thirds of the shares of that class, or the sanction of a resolution passed at a general meeting of the holders of the shares of that class by a majority of two-thirds of the votes cast at such a meeting. Consequently, the rights of any class of shares cannot be detrimentally altered without a simple majority of the vote of all of the shares in that class. The rights conferred upon the holders of the shares or any class of shares shall not, unless otherwise expressly provided by the terms of issue of such shares, be deemed to be varied by the creation, redesignation, or issue of shares ranking pari passu with such shares.
General Meetings of Shareholders
Shareholders meetings may be convened by a majority of our board of directors. Advance notice of at least seven calendar days is required for the convening of our annual general shareholders meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of the holders of a not less than one-third of all shares in issue present in person or by proxy.
Inspection of Books and Records
Holders of our ordinary shares will have a general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. See Where You Can Find More Information.
Changes in Capital
We may from time to time by ordinary resolution:
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increase our share capital by such sum as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto, as we in general meeting may determine; |
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consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares; |
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by subdivision of its existing shares or any of them divide the whole or any part of our share capital into shares of smaller amount than is fixed by our amended and restated memorandum of association; or |
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cancel any shares that at the date of the passing of the resolution have not been taken or agreed to be taken by any person. |
We may by special resolution reduce our share capital or any capital redemption reserve fund in any manner permitted by law.
Exempted Company
We are an exempted company with limited liability incorporated under the Companies Law. The Companies Law in the Cayman Islands distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
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an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; |
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an exempted companys register of members is not open to inspection; |
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an exempted company does not have to hold an annual general meeting; |
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an exempted company may issue no par value; |
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an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
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an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
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an exempted company may register as a limited duration company; and |
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an exempted company may register as a segregated portfolio company. |
Limited liability means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company. Upon the closing of this offering, we will be subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. We currently intend to comply with the NASDAQ Global Market rules in lieu of following home country practice after the closing of this offering. The NASDAQ Global Market rules require that every company listed on the NASDAQ Global Market hold an annual general meeting of shareholders. In addition, our amended and restated memorandum and articles of association allow directors to call extraordinary general meeting of shareholders pursuant to the procedures set forth in our articles.
Differences in Corporate Law
The Companies Law is modeled after that of England and Wales but does not follow recent statutory enactments in England. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements
A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization by a special resolution of the members of each constituent company.
A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders. For this purpose a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
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the statutory provisions as to the required majority vote have been met; |
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the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; |
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the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and |
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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders Suits
In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when:
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a company acts or proposes to act illegally or ultra vires; |
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the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and |
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those who control the company are perpetrating a fraud on the minority. |
Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a companys articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association permit indemnification of officers and directors for all actions, proceedings, charges, liabilities losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty, wilful default or fraud which may attach to such directors or officers as determined by a court of competent jurisdiction. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional indemnification beyond that provided in our amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles of Association
Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable,
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including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restated memorandum and articles of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.
Directors Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent
Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our amended and restated memorandum and articles of association provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
The Cayman Islands law does not allow our shareholders to requisition a shareholders meeting. However, under our amended and restated memorandum and articles of association, members holding not less than one
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third of the paid-up capital may requisition a meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders annual general meetings.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporations certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholders voting power with respect to electing such director. Our amended and restated memorandum and articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our amended and restated memorandum and articles of association, directors may be removed by ordinary resolution.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an interested shareholder for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the targets outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the targets board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporations outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
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Under the Companies Law of the Cayman Islands and our amended and restated memorandum and articles of association, our company may be dissolved, liquidated or wound up by the vote of holders of two-thirds of our shares voting at a meeting or the unanimous written resolution of all shareholders.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our amended and restated memorandum and articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporations governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, our amended and restated memorandum and articles of association may only be amended by special resolution or the unanimous written resolution of all shareholders.
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by our amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our amended and restated memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
Directors Power to Issue Shares
Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions.
History of Securities Issuances
The following is a summary of our securities issuances since our inception. None of transactions set forth below involved any underwriters underwriting discounts or commissions, or any public offering. We believe that each of the following transactions was exempt from registration under the Securities Act in reliance on Regulation S or Rule 701 under the Securities Act or pursuant to Section 4(2) of the Securities Act regarding transactions not involving a public offering.
Ordinary Shares
We were incorporated in the Cayman Islands as an exempted limited liability company on July 17, 2017. We issued one ordinary share to the incorporation agent, which was transferred on the same day to Innotech Group Holdings Ltd., a company ultimately controlled by Mr. Eric Siliang Tan, our co-founder and executive chairman.
On July 17, 2017, we issued (i) 42,499 ordinary shares, par value US$1 per share, to Innotech Group Holdings Ltd., for the consideration of US$42,499 and (ii) 7,500 ordinary shares, par value US$1 per share, to News Optimizer (BVI) Ltd., a company wholly owned by Mr. Lei Li, our co-founder, director and chief executive officer, for the consideration of US$7,500. We subsequently effected a share split in September 2017 in which each one of the previously issued ordinary shares was split into 10,000 ordinary shares.
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In January 2018, entities respectively controlled by our co-founders Mr. Eric Siliang Tan and Mr. Lei Li entered into share restriction deeds with us, pursuant to which a total of 15,937,500 ordinary shares beneficially owned by such co-founders became restricted shares. 12,187,500 of such restricted shares are beneficially owned by Mr. Eric Siliang Tan and will be vested in a period over 34 months. 3,750,000 of such restricted shares are beneficially owned by Mr. Lei Li and will be vested in a period over 24 months. At the end of the vesting periods, all such shares will have vested and will no longer constitute restricted shares. In the event that a co-founder voluntarily and unilaterally terminates his employment or service contract with us or his employment or service relationship is terminated by us for cause as specified in the applicable deed, the entity controlled by such co-founder is obligated to sell to us all of the restricted shares (but excluding vested shares as of such time) held by it at a price of US$0.0001 per share. These share restriction deeds will be terminated, and any remaining restricted shares will be vested, upon the completion of this offering.
Preferred Shares
On September 29, 2017, we issued a total of 4,945,055 Series A convertible redeemable preferred shares, par value US$0.0001 per share, of which (i) 3,296,703 Series A convertible redeemable preferred shares were issued to CW_toutiao Limited for the consideration of US$21,600,000, (ii) 1,539,560 Series A convertible redeemable preferred shares were issued to ACE Redpoint Ventures China I, L.P. for the consideration of US$10,087,200, (iii) 87,363 Series A convertible redeemable preferred shares were issued to ACE Redpoint Associates China I, L.P. for the consideration of US$572,400 and (iv) 21,429 Series A convertible redeemable preferred shares were issued to ACE Redpoint China Strategic I, L.P., for US$140,400.
On November 14, 2017, we issued a total of 1,373,626 Series A1 convertible redeemable preferred shares, par value US$0.0001 per share, to CMC Queen Holdings Limited, for the consideration of US$10,000,000.
On March 8, 2018, we issued a total of 5,420,144 Series B1 convertible redeemable preferred shares, par value US$0.0001 per share, to Image Flag Investment (HK) Limited, for the consideration of US$105,000,000.
On March 12, 2018, we issued a total of 3,684,004 Series B2 convertible redeemable preferred shares, par value US$0.0001 per share, of which (i) 1,371,974 Series B2 convertible redeemable preferred shares were issued to Long Range L.P. for the consideration of US$32,400,000, (ii) 342,993 Series B2 convertible redeemable preferred shares were issued to People Better Limited for the consideration of US$8,100,000, (iii) 342,993 Series B2 convertible redeemable preferred shares were issued to Shunwei Growth III Limited for the consideration of US$8,100,000, (iv) 716,145 Series B2 convertible redeemable preferred shares were issued to Double Excel Investment Limited for the consideration of US$16,912,196, (v) 127,035 Series B2 convertible redeemable preferred shares were issued to Lighthouse Capital International Inc. for the consideration of US$3,000,000, (vi) 423,449 Series B2 convertible redeemable preferred shares were issued to CMC Queen Holdings Limited for the consideration of US$10,000,000, (vii) 335,693 Series B2 convertible redeemable preferred shares were issued to ACE Redpoint Ventures China I, L.P. for the consideration of US$7,927,605, (viii) 19,049 Series B2 convertible redeemable preferred shares were issued to ACE Redpoint Associates China I, L.P. for the consideration of US$449,855 and (ix) 4,673 Series B2 convertible redeemable preferred shares were issued to ACE Redpoint China Strategic I, L.P. for the consideration of US$110,344. In addition, an investor, Shanghai ChuangVest Venture Investment Partnership (Limited Partnership), has exercised a warrant to purchase 211,724 series B2 convertible redeemable preferred shares for the consideration of US$5,000,000, which was completed on April 27, 2018.
On April 27, 2018, we issued a total of 1,751,539 Series B3 convertible redeemable preferred shares, par value US$0.0001 per share, of which (i) 962,384 Series B3 convertible redeemable preferred shares were issued to Hundreds TWC Fund Limited Partnership (now known as Hundreds ANTA Fund Limited Partnership) for the consideration of US$25,000,000, (ii) 654,421 Series B3 convertible redeemable preferred shares were issued to Harvest Ceres Fund, LP for the consideration of US$17,000,000 and (iii) 134,734 Series B3 convertible redeemable preferred shares were issued to Vision Global Capital Limited for the consideration of US$3,500,000.
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On August 17, 2018, we entered into a share purchase agreement to issue 1,450,520 Series C1 preferred shares to a fund managed by an affiliate of a leading real estate company in China for consideration of US$54,000,000, which are to be satisfied by cash consideration of US$50,000,000 and certain business cooperation between the real estate company and us. Such Series C1 preferred shares were issued on September 4, 2018. On August 17, 2018, we also entered into a share purchase agreement to issue Series C1 preferred shares to a fund under the management of People.cn Co. Ltd., which was subsequently amended on September 4, 2018 as to the number of Series C1 preferred shares that are to be issued. On September 4, 2018, we issued 145,052 Series C1 preferred shares to such fund for cash consideration of US$5,400,000.
Pursuant to a share purchase agreement dated August 27, 2018, we agreed to issue 1,480,123 Series C2 preferred shares to The Paper for the consideration of US$55,102,061, which will be satisfied by a combination of cash and certain business and strategic cooperation between The Paper and us.
Registration Rights
Pursuant to our shareholders agreement entered into on September 4, 2018, we have granted certain registration rights to holders of our registrable securities. Set forth below is a description of these registration rights.
Demand Registration Rights
At any time or from time to time after the earlier of (i) the date that is six (6) months after the closing of this offering or (ii) the date when the lock-up by underwriters is partially or wholly released, holders of no less than twenty percent (20%) of the voting power of the registrable securities then outstanding have the right to demand that we effect a registration under the Securities Act covering the registration of all or part of their registrable securities, so long as the anticipated proceeds, net of underwriting discounts and commissions of the securities to be sold under the registration statement, exceeds US$10,000,000. We, however, are not obligated to effect a demand registration if we have already effected two demand registrations, unless less than all of the registrable securities sought to be included in the demand registration were sold.
Form F-3/S-3 Demand Registration Rights
When eligible for use of form F-3/S-3, any holder of the registrable securities then outstanding have the right to demand that we effect a registration on Form F-3/S-3. We, however, are not obligated to effect a registration on Form F-3/S-3 if, among other things, we have already effected two registrations within any twelve-month period preceding the date of the registration request, unless less than all of the registrable securities sought to be included in the Form F-3/S-3 registration were sold for any reason other than solely due to the action or inaction of their holder.
Piggyback Registration Rights
If we propose to file a registration statement in connection with a public offering of securities of our company other than relating to an employee share plan, corporate reorganization or transaction under Rule 145 of the Securities Act, then we must offer each holder of the registrable securities the opportunity to include their shares in the registration statement. Registration pursuant to piggyback registration rights is not deemed to be a demand registration, and there is no limit on the number of times the holders may exercise their piggyback registration rights.
Expenses of Registration
We will pay all expenses, including the underwriting discounts and selling commissions applicable to the sale of the registrable securities, as well as all registration, filing and qualification fees, printers and accounting
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fees, fees and disbursements of counsel for our company and reasonable fees and disbursement of counsel for all selling holders, incurred in connection with any piggyback registration or demand registration, whether or not on Form F-3/S-3. We will not, however, be required to pay for any expenses of any registration proceeding begun pursuant to demand registration rights, whether or not on Form F-3/S-3, if the registration request is subsequently withdrawn by the holders of no less than a majority of the voting power of the registrable securities requested to be registered, subject to certain exceptions.
Termination of Registration Rights
The registration rights discussed above shall terminate on the earlier of (i) the date that is three years from the date of closing of this offering, and (ii) with respect to any holder, the date on which such holder no longer holders any registrable securities.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
American Depositary Shares
The Bank of New York Mellon, as depositary, will register and deliver American Depositary Shares, also referred to as ADSs. Every four ADSs will represent one Class A ordinary share (or a right to receive one Class A ordinary share) deposited with The Hongkong and Shanghai Banking Corporation Limited, as custodian for the depositary in Hong Kong. Each ADS will also represent any other securities, cash or other property which may be held by the depositary. The deposited shares together with any other securities, cash or other property held by the depositary are referred to as the deposited securities. The depositarys office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286. The Bank of New York Mellons principal executive office is located at 225 Liberty Street, New York, New York 10286.
You may hold ADSs either (A) directly (i) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (ii) by having uncertificated ADSs registered in your name, or (B) indirectly by holding a security entitlement in ADSs through your broker or other financial institution that is a direct or indirect participant in The Depository Trust Company, also called DTC. If you hold ADSs directly, you are a registered ADS holder, also referred to as an ADS holder. This description assumes you are an ADS holder. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.
Registered holders of uncertificated ADSs will receive statements from the depositary confirming their holdings.
As an ADS holder, we will not treat you as one of our shareholders and you will not have shareholder rights. Cayman Islands law governs shareholder rights. The depositary will be the holder of the shares underlying your ADSs. As a registered holder of ADSs, you will have ADS holder rights. A deposit agreement among us, the depositary, ADS holders and all other persons indirectly or beneficially holding ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADSs.
The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of ADR. Please see Where You Can Find More Information as to directions on how to obtain copies of those documents.
Dividends and Other Distributions
How will you receive dividends and other distributions on the shares?
The depositary has agreed to pay or distribute to ADS holders the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, upon payment or deduction of its fees and expenses. You will receive these distributions in proportion to the number of shares your ADSs represent.
Cash . The depositary will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest.
Before making a distribution, any withholding taxes, or other governmental charges that must be paid will be deducted. See Taxation. The depositary will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some of the value of the distribution.
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Shares . The depositary may distribute additional ADSs representing any shares we distribute as a dividend or free distribution. The depositary will only distribute whole ADSs. It will sell shares which would require it to deliver a fraction of an ADS (or ADSs representing those shares) and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional ADSs, the outstanding ADSs will also represent the new shares. The depositary may sell a portion of the distributed shares (or ADSs representing those shares) sufficient to pay its fees and expenses in connection with that distribution.
Rights to purchase additional shares . If we offer holders of our securities any rights to subscribe for additional shares or any other rights, the depositary may (i) exercise those rights on behalf of ADS holders, (ii) distribute those rights to ADS holders or (iii) sell those rights and distribute the net proceeds to ADS holders, in each case after deduction or upon payment of its fees and expenses. To the extent the depositary does not do any of those things, it will allow the rights to lapse. In that case, you will receive no value for them. The depositary will exercise or distribute rights only if we ask it to and provide satisfactory assurances to the depositary that it is legal to do so. If the depositary will exercise rights, it will purchase the securities to which the rights relate and distribute those securities or, in the case of shares, new ADSs representing the new shares, to subscribing ADS holders, but only if ADS holders have paid the exercise price to the depositary. U.S. securities laws may restrict the ability of the depositary to distribute rights or ADSs or other securities issued on exercise of rights to all or certain ADS holders, and the securities distributed may be subject to restrictions on transfer.
Other Distributions . The depositary will send to ADS holders anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, the depositary has a choice. It may decide to sell what we distributed and distribute the net proceeds, in the same way as it does with cash. Or, it may decide to hold what we distributed, in which case ADSs will also represent the newly distributed property. However, the depositary is not required to distribute any securities (other than ADSs) to ADS holders unless it receives satisfactory evidence from us that it is legal to make that distribution. The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses in connection with that distribution. U.S. securities laws may restrict the ability of the depositary to distribute securities to all or certain ADS holders, and the securities distributed may be subject to restrictions on transfer.
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us to make them available to you .
Deposit, Withdrawal and Cancellation
How are ADSs issued?
The depositary will deliver ADSs if you or your broker deposits shares or evidence of rights to receive shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons that made the deposit.
How can ADS holders withdraw the deposited securities?
You may surrender your ADSs to the depositary for the purpose of withdrawal. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the shares and any other deposited securities underlying the ADSs to the ADS holder or a person the ADS holder designates at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its office, if feasible. However, the depositary is not required to accept surrender of ADSs to the extent it would require delivery of a fraction of a deposited share or other security. The depositary may charge you a fee and its expenses for instructing the custodian regarding delivery of deposited securities.
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How do ADS holders interchange between certificated ADSs and uncertificated ADSs?
You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will send to the ADS holder a statement confirming that the ADS holder is the registered holder of uncertificated ADSs. Upon receipt by the depositary of a proper instruction from a registered holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to the ADS holder an ADR evidencing those ADSs.
Voting Rights
How do you vote?
ADS holders may instruct the depositary how to vote the number of deposited shares their ADSs represent. If we request the depositary to solicit your voting instructions (and we are not required to do so), the depositary will notify you of a shareholders meeting and send or make voting materials available to you. Those materials will describe the matters to be voted on and explain how ADS holders may instruct the depositary how to vote. For instructions to be valid, they must reach the depositary by a date set by the depositary. The depositary will try, as far as practical, subject to the laws of the Cayman Islands and the provisions of our amended and restated memorandum and articles of association or similar documents, to vote or to have its agents vote the shares or other deposited securities as instructed by ADS holders. If we do not request the depositary to solicit your voting instructions, you can still send voting instructions, and, in that case, the depositary may try to vote as you instruct, but it is not required to do so.
Except by instructing the depositary as described above, you wont be able to exercise voting rights unless you surrender your ADSs and withdraw the shares. However, you may not know about the meeting enough in advance to withdraw the shares. In any event, the depositary will not exercise any discretion in voting deposited securities and it will only vote or attempt to vote as instructed.
We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise voting rights and there may be nothing you can do if your shares are not voted as you requested.
In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to Deposited Securities, if we request the Depositary to act, we agree to give the depositary notice of any such meeting and details concerning the matters to be voted upon at least 30 days in advance of the meeting date.
Fees and Expenses
Persons depositing or withdrawing shares or ADS holders must pay : |
For : |
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US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
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US$0.05 (or less) per ADS | Any cash distribution to ADS holders | |
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders | |
US$0.05 (or less) per ADS per calendar year | Depositary services |
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Persons depositing or withdrawing shares or ADS holders must pay : |
For : |
|
Registration or transfer fees | Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares | |
Expenses of the depositary |
Cable and facsimile transmissions (when expressly provided in the deposit agreement)
Converting foreign currency to U.S. dollars |
|
Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes |
As necessary |
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Any charges incurred by the depositary or its agents for servicing the deposited securities | As necessary |
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities or other property distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other service providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
The depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain for its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made under the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its own account. The depositary makes no representation that the exchange rate used or obtained in any currency conversion under the deposit agreement will be the most favorable rate that could be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject to the depositarys obligations under the deposit agreement. The methodology used to determine exchange rates used in currency conversions is available upon request.
Payment of Taxes
You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until those taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your American Depositary Shares to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells
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deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
Tender and Exchange Offers; Redemption, Replacement or Cancellation of Deposited Securities
The depositary will not tender deposited securities in any voluntary tender or exchange offer unless instructed to do by an ADS holder surrendering ADSs and subject to any conditions or procedures the depositary may establish.
If deposited securities are redeemed for cash in a transaction that is mandatory for the depositary as a holder of deposited securities, the depositary will call for surrender of a corresponding number of ADSs and distribute the net redemption money to the holders of called ADSs upon surrender of those ADSs.
If there is any change in the deposited securities such as a sub-division, combination or other reclassification, or any merger, consolidation, recapitalization or reorganization affecting the issuer of deposited securities in which the depositary receives new securities in exchange for or in lieu of the old deposited securities, the depositary will hold those replacement securities as deposited securities under the deposit agreement. However, if the depositary decides it would not be lawful and practical to hold the replacement securities because those securities could not be distributed to ADS holders or for any other reason, the depositary may instead sell the replacement securities and distribute the net proceeds upon surrender of the ADSs.
If there is a replacement of the deposited securities and the depositary will continue to hold the replacement securities, the depositary may distribute new ADSs representing the new deposited securities or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited securities.
If there are no deposited securities underlying ADSs, including if the deposited securities are cancelled, or if the deposited securities underlying ADSs have become apparently worthless, the depositary may call for surrender or of those ADSs or cancel those ADSs upon notice to the ADS holders.
Amendment and Termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the ADRs without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, or prejudices a substantial right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended .
How may the deposit agreement be terminated?
The depositary will initiate termination of the deposit agreement if we instruct it to do so. The depositary may initiate termination of the deposit agreement if
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60 days have passed since the depositary told us it wants to resign but a successor depositary has not been appointed and accepted its appointment; |
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we delist the ADSs from an exchange on which they were listed and do not list the ADSs on another exchange; |
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we appear to be insolvent or enter insolvency proceedings; |
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all or substantially all the value of the deposited securities has been distributed either in cash or in the form of securities; |
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there are no deposited securities underlying the ADSs or the underlying deposited securities have become apparently worthless; or |
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there has been a replacement of deposited securities. |
If the deposit agreement will terminate, the depositary will notify ADS holders at least 90 days before the termination date. At any time after the termination date, the depositary may sell the deposited securities. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement, unsegregated and without liability for interest, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. Normally, the depositary will sell as soon as practicable after the termination date.
After the termination date and before the depositary sells, ADS holders can still surrender their ADSs and receive delivery of deposited securities, except that the depositary may refuse to accept a surrender for the purpose of withdrawing deposited securities or reverse previously accepted surrenders of that kind if it would interfere with the selling process. The depositary may refuse to accept a surrender for the purpose of withdrawing sale proceeds until all the deposited securities have been sold. The depositary will continue to collect distributions on deposited securities, but, after the termination date, the depositary is not required to register any transfer of ADSs or distribute any dividends or other distributions on deposited securities to the ADSs holder (until they surrender their ADSs) or give any notices or perform any other duties under the deposit agreement except as described in this paragraph.
Limitations on Obligations and Liability
Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADSs
The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We and the depositary:
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are only obligated to take the actions specifically set forth in the deposit agreement without negligence or bad faith, and the depositary will not be a fiduciary or have any fiduciary duty to holders of ADSs; |
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are not liable if we are or it is prevented or delayed by law or by events or circumstances beyond our or its ability to prevent or counteract with reasonable care or effort from performing our or its obligations under the deposit agreement; |
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are not liable if we or it exercises discretion permitted under the deposit agreement; |
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are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made available to holders of ADSs under the terms of the deposit agreement, or for any special, consequential or punitive damages for any breach of the terms of the deposit agreement, or for any; |
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have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the deposit agreement on your behalf or on behalf of any other person; |
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may rely upon any documents we believe or it believes in good faith to be genuine and to have been signed or presented by the proper person; |
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are not liable for the acts or omissions of any securities depository, clearing agency or settlement system; and |
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the depositary has no duty to make any determination or provide any information as to our tax status, or any liability for any tax consequences that may be incurred by ADS holders as a result of owning or |
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holding ADSs or be liable for the inability or failure of an ADS holder to obtain the benefit of a foreign tax credit, reduced rate of withholding or refund of amounts withheld in respect of tax or any other tax benefit. |
In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances.
Requirements for Depositary Actions
Before the depositary will deliver or register a transfer of ADSs, make a distribution on ADSs, or permit withdrawal of shares, the depositary may require:
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payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any shares or other deposited securities; |
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satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and |
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compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer documents. |
The depositary may refuse to deliver ADSs or register transfers of ADSs when the transfer books of the depositary or our transfer books are closed or at any time if the depositary or we think it advisable to do so.
Your Right to Receive the Shares Underlying your ADSs
ADS holders have the right to cancel their ADSs and withdraw the underlying shares at any time except:
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when temporary delays arise because: (i) the depositary has closed its transfer books or we have closed our transfer books; (ii) the transfer of shares is blocked to permit voting at a shareholders meeting; or (iii) we are paying a dividend on our shares; |
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when you owe money to pay fees, taxes and similar charges; or |
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when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of shares or other deposited securities. |
This right of withdrawal may not be limited by any other provision of the deposit agreement.
Direct Registration System
In the deposit agreement, all parties to the deposit agreement acknowledge that the Direct Registration System, also referred to as DRS, and Profile Modification System, also referred to as Profile, will apply to the ADSs. DRS is a system administered by DTC that facilitates interchange between registered holding of uncertificated ADSs and holding of security entitlements in ADSs through DTC and a DTC participant. Profile is feature of DRS that allows a DTC participant, claiming to act on behalf of a registered holder of uncertificated ADSs, to direct the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization from the ADS holder to register that transfer.
In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit agreement understand that the depositary will not determine whether the DTC participant that is claiming to be acting on behalf of an ADS holder in requesting registration of transfer and delivery as described in the paragraph above has the actual authority to act on behalf of the ADS holder (notwithstanding any requirements under the Uniform Commercial Code). In the deposit agreement, the parties agree that the depositarys reliance on and compliance with instructions received by the depositary through the DRS/Profile system and in accordance with the deposit agreement will not constitute negligence or bad faith on the part of the depositary.
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Shareholder communications; inspection of register of holders of ADSs
The depositary will make available for your inspection at its office all communications that it receives from us as a holder of deposited securities that we make generally available to holders of deposited securities. The depositary will send you copies of those communications or otherwise make those communications available to you if we ask it to. You have a right to inspect the register of holders of ADSs, but not for the purpose of contacting those holders about a matter unrelated to our business or the ADSs.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon closing of this offering, we will have 16,000,000 ADSs outstanding representing 4,000,000 Class A ordinary shares, or approximately 5.5% of our outstanding ordinary shares (or 18,400,000 ADSs outstanding representing 4,600,000 Class A ordinary shares, or approximately 6.3% of our outstanding ordinary shares if the underwriters exercise in full the over-allotment option). In addition, options to purchase an aggregate of approximately 2,873,598 ordinary shares will be outstanding as of the closing of this offering. Of these options, 7,410 will have vested at or prior to the closing of this offering and 2,866,188 will vest over the next four years.
All of the ADSs sold in this offering will be freely transferable by persons other than our affiliates without restriction or further registration under the Securities Act. Rule 144 of the Securities Act defines an affiliate of a company as a person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, our company. All outstanding ordinary shares prior to this offering and the Class A ordinary shares issuable to The Paper or convertible from the Series C2 preferred shares issuable to The Paper, as the case may be, are restricted securities as that term is defined in Rule 144 because they were issued in a transaction or series of transactions not involving a public offering. Restricted securities, including restricted ordinary shares represented by ADSs, may be sold only if they are the subject of an effective registration statement under the Securities Act or if they are sold pursuant to an exemption from the registration requirement of the Securities Act such as those provided for in Rules 144 or 701 promulgated under the Securities Act, which rules are summarized below. Restricted ordinary shares may also be sold outside of the United States to non-U.S. persons in accordance with Rule 904 of Regulation S under the Act. This prospectus may not be used in connection with any resale of ADSs acquired in this offering by our affiliates.
Pursuant to Rule 144, ordinary shares will be eligible for sale at various times after the date of this prospectus, subject to the lock-up agreements.
Sales of substantial amounts of ADSs in the public market could adversely affect prevailing market prices of the ADSs. Prior to this offering, there has been no public market for our Class A ordinary shares or the ADSs, and while our application has been made to list the ADSs on the NASDAQ Global Market, we cannot assure you that a regular trading market will develop in the ADSs. We do not expect that a trading market will develop for our ordinary shares not represented by ADSs.
Lock-up Agreements
We have agreed that we will not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of (including entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequence of ownership interests), directly or indirectly, any of the ADSs or ordinary shares or any securities that are convertible into or exchangeable for, or that represent the right to receive, the ADSs or ordinary shares or any substantially similar securities, without the prior written consent of the representatives on behalf of the underwriters for a period ending 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee restricted share units outstanding on the date hereof and certain other exceptions.
Each of our directors and officers, our existing shareholders and The Paper has agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ADSs, ordinary shares or similar securities or any securities convertible into or exchangeable or exercisable for our ordinary shares or ADSs, for a period ending 180 days after the date of this prospectus.
In addition, we have irrevocably instructed The Bank of New York Mellon, the depositary, not to accept any deposit of any ordinary shares or issue any ADSs for 180 days after the date of this prospectus (other than in
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connection with this offering). After the expiration of the 180-day period, the ordinary shares or ADSs held by our directors, officers or existing shareholders may be sold subject to the restrictions under Rule 144 under the Securities Act or by means of registered public offerings.
Rule 144
In general, under Rule 144 as currently in effect, a person who has beneficially owned our restricted securities for at least six months is entitled to sell the restricted securities without registration under the Securities Act, subject to certain restrictions. Persons who are our affiliates (including persons beneficially owning 10% or more of our outstanding shares) may sell within any three-month period a number of restricted securities that does not exceed the greater of the following:
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1% of the number of our ordinary shares then outstanding, including ordinary shares represented by ADSs, which will equal approximately 729,817 ordinary shares immediately after this offering; and |
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the average weekly trading volume of our ADSs on the NASDAQ Global Market during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC. |
Such sales are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us. The manner-of-sale provisions require the securities to be sold either in brokers transactions as such term is defined under the Securities Act, through transactions directly with a market maker as such term is defined under the Exchange Act or through a riskless principal transaction as described in Rule 144. In addition, the manner-of-sale provisions require the person selling the securities not to solicit or arrange for the solicitation of orders to buy the securities in anticipation of or in connection with such transaction or make any payment in connection with the offer or sale of the securities to any person other than the broker or dealer who executes the order to sell the securities. If the amount of securities to be sold in reliance upon Rule 144 during any period of three months exceeds 5,000 shares or other units or has an aggregate sale price in excess of US$50,000, three copies of a notice on Form 144 should be filed with the SEC. If such securities are admitted to trading on any national securities exchange, one copy of such notice also must be transmitted to the principal exchange on which such securities are admitted. The Form 144 should be signed by the person for whose account the securities are to be sold and should be transmitted for filing concurrently with either the placing with a broker of an order to execute a sale of securities or the execution directly with a market maker of such a sale.
Persons who are not our affiliates and have beneficially owned our restricted securities for more than six months but not more than one year may sell the restricted securities without registration under the Securities Act subject to the availability of current public information about us. Persons who are not our affiliates and have beneficially owned our restricted securities for more than one year may freely sell the restricted securities without registration under the Securities Act.
In addition, in each case, shares held by our affiliates that are subject to lock-up arrangements would only become eligible for sale when the lock-up period expires.
Rule 701
Beginning 90 days after the date of this prospectus, persons other than affiliates who purchased ordinary shares under a written compensatory plan or contract may be entitled to sell such shares in the United States in reliance on Rule 701 under the Securities Act, or Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 subject only to its manner-of-sale requirements. However, the Rule 701 shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.
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Form S-8
We intend to file a registration statement on Form S-8 under the Securities Act covering all ordinary shares which are either subject to outstanding options or may be issued upon exercise of any options or other equity awards which may be granted or issued in the future pursuant to our share incentive plans. We expect to file this registration statement as soon as practicable after the date of this prospectus. Shares registered under any registration statements will be available for sale in the open market, except to the extent that the shares are subject to vesting restrictions with us or the contractual restrictions described below.
Registration Rights
Upon closing of this offering, certain holders of our Class A ordinary shares or their transferees will be entitled to request that we register their ordinary shares under the Securities Act, following the expiration of the lock-up agreements described above. See Description of Share Capital Registration Rights.
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The following is a general summary of certain Cayman Islands, Peoples Republic of China and United States federal income tax consequences relevant to an investment in ADSs and Class A ordinary shares. To the extent that the discussion below relates to matters of Cayman Islands tax law, it is the opinion of Walkers, our Cayman Islands counsel. To the extent that the discussion below relates to matters of PRC tax law, it is the opinion of King & Wood Mallesons, our PRC counsel. To the extent that the discussion below relates to matters of United States federal income tax law, it is the opinion of Simpson Thacher & Bartlett LLP, our United States counsel. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the Peoples Republic of China and the United States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of ADSs and Class A ordinary shares.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of ADSs and Class A ordinary shares. Stamp duties may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is a party to a double tax treaty entered with the United Kingdom in 2010 but is otherwise not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Pursuant to Section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we have obtained an undertaking from the Financial Secretary:
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that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations; and |
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that no tax be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable by the Company: |
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on or in respect of the shares, debentures or other obligations of the Company; or |
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by way of withholding in whole or in part of any relevant payment as defined in section 6(3) of the Tax Concessions Law (2011 Revision). |
The undertaking for us is for a period of twenty years from November 29, 2016.
Peoples Republic of China Taxation
In February 2017, the National Peoples Congress of China enacted the modified Enterprise Income Tax Law, which became effective on February 24, 2017. The modified Enterprise Income Tax Law provides that enterprises organized under the laws of jurisdictions outside China with their de facto management bodies located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The implementing rules of the Enterprise Income Tax Law further define the term de facto management body as the management body that exercises substantial and overall management and control over the business, personnel, accounts and properties of an enterprise. While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident enterprise since a substantial majority of the members of our management team as well as the
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management team of some of our overseas subsidiaries are located in China, in which case we or the overseas subsidiaries, as the case may be, would be subject to the PRC enterprise income tax at the rate of 25% on worldwide income. If the PRC tax authorities determine that our Cayman Islands holding company is a resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. One example is a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or ADSs. Furthermore, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or ordinary shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions. It is unclear whether, if we are considered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.
Certain United States Federal Income Tax Considerations
The following discussion describes certain United States federal income tax consequences of the ownership and disposition of our ADSs and Class A ordinary shares as of the date hereof. This discussion deals only with ADSs and Class A ordinary shares that are held as capital assets by a United States Holder (as defined below).
As used herein, the term United States Holder means a beneficial owner of our ADSs or Class A ordinary shares that is, for United States federal income tax purposes, any of the following:
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an individual who is a citizen or resident of the United States; |
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a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
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an estate the income of which is subject to United States federal income taxation regardless of its source; or |
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a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. |
This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the Code), and regulations, rulings and judicial decisions thereunder as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarized below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
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a dealer in securities or currencies; |
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a financial institution; |
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a regulated investment company; |
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a real estate investment trust; |
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an insurance company; |
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a tax-exempt organization; |
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a person holding our ADSs or Class A ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle; |
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a trader in securities that has elected the mark-to-market method of accounting for your securities; |
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a person liable for alternative minimum tax; |
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a person who owns or is deemed to own 10% or more of our stock by vote or value; |
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a partnership or other pass-through entity for United States federal income tax purposes; |
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a person required to accelerate the recognition of any item of gross income with respect to our ADSs or Class A ordinary shares as a result of such income being recognized on an applicable financial statement; or |
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a person whose functional currency is not the United States dollar. |
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our ADSs or Class A ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or Class A ordinary shares, you should consult your tax advisors.
This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income or the effects of any state, local or non-United States tax laws. If you are considering the purchase of our ADSs or Class A ordinary shares, you should consult your own tax advisors concerning the particular United States federal income tax consequences to you of the ownership and disposition of our ADSs or Class A ordinary shares, as well as the consequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying Class A ordinary shares that are represented by such ADSs. Accordingly, deposits in or withdrawals from our ADS facility as such will not be subject to United States federal income tax.
Taxation of Dividends
Subject to the discussion under Passive Foreign Investment Company below, the gross amount of distributions on the ADSs or Class A ordinary shares (including any amounts withheld to reflect potential PRC withholding taxes, as discussed above under Peoples Republic of China Taxation) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in the tax basis of the ADSs or Class A ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. We do not, however, expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend.
Any dividends that you receive (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of Class A ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.
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With respect to non-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our ADSs (which we will apply to list on the NASDAQ Global Market will be readily tradable on an established securities market in the United States once they are so listed. Thus, we believe that dividends we pay on our ADSs will meet the conditions required for these reduced tax rates. Since we do not expect that our Class A ordinary shares will be listed on an established securities market in the United States, we do not believe that dividends that we pay on our Class A ordinary shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance, however, that our ADSs will be considered readily tradable on an established securities market in later years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United States. In the event that we are deemed to be a PRC resident enterprise under the Enterprise Income Tax Law, we may be eligible for the benefits of the income tax treaty between the United States and PRC, or the Treaty, and if we are eligible for such benefits, dividends we pay on our Class A ordinary shares, regardless of whether such shares are represented by ADSs, would be eligible for reduced rates of taxation. See Taxation Peoples Republic of China Taxation. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as investment income pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particular circumstances.
Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company (a PFIC) in the taxable year in which such dividends are paid or in the preceding taxable year (see Passive Foreign Investment Company below).
Subject to certain conditions and limitations (including a minimum holding period requirement), any PRC withholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or Class A ordinary shares will be treated as income from sources outside the United States and will generally constitute passive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
Distributions of ADSs, Class A ordinary shares or rights to subscribe for ADSs or Class A ordinary shares that are received as part of a pro rata distribution to all of our shareholders generally will not be subject to United States federal income tax.
Passive Foreign Investment Company
Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill, we do not believe we were a PFIC for our most recent taxable year, and we do not expect to become a PFIC in the current taxable year or the foreseeable future, although there can be no assurance in this regard.
In general, we will be a PFIC for any taxable year in which:
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at least 75% of our gross income is passive income, or |
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at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income. |
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For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person), and cash, including cash from this offering, is treated as an asset that produces passive income. If we own at least 25% (by value) of the stock of another corporation, for purposes of determining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporations assets and receiving our proportionate share of the other corporations income. However, there is uncertainty as to the treatment of our corporate structure and ownership of our consolidated VIE for United States federal income tax purposes. For United States federal income tax purposes, we consider ourselves to own the equity of our consolidated VIE. If it is determined, contrary to our view, that we do not own the equity of our consolidated VIE for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC.
The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have calculated the value of our goodwill by taking into account the market value of our ADSs, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, you will be subject to special tax rules discussed below.
If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares and you do not make a timely mark-to-market election, as described below, you will be subject to special tax rules with respect to any excess distribution received and any gain realized from a sale or other disposition, including a pledge, of ADSs or Class A ordinary shares. Distributions received in a taxable year will be treated as excess distributions to the extent that they are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs or Class A ordinary shares. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the ADSs or Class A ordinary shares, |
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the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
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the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year in which you hold our ADSs or Class A ordinary shares, you will generally be subject to the special tax rules described above for that year and for each subsequent year in which you hold the ADSs or Class A ordinary shares (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election to recognize gain as if your ADSs or Class A ordinary shares had been sold on the last day of the last taxable year during which we were a PFIC. You are urged to consult your own tax advisor about this election.
In lieu of being subject to the special tax rules discussed above, you may make a mark-to-market election with respect to your ADSs or Class A ordinary shares, provided such ADSs or Class A ordinary shares are treated as marketable stock. The ADSs or Class A ordinary shares generally will be treated as marketable stock if the ADSs or Class A ordinary shares are regularly traded on a qualified exchange or other market (within the meaning of the applicable Treasury regulations). Under current law, the mark-to-market election may be available to holders of ADSs once the ADSs are listed on the NASDAQ Global Market, which constitutes a qualified exchange, although there can be no assurance that the ADSs will be regularly traded for purposes of the mark-to-market election. It should also be noted that it is intended that only the ADSs and not the Class A
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ordinary shares will be listed on the NASDAQ Global Market. Consequently, if you are a holder of Class A ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election.
If you make an effective mark-to-market election, for each taxable year that we are a PFIC you will include as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. In addition, upon the sale or other disposition of your ADSs in a year that we are a PFIC, any gain will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election. Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, if you make a mark-to market election with respect to our ADSs, you may continue to be subject to the general PFIC rules with respect to your indirect interest in any of our non-United States subsidiaries that is classified as a PFIC (as discussed below).
If you make a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or other market, or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.
Alternatively, you can sometimes avoid the special tax rules described above by electing to treat a PFIC as a qualified electing fund under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.
If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares and any of our non-United States subsidiaries is also a PFIC, you will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
You will generally be required to file Internal Revenue Service Form 8621 if you hold our ADSs or Class A ordinary shares in any year in which we are classified as a PFIC. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or Class A ordinary shares if we are considered a PFIC in any taxable year.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of the ADSs or Class A ordinary shares in an amount equal to the difference between the amount realized for the ADSs or Class A ordinary shares and your tax basis in the ADSs or Class A ordinary shares. Subject to the discussion under Passive Foreign Investment Company above, such gain or loss will generally be capital gain or loss and will generally be long-term capital gain or loss if you have held the ADSs or Class A ordinary shares for more than one year. Long-term capital gains of non-corporate United States Holders (including individuals) are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss. However, if we are treated as a PRC resident enterprise for PRC tax purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of the Treaty, you may be able to elect to treat such gain as PRC source gain under the Treaty. If you are not eligible for the benefits of the Treaty or if you fail to make the election to treat any gain as PRC source, then you generally would not be able to use the foreign tax credit arising
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from any PRC tax imposed on the disposition of ADSs or Class A ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income derived from foreign sources.
Information Reporting and Backup Withholding
You may be required to report information to the Internal Revenue Service relating to an interest in specified foreign financial assets, including our ADSs or Class A ordinary shares, subject to certain asset value thresholds and subject to certain exceptions (including an exception for shares held in a custodial account maintained with a United States financial institution). You may also be subject to penalties if you are required to submit information to the Internal Revenue Service and fail to do so.
In general, information reporting will apply to dividends in respect of our ADSs or Class A ordinary shares and the proceeds from the sale, exchange or other disposition of our ADSs or Class A ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of exempt status or fail to report in full dividend and interest income.
Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.
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We and the underwriters named below will enter into an underwriting agreement with respect to the ADSs being offered. Under the terms and subject to the conditions contained in the underwriting agreement, each underwriter has severally agreed to purchase the number of ADSs indicated in the following table. Citigroup Global Markets Inc., Deutsche Bank Securities Inc., China Merchants Securities (HK) Co., Ltd. and UBS Securities LLC are the representatives of the underwriters.
Underwriters |
Number of
ADSs |
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Citigroup Global Markets Inc. |
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Deutsche Bank Securities Inc. |
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China Merchants Securities (HK) Co., Ltd. |
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UBS Securities LLC |
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KeyBanc Capital Markets Inc. |
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Total |
16,000,000 | |||
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The underwriters and the representatives of the underwriters are collectively referred to as the underwriters and the representatives, respectively. The underwriters are offering the ADSs subject to their acceptance of the ADSs from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the ADSs offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and the independent registered public accounting firm. The underwriters are obligated, severally and not jointly, to take and pay for all of the ADSs offered by this prospectus if any such ADSs are taken, other than the ADSs covered by the underwriters option to purchase additional ADSs described below. The underwriters reserve the right to withdraw, cancel or modify offers to the public and reject orders in whole or in part.
The underwriters initially propose to offer part of the ADSs directly to the public at the public offering price listed on the cover page of this prospectus and part of the ADSs to certain dealers at a price that represents a concession not in excess of US$ per ADS from the initial public offering price. After the initial offering of the ADSs, the offering price and other selling terms may from time to time be varied by the representatives.
Certain of the underwriters are expected to make offers and sales both inside and outside the United States through their respective selling agents. Any offers or sales in the United States will be conducted by broker-dealers registered with the SEC. China Merchants Securities (HK) Co., Ltd. is not an SEC-registered dealer-broker and does not intend to make any offers or sales of the ADSs within the United States or to any U.S. persons.
An affiliate of JD.com, Inc. has indicated an interest in purchasing up to US$40 million of the ADSs representing Class A ordinary shares in this offering at the initial public offering price and on the same terms as the other ADSs being offered. We and the underwriters are currently under no obligation to sell ADSs to such affiliate of JD.com, Inc.
The address of Citigroup Global Markets Inc. is 388 Greenwich Street, New York, NY 10013, United States. The address of Deutsche Bank Securities Inc. is 60 Wall Street, New York, NY 10005, United States. The address of China Merchants Securities (HK) Co., Ltd. is 48/F, One Exchange Square, Central, Hong Kong. The address of UBS Securities LLC is 1285 Avenue of the Americas, New York, NY, 10019, United States. The address of KeyBanc Capital Markets Inc. is 127 Public Square, 4th Floor Cleveland, OH, 44114, United States.
Option to Purchase Additional ADSs
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 2,400,000 additional ADSs at the public offering price listed on the cover page of
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this prospectus, less underwriters discounts and commissions. The underwriters may exercise this option for the purpose of covering over-allotments, if any, made in connection with the offering of the ADSs offered by this prospectus. To the extent the option is exercised, each underwriter will become severally obligated, subject to certain conditions, to purchase additional ADSs approximately proportionate to each underwriters initial amount reflected in the table above. If the underwriters option is exercised in full, the total price to the public would be US$147.2 million, based on the mid-point of the estimated public offering price range, the total underwriters discounts and commissions would be US$10.3 million and the total proceeds to us (before expenses) would be US$136.9 million.
Commissions and Expenses
The underwriting discounts and commissions are determined by negotiations among us and the underwriters and are a percentage of the offering price to the public. Among the factors considered in determining the discounts and commissions are the size of the offering, the nature of the security to be offered and the discounts and commissions charged in comparable transactions. The following table shows the per ADS and total underwriting discounts and commissions to be paid to the underwriters by us. Such amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase additional ADSs.
Total | ||||||||||||
Per ADS | No Exercise | Full Exercise | ||||||||||
Public offering price |
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Discounts and commissions paid by us |
The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately US$3.6 million. See Expenses Related to This Offering.
Lock-Up Agreements
We have agreed that, without the prior written consent of the representatives on behalf of the underwriters, subject to certain exceptions, we will not, for a period of 180 days after the date of this prospectus:
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offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any ordinary shares or ADSs or any securities convertible into or exercisable or exchangeable for ordinary shares or ADSs; |
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enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the ordinary shares or ADSs; or |
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file any registration statement with the SEC relating to the offering of any ordinary shares, ADSs or any securities convertible into or exercisable or exchangeable for ordinary shares or ADSs (other than a registration statement on Form S-8), |
whether any such transaction described above is to be settled by delivery of ordinary shares, ADSs or such other securities, in cash or otherwise.
Each of our officers and directors, our existing shareholders and The Paper has agreed that, without the prior written consent of the representatives on behalf of the underwriters, such parties, subject to certain exceptions, will not, during the period ending 180 days after the date of this prospectus:
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offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any ordinary shares or ADSs or any securities convertible into or exercisable or exchangeable for ordinary shares or ADSs; or |
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enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the ordinary shares or ADSs, |
whether any such transaction described above is to be settled by delivery of ordinary shares, ADSs, or such other securities, in cash or otherwise. In addition, we and each such person agree that, without the prior written consent of the representatives on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any ordinary shares, ADSs or any security convertible into or exercisable or exchangeable for ordinary shares or ADSs.
The restrictions described in the preceding paragraphs are subject to certain exceptions.
Subject to compliance with the notification requirements under FINRA Rule 5131 applicable to lock-up agreements with our directors or officers, if the representatives, in their sole discretion, agree to release or waive the restrictions set forth in a lock-up agreement for an officer or director of our company and provide us with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, we agree to announce the impending release or waiver by a press release through a major news service at least two business days before the effective date of the release or waiver. Currently, there are no agreements, understandings or intentions, tacit or explicit, to release any of the securities from the lock-up agreements prior to the expiration of the corresponding period.
In addition, we have irrevocably instructed The Bank of New York Mellon, the depositary, not to accept any deposit of any ordinary shares or issue any ADSs for 180 days after the date of this prospectus (other than in connection with this offering).
Listing
We have applied for the listing of the ADSs on the NASDAQ Global Market under the symbol QTT.
Stabilization, Short Positions and Penalty Bids
To facilitate this offering of the ADSs, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the ADSs. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of ADSs than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters option to purchase additional ADSs in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional ADSs or purchasing ADSs in the open market. In determining the source of ADSs to close out the covered short position, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market as compared to the price at which they may purchase additional ADSs pursuant to the option granted to them. Naked short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for, or purchases of, ADSs made by the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased ADSs sold by, or for the account of, such underwriter in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price
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of the ADSs, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the ADSs. As a result, the price of the ADSs may be higher than the price that otherwise might exist in the open market. The underwriters are not required to engage in these activities. If these activities are commenced, they are required to be conducted in accordance with applicable laws and regulations, and they may be discontinued at any time. These transactions may be effected on the NASDAQ Global Market, the over-the-counter market or otherwise.
Electronic Distribution
A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or one or more securities dealers. One or more of the underwriters may distribute prospectuses electronically. The representatives may agree to allocate a number of ADSs for sale to their online brokerage account holders. ADSs to be sold pursuant to an Internet distribution will be allocated on the same basis as other allocations. In addition, ADSs may be sold by the underwriters to securities dealers who resell ADSs to online brokerage account holders. Other than the prospectus in electronic format, the information on any underwriters or securities dealers website and any information contained in any other website maintained by any underwriter or securities dealer is not part of the prospectus or the registration statement of which the prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or securities dealer in its capacity as underwriter or securities dealer and should not be relied upon by investors.
Discretionary Sales
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of ADSs offered by them.
Indemnification
We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to payments that the underwriters may be required to make for these liabilities.
Relationships
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include the sales and trading of securities, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, financing, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates may have, from time to time, performed, and may in the future perform, a variety of such activities and services for us and for persons or entities with relationships with us for which they received or will receive customary fees, commissions and expenses.
In the ordinary course of their various business activities, the underwriters and their respective affiliates, directors, officers and employees may at any time purchase, sell or hold a broad array of investments, and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers. Such investment and trading activities may involve or relate to the assets, securities and/or instruments of us (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with us. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments. In addition, the underwriters and their respective affiliates may at any time hold, or recommend to clients that they should acquire, long and short positions in such assets, securities and instruments.
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Pricing of the Offering
Prior to this offering, there has been no public market for our Class A ordinary shares or the ADSs. The initial public offering price was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price of the ADSs, in addition to prevailing market conditions, were our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. Neither we nor the underwriters can assure investors that an active trading market will develop for the ADSs, or that the ADSs will trade in the public market at or above the initial public offering price.
Selling Restrictions
No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of the ADSs, or the possession, circulation or distribution of this prospectus or any other material relating to us or the ADSs in any jurisdiction where action for that purpose is required. Accordingly, the ADSs may not be offered or sold, directly or indirectly, and neither this prospectus nor any other material or advertisements in connection with the ADSs may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable laws, rules and regulations of any such country or jurisdiction.
Australia
This document has not been lodged with the Australian Securities & Investments Commission and is only directed to certain categories of exempt persons. Accordingly, if you receive this document in Australia:
(a) |
you confirm and warrant that you are either: |
(i) |
sophisticated investor under section 708(8)(a) or (b) of the Corporations Act 2001 (Cth) of Australia, or the Corporations Act; |
(ii) |
sophisticated investor under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountants certificate to the company which complies with the requirements of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made; |
(iii) |
person associated with the company under section 708(12) of the Corporations Act; or |
(iv) |
professional investor within the meaning of section 708(11)(a) or (b) of the Corporations Act; |
and to the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act, any offer made to you under this document is void and incapable of acceptance;
(b) |
you warrant and agree that you will not offer any of the ADSs issued to you pursuant to this document for resale in Australia within 12 months of those ADSs being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act. |
Canada
The ADSs may be sold in Canada only to purchasers resident or located in the Provinces of Ontario, Québec, Alberta and British Columbia, purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations . Any resale of the ADSs must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
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Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts, or NI 33-105, the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Cayman Islands
This prospectus does not constitute an invitation or offer to the public in the Cayman Islands of the ADSs, whether by way of sale or subscription. The underwriters have not offered or sold, and will not offer or sell, directly or indirectly, any ADSs in the Cayman Islands.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) an offer to the public of any shares which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State unless the prospectus has been approved by the competent authority in such Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that an offer to the public in that Relevant Member State of any shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
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to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; |
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to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; |
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by the underwriters to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives for any such offer; or |
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in any other circumstances falling within Article 3(2) of the Prospectus Directive; provided that no such offer of shares shall result in a requirement for the publication by us or any representative of a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive. |
Any person making or intending to make any offer of shares within the EEA should only do so in circumstances in which no obligation arises for us or any of the underwriters to produce a prospectus for such offer. Neither we nor the underwriters have authorized, nor do they authorize, the making of any offer of shares through any financial intermediary, other than offers made by the underwriters which constitute the final offering of shares contemplated in this prospectus.
For the purposes of this provision, and your representation below, the expression an offer to the public in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide
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to purchase any shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC (including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
Each person in a Relevant Member State who receives any communication in respect of, or who acquires any shares under, the offer of shares contemplated by this prospectus will be deemed to have represented, warranted and agreed to and with us and each underwriter that:
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it is a qualified investor within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive; and |
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in the case of any shares acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, (1) the shares acquired by it in the offering have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than qualified investors (as defined in the Prospectus Directive), or in circumstances in which the prior consent of the representatives has been given to the offer or resale; or (2) where shares have been acquired by it on behalf of persons in any Relevant Member State other than qualified investors, the offer of those shares to it is not treated under the Prospectus Directive as having been made to such persons. |
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are qualified investors (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended, or the Order, and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available to, and will be engaged in with, relevant persons.
Switzerland
The ADSs may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or the SIX, or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the ADSs or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this prospectus nor any other offering or marketing material relating to the offering, the issuer, the ADSs have been or will be filed with or approved by any Swiss regulatory authority. In particular, this prospectus will not be filed with, and the offer of ADSs will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, or the FINMA, and the offer of ADSs has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or the CISA. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of ADSs.
Dubai International Financial Centre
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority, or the DFSA. This prospectus is intended for distribution only to persons of a type
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specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for this prospectus. The ADSs to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the ADSs offered should conduct their own due diligence on the ADSs. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
Hong Kong
The ADSs may not be offered or sold in Hong Kong by means of any document other than (1) in circumstances which do not constitute an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32, Laws of Hong Kong), or (2) to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (3) in other circumstances which do not result in the document being a prospectus within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the ADSs may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to ADSs which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder.
Japan
The ADSs have not been and will not be registered under the Financial Instruments and Exchange Law of Japan, and ADSs will not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to any exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
Peoples Republic of China
This prospectus has not been and will not be circulated or distributed in the PRC, and ADSs may not be offered or sold, and will not be offered or sold to any person for re-offering or resale, directly or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of our ADSs may not be circulated or distributed, nor may our ADSs be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (1) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or SFA, (2) to a relevant person or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (3) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.
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Where our ADSs are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor as defined in Section 4A of the SFA) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor; shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the ADSs under Section 275 of the SFA, except: (1) to an institutional investor (for corporations under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is or will be given for the transfer; or (3) where the transfer is by operation of law.
United Kingdom
Each underwriter has represented and agreed that: (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, or the FSMA, received by it in connection with the issue or sale of the ADSs in circumstances in which Section 21(1) of the FSMA does not apply to us; and (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the ADSs in, from or otherwise involving the United Kingdom.
Korea
The ADSs may not be offered, sold and delivered directly or indirectly, or offered or sold to any person for reoffering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to the applicable laws and regulations of Korea, including the Korea Securities and Exchange Act and the Foreign Exchange Transaction Law and the decrees and regulations thereunder. The ADSs have not been registered with the Financial Services Commission of Korea for public offering in Korea. Furthermore, the ADSs may not be resold to Korean residents unless the purchaser of the ADSs complies with all applicable regulatory requirements (including but not limited to government approval requirements under the Foreign Exchange Transaction Law and its subordinate decrees and regulations) in connection with the purchase of the ADSs.
Malaysia
No prospectus or other offering material or document in connection with the offer and sale of the securities has been or will be registered with the Securities Commission of Malaysia, or Commission, for the Commissions approval pursuant to the Capital Markets and Services Act 2007. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the securities may not be circulated or distributed, nor may the securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Malaysia other than (i) a closed end fund approved by the Commission; (ii) a holder of a Capital Markets Services License; (iii) a person who acquires the securities as principal, if the offer is on terms that the securities may only be acquired at a consideration of not less than RM250,000 (or its equivalent in foreign currencies) for each transaction; (iv) an individual whose total net personal assets or total net joint assets with his or her spouse exceeds RM3 million (or its equivalent in foreign currencies), excluding the value of the primary residence of the individual; (v) an individual who has a gross annual income exceeding RM300,000 (or its equivalent in foreign currencies) per annum in the preceding twelve months; (vi) an individual who, jointly with his or her spouse, has
206
a gross annual income of RM400,000 (or its equivalent in foreign currencies), per annum in the preceding twelve months; (vii) a corporation with total net assets exceeding RM10 million (or its equivalent in a foreign currencies) based on the last audited accounts; (viii) a partnership with total net assets exceeding RM10 million (or its equivalent in foreign currencies); (ix) a bank licensee or insurance licensee as defined in the Labuan Financial Services and Securities Act 2010; (x) an Islamic bank licensee or takaful licensee as defined in the Labuan Financial Services and Securities Act 2010; and (xi) any other person as may be specified by the Commission; provided that, in the each of the preceding categories (i) to (xi), the distribution of the securities is made by a holder of a Capital Markets Services License who carries on the business of dealing in securities. The distribution in Malaysia of this prospectus is subject to Malaysian laws. This prospectus does not constitute and may not be used for the purpose of public offering or an issue, offer for subscription or purchase, invitation to subscribe for or purchase any securities requiring the registration of a prospectus with the Commission under the Capital Markets and Services Act 2007.
Mexico
None of the ADSs or the ordinary shares have been or will be registered with the National Securities Registry (Registro Nacional de Valores) maintained by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) of Mexico and, as a result, may not be offered or sold publicly in Mexico. The ADSs and the ordinary shares may only be sold to Mexican institutional and qualified investors, pursuant to the private placement exemption set forth in the Mexican Securities Market Law (Ley del Mercado de Valores).
Taiwan
The ADSs have not been and will not be registered or filed with, or approved by, the Financial Supervisory Commission of Taiwan pursuant to relevant securities laws and regulations and may not be offered or sold in Taiwan through a public offering or in circumstances which constitute an offer within the meaning of the Securities and Exchange Act of Taiwan or relevant laws and regulations that require a registration, filing or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorized to offer or sell the ADSs in Taiwan.
United Arab Emirates
This prospectus is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates, or the UAE. The ADSs have not been and will not be registered under Federal Law No. 4 of 2000 Concerning the Emirates Securities and Commodities Authority and the Emirates Security and Commodity Exchange, or with the UAE Central Bank, the Dubai Financial Market, the Abu Dhabi Securities Market or with any other UAE exchange.
The offering, the ADSs and interests therein have not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities in the UAE, and do not constitute a public offer of securities in the UAE in accordance with the Commercial Companies Law, Federal Law No. 8 of 1984 (as amended) or otherwise.
In relation to its use in the UAE, this prospectus is strictly private and confidential and is being distributed to a limited number of investors and must not be provided to any person other than the original recipient, and may not be reproduced or used for any other purpose. The interests in the ADSs may not be offered or sold directly or indirectly to the public in the UAE.
Qatar
In the State of Qatar, the offer contained herein is made on an exclusive basis to the specifically intended recipient thereof, upon that persons request and initiative, for personal use only and shall in no way be construed as
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a general offer for the sale of securities to the public or an attempt to do business as a bank, an investment company or otherwise in the State of Qatar. This prospectus and the underlying securities have not been approved or licensed by the Qatar Central Bank or the Qatar Financial Centre Regulatory Authority or any other regulator in the State of Qatar. The information contained in this prospectus shall only be shared with any third parties in Qatar on a need to know basis for the purpose of evaluating the contained offer. Any distribution of this prospectus by the recipient to third parties in Qatar beyond the terms hereof is not permitted and shall be at the liability of such recipient.
Kuwait
Unless all necessary approvals from the Kuwait Ministry of Commerce and Industry required by Law No. 31/1990 Regulating the Negotiation of Securities and Establishment of Investment Funds, its Executive Regulations and the various Ministerial Orders issued pursuant thereto or in connection therewith, have been given in relation to the marketing and sale of the ADSs, these may not be marketed, offered for sale, nor sold in the State of Kuwait. Neither this prospectus (including any related document), nor any of the information contained therein is intended to lead to the conclusion of any contract of whatsoever nature within Kuwait.
208
EXPENSES RELATED TO THIS OFFERING
Set forth below is an itemization of the total expenses, excluding underwriting discounts and commissions, which are expected to be incurred in connection with the offer and sale of the ADSs by us. With the exception of the SEC registration fee and the Financial Industry Regulatory Authority filing fee, all amounts are estimates.
SEC registration fee |
US$ | 20,617 | ||
NASDAQ Global Market listing fee |
125,000 | |||
Financial Industry Regulatory Authority filing fee |
25,340 | |||
Printing and engraving expenses |
210,000 | |||
Legal fees and expenses |
1,427,000 | |||
Accounting fees and expenses |
1,520,000 | |||
Miscellaneous |
272,043 | |||
|
|
|||
Total |
US$ | 3,600,000 | ||
|
|
These expenses will be borne by us, except for underwriting discounts and commissions, which will be borne by us in proportion to the numbers of ADSs sold in the offering by us, respectively.
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We are being represented by Simpson Thacher & Bartlett LLP with respect to certain legal matters of United States federal securities and New York state law. The underwriters are being represented by Wilson Sonsini Goodrich & Rosati with respect to certain legal matters as to United States. The validity of the Class A ordinary shares represented by the ADSs offered in this offering and legal matters as to Cayman Islands law will be passed upon for us by Walkers. Certain legal matters as to PRC law will be passed upon for us by King & Wood Mallesons and for the underwriters by Jingtian & Gongcheng. Simpson Thacher & Bartlett LLP and Walkers may rely upon King & Wood Mallesons with respect to matters governed by PRC law. Wilson Sonsini Goodrich & Rosati may rely upon Jingtian & Gongcheng with respect to matters governed by PRC law.
210
The financial statements as of December 31, 2016 and 2017, and for each of the two years in the period ended December 31, 2017 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The office of PricewaterhouseCoopers Zhong Tian LLP is located at 11/F, PricewaterhouseCoopers Center, 2 Corporate Avenue, 202 Hu Bin Road, Huangpu District, Shanghai 200021, the Peoples Republic of China.
211
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form F-1, including relevant exhibits and schedules under the Securities Act with respect to underlying Class A ordinary shares represented by the ADSs, to be sold in this offering. A related registration statement on F-6 will be filed with the SEC to register the ADSs. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement. You should read the registration statement and its exhibits and schedules for further information with respect to us and our ADSs.
Immediately upon closing of this offering, we will become subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. All information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Additional information may also be obtained over the Internet at the SECs web site at www.sec.gov .
As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to furnish the depositary with our annual reports, which will include a review of operations and annual audited consolidated combined financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders meeting and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and will mail to all record holders of ADSs the information contained in any notice of a shareholders meeting received by the depositary from us.
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I NDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the board of directors and shareholders of Qutoutiao Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Qutoutiao Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive loss, of changes in shareholders deficit and of cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shanghai, the Peoples Republic of China
March 9, 2018
We have served as the Companys auditor since 2017.
F-2
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and 2017
(RMB, except share data and per share data, or otherwise noted)
F-3
QUTOUTIAO INC.
CONSOLIDATED BALANCE SHEETS (Continued)
As of December 31, 2016 and 2017
(RMB, except share data and per share data, or otherwise noted)
As of December 31, | ||||||||||||||||
Note | 2016 | 2017 | ||||||||||||||
RMB | RMB |
US$ (Note 2(e)) |
||||||||||||||
Commitments and contingencies (Notes 17) |
||||||||||||||||
Mezzanine equity: |
||||||||||||||||
Series A convertible redeemable preferred shares (US$0.0001 par value; 4,945,055 shares authorized, issued and outstanding as of December 31, 2017; redemption amount of RMB 375,151,726 as of December 31, 2017) |
10 | | 210,478,110 | 32,349,893 | ||||||||||||
Series A1 convertible redeemable preferred shares (US$0.0001 par value; 1,373,626 shares authorized, issued and outstanding as of December 31, 2017; redemption amount of RMB 115,787,570 as of December 31, 2017) |
10 | | 63,416,581 | 9,746,950 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total mezzanine equity |
| 273,894,691 | 42,096,843 | |||||||||||||
|
|
|
|
|
|
|||||||||||
Shareholders deficit: |
||||||||||||||||
Ordinary shares (US$0.0001 par value; 493,681,319 shares authorized, 34,062,500 shares issued as of December 31, 2016 and 2017, respectively, 24,062,500 shares outstanding as of December 31, 2016 and 2017, respectively) |
11 | 15,723 | 15,723 | 2,417 | ||||||||||||
Additional paid-in capital |
1,118,808 | 8,856,316 | 1,361,190 | |||||||||||||
Treasury stock (US$0.0001 par value; 10,000,000 shares as of December 31, 2016 and 2017, respectively) |
11 | | | | ||||||||||||
Accumulated other comprehensive income |
| 24,651 | 3,789 | |||||||||||||
Accumulated deficit |
(12,325,548 | ) | (117,456,701 | ) | (18,052,764 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total shareholders deficit |
(11,191,017 | ) | (108,560,011 | ) | (16,685,368 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total liabilities, mezzanine equity and shareholders deficit |
29,896,180 | 476,580,750 | 73,249,120 | |||||||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2016 and 2017
(RMB, except share data and per share data, or otherwise noted)
For the years ended December 31, | ||||||||||||||||
Note | 2016 | 2017 | ||||||||||||||
RMB | RMB | US$(Note 2(e)) | ||||||||||||||
Advertising revenue |
57,880,338 | 512,882,481 | 78,828,594 | |||||||||||||
Other revenue |
73,974 | 4,170,469 | 640,989 | |||||||||||||
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|
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Net revenues |
57,954,312 | 517,052,950 | 79,469,583 | |||||||||||||
Cost of revenues |
(7,058,321 | ) | (75,996,476 | ) | (11,680,445 | ) | ||||||||||
Cost of revenues-related party |
15 | (120,000 | ) | (484,019 | ) | (74,392 | ) | |||||||||
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|
|
|
|
|
|||||||||||
Gross profit |
50,775,991 | 440,572,455 | 67,714,746 | |||||||||||||
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Operating expenses: |
||||||||||||||||
Research and development expenses |
(2,460,972 | ) | (15,096,815 | ) | (2,320,338 | ) | ||||||||||
Research and development expenses-related party |
15 | (166,000 | ) | (220,189 | ) | (33,842 | ) | |||||||||
Sales and marketing expenses |
(54,558,811 | ) | (493,775,027 | ) | (75,891,832 | ) | ||||||||||
Sales and marketing expenses-related party |
15 | (74,000 | ) | (950,185 | ) | (146,041 | ) | |||||||||
General and administrative expenses |
(1,763,219 | ) | (10,812,869 | ) | (1,661,908 | ) | ||||||||||
General and administrative expenses-related party |
15 | (2,664,000 | ) | (15,133,767 | ) | (2,326,017 | ) | |||||||||
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|
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Total operating expenses |
(61,687,002 | ) | (535,988,852 | ) | (82,379,978 | ) | ||||||||||
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Loss from operations |
(10,911,011 | ) | (95,416,397 | ) | (14,665,232 | ) | ||||||||||
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|
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Interest income |
50,840 | 673,858 | 103,570 | |||||||||||||
Others, net |
(2,208 | ) | (17,150 | ) | (2,636 | ) | ||||||||||
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|
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Loss before income tax expenses |
(10,862,379 | ) | (94,759,689 | ) | (14,564,298 | ) | ||||||||||
Income tax expense |
14 | | | | ||||||||||||
|
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|
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|
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Net loss |
(10,862,379 | ) | (94,759,689 | ) | (14,564,298 | ) | ||||||||||
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|
|
|
|||||||||||
Accretion to convertible redeemable preferred shares redemption value |
| (6,012,783 | ) | (924,148 | ) | |||||||||||
Net loss attributable to Qutoutiao Inc.s ordinary shareholders |
(10,862,379 | ) | (100,772,472 | ) | (15,488,446 | ) | ||||||||||
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|
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|
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Net loss |
(10,862,379 | ) | (94,759,689 | ) | (14,564,298 | ) | ||||||||||
Other comprehensive income |
||||||||||||||||
Foreign currency translation adjustment, net of nil tax |
| 24,651 | 3,789 | |||||||||||||
|
|
|
|
|
|
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Comprehensive loss attributable to Qutoutiao Inc. |
(10,862,379 | ) | (94,735,038 | ) | (14,560,509 | ) | ||||||||||
|
|
|
|
|
|
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Net loss per share attributable to Qutoutiao Inc. |
||||||||||||||||
Basic and diluted |
16 | (0.45 | ) | (4.19 | ) | (0.64 | ) | |||||||||
Weighted average number of ordinary shares used in per share calculation: |
||||||||||||||||
Basic and Diluted |
16 | 24,062,500 | 24,062,500 | 24,062,500 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS DEFICIT
For the Years Ended December 31, 2016 and 2017
(RMB, except share data and per share data, or otherwise noted)
Outstanding ordinary
shares |
Treasury stocks |
Accumulated
other comprehensive income |
Accumulated
deficit |
Statutory
reserves |
Total
shareholders deficit |
|||||||||||||||||||||||||||||||
Number of
Shares |
Amount |
Additional
paid-in capital |
Number of
Shares |
Amount | ||||||||||||||||||||||||||||||||
Balance as of January 1, 2016 |
24,062,500 | 15,723 | 84,277 | 10,000,000 | | | (822,404 | ) | | (722,404 | ) | |||||||||||||||||||||||||
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|
|||||||||||||||||||
Share-based compensation expense (Note 12) |
| | 393,766 | | | | | | 393,766 | |||||||||||||||||||||||||||
Distribution to the founder (Note 12) |
| | 640,765 | | | | (640,765 | ) | | | ||||||||||||||||||||||||||
Net loss for the year |
| | | | | | (10,862,379 | ) | | (10,862,379 | ) | |||||||||||||||||||||||||
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|
|
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|
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|
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|
|||||||||||||||||||
Balance as of December 31, 2016 |
24,062,500 | 15,723 | 1,118,808 | 10,000,000 | | | (12,325,548 | ) | | (11,191,017 | ) | |||||||||||||||||||||||||
|
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|
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|
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|
|||||||||||||||||||
Share-based compensation expense (Note 12) |
| | 3,378,827 | | | | | | 3,378,827 | |||||||||||||||||||||||||||
Distribution to the founder (Note 12) |
| | 4,358,681 | | | | (4,358,681 | ) | | | ||||||||||||||||||||||||||
Accretion on Series A convertible redeemable preferred shares to redemption value |
| | | | | | (5,213,802 | ) | (5,213,802 | ) | ||||||||||||||||||||||||||
Accretion on Series A1 convertible redeemable preferred shares to redemption value |
| | | | | | (798,981 | ) | | (798,981 | ) | |||||||||||||||||||||||||
Net loss for the year |
| | | | | | (94,759,689 | ) | | (94,759,689 | ) | |||||||||||||||||||||||||
Foreign currency translation |
| | | | | 24,651 | | | 24,651 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance as of December 31, 2017 |
24,062,500 | 15,723 | 8,856,316 | 10,000,000 | | 24,651 | (117,456,701 | ) | | (108,560,011 | ) | |||||||||||||||||||||||||
|
|
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|
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|
|
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|
|
|
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|
|
The accompanying notes are an integral part of these consolidated financial statements
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2016 and 2017
(RMB, except share data and per share data, or otherwise noted)
For the Years Ended December 31, | ||||||||||||
2016 | 2017 | |||||||||||
RMB | RMB | US$(Note 2(e)) | ||||||||||
Cash flows from operating activities |
||||||||||||
Net loss |
(10,862,379 | ) | (94,759,689 | ) | (14,564,298 | ) | ||||||
Adjustments for: |
||||||||||||
Depreciation of property and equipment |
21,360 | 330,238 | 50,756 | |||||||||
Share-based compensation |
393,766 | 3,378,827 | 519,316 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
(9,654,384 | ) | (32,099,995 | ) | (4,933,679 | ) | ||||||
Amount due from a related party |
(5,000,000 | ) | 5,000,000 | 768,486 | ||||||||
Prepayments and other current assets |
10,445 | (13,759,902 | ) | (2,114,858 | ) | |||||||
Other non-current assets |
| (5,758,946 | ) | (885,134 | ) | |||||||
Accounts payable |
5,077,380 | 7,050,837 | 1,083,694 | |||||||||
Amount due to a related party |
3,024,000 | (3,024,000 | ) | (464,780 | ) | |||||||
Registered users loyalty payable |
1,023,230 | 19,953,908 | 3,066,860 | |||||||||
Salary and welfare payable |
556,782 | 5,086,102 | 781,720 | |||||||||
Tax payable |
3,439,291 | 19,901,230 | 3,058,763 | |||||||||
Accrued liabilities related to users loyalty programs |
24,508,556 | 162,494,913 | 24,975,011 | |||||||||
Accrued liabilities and other current liabilities |
(547,761 | ) | 19,297,288 | 2,965,939 | ||||||||
Advances from advertising customers |
729,004 | 39,135,595 | 6,015,031 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
12,719,290 | 132,226,406 | 20,322,827 | |||||||||
|
|
|
|
|
|
|||||||
Cash flows from investing activities: |
||||||||||||
Purchase of short-term investments |
(45,250,000 | ) | (539,360,549 | ) | (82,898,199 | ) | ||||||
Proceeds from maturity of short-term investments |
32,880,000 | 421,985,200 | 64,857,938 | |||||||||
Purchase of property and equipment |
(153,274 | ) | (4,543,180 | ) | (698,274 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(12,523,274 | ) | (121,918,529 | ) | (18,738,535 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of Series A Convertible redeemable Preferred Shares, net of issuance costs |
| 208,490,509 | 32,044,405 | |||||||||
Proceeds from issuance of Series A1 Convertible redeemable Preferred Shares, net of issuance costs |
| 63,630,530 | 9,779,833 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by financing activities |
| 272,121,039 | 41,824,238 | |||||||||
|
|
|
|
|
|
|||||||
Net increase in cash and cash equivalents |
196,016 | 282,428,916 | 43,408,530 | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
| (4,239,131 | ) | (651,543 | ) | |||||||
Cash and cash equivalents at the beginning of year |
72,612 | 268,628 | 41,287 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at the end of year |
268,628 | 278,458,413 | 42,798,274 | |||||||||
|
|
|
|
|
|
|||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Accounts payable related to the purchase of property and equipment |
| 263,000 | 40,422 | |||||||||
Accretion to Series A preferred shares redemption value |
| 5,213,802 | 801,347 | |||||||||
Accretion to Series A1 preferred shares redemption value |
| 798,981 | 122,801 | |||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(RMB, except share data and per share data, or otherwise noted)
1. |
Organization and Principal Activities |
(a) |
Principal activities |
Qutoutiao Inc. (the Company), an exempted company with limited liability incorporated in the Cayman Islands, (i) its various equity-owned consolidated subsidiaries, (ii) its controlled affiliate Shanghai Jifen Culture Communications Co., Ltd. (Jifen or Jifen VIE), and (iii) the subsidiaries of its controlled affiliate are collectively referred to as the Group. The Groups principal activity is to operate mobile platforms Qutoutiao (QTT) and Quduopai (QDP) for the distribution, consumption and sharing of light entertainment content. The Group generates revenue primarily by providing cost-effective and targeted advertising solutions through the mobile platforms in the Peoples Republic of China (PRC), through Jifen and its wholly-owned subsidiaries thereof. Jifen and its wholly-owned subsidiaries are collectively referred to as the Affiliated Entities.
As of December 31, 2017, the Companys principal subsidiaries and consolidated Affiliated Entities are as follows:
Name of subsidiaries and VIE |
Date of establishment/acquisition |
Place of
incorporation |
Percentage of
direct or indirect economic ownership |
|||||||
Wholly owned subsidiaries of the Company: |
||||||||||
InfoUniversal Limited (InfoUniversal) |
Established on August 15, 2017 | Hong Kong | 100 | % | ||||||
Shanghai Quyun Internet Technology Co., Ltd. (Quyun WFOE) |
Established on October 13, 2017 |
PRC | 100 | % | ||||||
Variable Interest Entity (VIE) |
||||||||||
Shanghai Jifen Culture Communications Co., Ltd. (Jifen or Jifen VIE) |
Established on January 10, 2012 |
PRC | 100 | % | ||||||
Subsidiaries of Variable Interest Entity (VIE subsidiaries) |
||||||||||
Shanghai Xike Information Technology Service Co., Ltd. (Xike) |
Established on July 14, 2016 | PRC | 100 | % | ||||||
Shanghai Tuile Information Technology Service Co., Ltd. (Tuile) |
Established on July 14, 2016 | PRC | 100 | % | ||||||
Anhui Zhangduan Internet Technology Co., Ltd. (Zhangduan) |
Established on March 31, 2017 | PRC | 100 | % | ||||||
Beijing Qukandian Internet Technology Co., Ltd. (Qukandian) |
Established on April 13, 2017 | PRC | 100 | % |
(b) |
Reorganization |
Jifen was incorporated in the PRC in 2012 with insignificant operations from 2012 to 2015. The Companys current owners acquired 100% equity interests in Jifen in 2015 for a total consideration of RMB 199,000. Jifen started the operation of the mobile platforms for distribution, consumption and sharing of light entertainment content (the principal business) from 2016.
F-8
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
1. |
Organization and Principal Activities (Continued) |
(b) |
Reorganization (Continued) |
To facilitate offshore financing, an offshore corporate structure was formed in July 2017 (the Reorganization), which was carried out as follows:
1) |
On July 17, 2017, the Company was incorporated in the Cayman Islands by the founders. |
2) |
On August 15, 2017, InfoUniversal was incorporated in Hong Kong with 100% ownership by the Company. |
3) |
October 13, 2017, Quyun WFOE was incorporated in the PRC with 100% ownership by InfoUniversal. |
4) |
On October 13, 2017, the Group entered into various arrangements (VIE Agreements) as related to its Affiliated Entities or its shareholders in order to comply with PRC laws and regulations on internet business. |
By entering the VIE Agreements, Jifen became a VIE whose primary beneficiary is Quyun WFOE and the shareholders of Jifen became the Nominee Shareholders of Jifen. Reorganization is accounted for as a common control transaction under the pooling of interest method. Accordingly, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods.
Jifen VIE
The Group has entered into various agreements as related to its Affiliated Entities or its shareholders as follows:
Exclusive Technology Support and Consulting Services Agreement
Under the exclusive technology support and consulting services agreement entered on October 13, 2017 between Jifen VIE and Quyun WFOE, Quyun WFOE has the exclusive right to provide to Jifen technology support, business management consulting, marketing consultation, products research and development and technology services related to all technologies, and business operations needed for its business. Quyun WFOE owns the exclusive intellectual property rights created because of the performance of this agreement. The service fee payable by Jifen to Quyun WFOE is determined by Quyun WFOE based on its services provided including various factors such as Quyun WFOEs incurred technology support and consulting services fees, performance data and Jifen VIEs revenues. The term of this agreement will expire in 10 years and may be extended at Quyun WFOEs request prior to the expiration date. Quyun WFOE is entitled to terminate the agreement at any time by providing 30 days prior written notice to Jifen VIE. There was no service fee paid and payable from Jifen VIE to Quyun WFOE for the year ended December 31, 2017 as Jifen, in aggregated, has been incurring losses.
Exclusive Option Agreement
The parties to the exclusive option agreement entered on October 13, 2017 are Jifen VIE, Quyun WFOE and each of the shareholders of Jifen VIE. Under the exclusive option agreement, each of the shareholders of Jifen VIE irrevocably granted Quyun WFOE or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of his or its equity interests in Jifen VIE and all or part of assets of Jifen VIE. Quyun WFOE or its designated representative(s) have sole discretion as to
F-9
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
1. |
Organization and Principal Activities (Continued) |
(b) |
Reorganization (Continued) |
Exclusive Option Agreement (Continued)
when to exercise such options, either in part or in full. The exercise price shall be the lowest allowable share purchase amount permitted by the PRC law for the 100% equity interest (or pro-rata if Quyun WFOE decides to purchase part of the equity interest). Additionally, the share purchase amount paid by WFOE to the shareholders should be used to settle the outstanding loan amounts under the loan agreement and/or refund back to Quyun WFOE through the method permitted by the PRC law once received. Without Quyun WFOEs prior written consent, Jifen VIEs shareholders shall not sell, transfer, mortgage or otherwise dispose their equity interests in Jifen VIE. The agreement expires upon transfer of all shares or assets of Jifen VIE to Quyun WFOE or its designated representative(s). The term of this agreement will expire in 10 years and may be extended at Quyun WFOEs request prior to the expiration date. Quyun WFOE is entitled to terminate the agreement at any time by providing 30 days prior written notice to Jifen VIE.
Voting Rights Proxy Agreement
The parties to the exclusive option agreement entered on October 13, 2017 are Jifen VIE, Quyun WFOE and each of the shareholders of Jifen VIE. Under the agreement, each of the shareholders of Jifen VIE irrevocably granted Quyun WFOE or its designated representative(s) the right to exercise his/her rights as a shareholder of Jifen VIE including hosting board of directors meeting, terminate and nominate board members and senior management of Jifen VIE and other shareholders voting rights. During the period that each of Shanghai Quyun and Shanghai Jifen remain in operation, the voting rights proxy agreement shall be irrevocable and continuously effective and valid for ten years from the execution date unless otherwise agreed to by all parties. Upon the expiration of the original term or any renewal term of the voting rights proxy agreement, the agreement shall be automatically renewed for an additional one year period unless, at least 30 days prior to the expiration date, Shanghai Quyun provides notice to the other parties to the voting rights proxy agreement not to renew the agreement.
Loan Agreement
Quyun WFOE has entered into an interest-free loan agreement with Jifen VIE, which may only be used for the purpose of business operations and development of Jifen VIE. Under the terms of the agreement, Quyun WFOE is going to provide unconditional financial support to Jifen VIE and the amount would be agreed between Quyun WFOE and Jifen VIE. Jifen VIE along with its subsidiaries pledge all its shares equity for the outstanding loan. Also, the maturity date of the loan is the earlier of 10 years, the end of Quyun WFOEs operation period or the end of Jifen VIEs operation period. Upon maturity, Quyun WFOE or its designated third party may purchase the equity interests in the Jifen VIE at a price equal to the lowest allowable amount for a similar transaction per PRC laws, rules and regulations. Quyun WFOE can also accelerate the payment terms of Jifen VIE to repay the loan using its shares/equity. Additionally, Quyun WFOE should provide unconditional capital support to Jifen VIE.
Equity Interest Pledge Agreement
Pursuant to the equity interest pledge agreement between Quyun WFOE and the shareholders of Jifen VIE, the shareholders of Jifen VIE has pledged all of their equity interests in Jifen VIE to Quyun WFOE to guarantee the performance by Jifen VIE and its shareholders performance of their respective obligations
F-10
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
1. |
Organization and Principal Activities (Continued) |
(b) |
Reorganization (Continued) |
Equity Interest Pledge Agreement (Continued)
under the exclusive option agreement, exclusive technology support and business services agreement, voting rights proxy agreement and loan agreement. If Jifen VIE and/or its shareholders breach their contractual obligations under those agreements, Quyun WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.
Jifen, under Generally Accepted Accounting Principles in the United States (US GAAP), is considered to be a consolidated VIE in which the Company, or its subsidiaries, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore the Company or one of its subsidiaries is the primary beneficiary of the entity. Through the aforementioned contractual agreements, the Company has the ability to:
|
exercise effective control over Jifen whereby having the power to direct Jifens activities that most significantly drive the economic results of Jifen; |
|
receive substantially all of the economic benefits and residual returns, and absorb substantially all the risks and expected losses from the Jifen as if it was their sole shareholder; and |
|
have an exclusive option to purchase all of the equity interests in Jifen. |
Management evaluated the relationships among the Company, Quyun WFOE and Jifen VIE, and concluded that Quyun WFOE is the primary beneficiary of Jifen VIE. As a result, Jifens results of operations, assets and liabilities have been included in the Groups consolidated financial statements for all the presented periods.
F-11
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
1. |
Organization and Principal Activities (Continued) |
(b) |
Reorganization (Continued) |
Share Pledge Agreement
The following table sets forth the assets, liabilities, results of operations and cash flows of Jifen and its subsidiaries are included in the Groups consolidated financial statements. Transactions between the VIE and its subsidiaries are eliminated in the balances presented below:
As of December 31, | ||||||||
2016 | 2017 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
268,628 | 11,317,670 | ||||||
Short-term investments |
12,370,000 | 129,770,000 | ||||||
Accounts receivable, net |
11,150,600 | 43,250,595 | ||||||
Amount due from a related party |
5,000,000 | | ||||||
Prepayments and other current assets |
968,832 | 14,728,734 | ||||||
|
|
|
|
|||||
Total current assets |
29,758,060 | 199,066,999 | ||||||
|
|
|
|
|||||
Non-current assets |
||||||||
Property and equipment, net |
138,120 | 4,614,062 | ||||||
Other non-current assets |
| 5,758,946 | ||||||
|
|
|
|
|||||
Total non-current assets |
138,120 | 10,373,008 | ||||||
|
|
|
|
|||||
Total assets |
29,896,180 | 209,440,007 | ||||||
|
|
|
|
|||||
Liabilities |
||||||||
Current liabilities |
||||||||
Accounts payable |
7,678,904 | 14,992,741 | ||||||
Amount due to a related party |
3,024,000 | | ||||||
Registered users loyalty payable |
1,023,230 | 20,977,138 | ||||||
Advance from advertising customers |
729,004 | 39,864,599 | ||||||
Salary and welfare payable |
556,782 | 5,642,884 | ||||||
Tax payable |
1,442,370 | 21,343,600 | ||||||
Accrued liabilities related to users loyalty programs |
24,508,556 | 187,003,469 | ||||||
Accrued liabilities and other current liabilities |
2,124,351 | 18,271,639 | ||||||
|
|
|
|
|||||
Total current liabilities |
41,087,197 | 308,096,070 | ||||||
|
|
|
|
|||||
Total liabilities |
41,087,197 | 308,096,070 | ||||||
|
|
|
|
2016 | 2017 | |||||||
Net revenues |
57,954,312 | 517,052,950 | ||||||
Net loss |
(10,862,379 | ) | (90,843,873 | ) |
For the year ended December 31, | ||||||||
2016 | 2017 | |||||||
Net cash provided by operating activities |
12,719,290 | 132,992,222 | ||||||
Net cash used in investing activities |
(12,523,274 | ) | (121,943,180 | ) | ||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
196,016 | 11,049,042 | ||||||
|
|
|
|
F-12
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
1. |
Organization and Principal Activities (Continued) |
(b) |
Reorganization (Continued) |
Share Pledge Agreement (Continued)
In accordance with the aforementioned agreements, the Company has power to direct activities of the Jifen VIE, and can have assets transferred out of Jifen VIE. Therefore the Company considers that there is no asset in Jifen VIE that can be used only to settle obligations of the Jifen VIE, except for registered capital, as of December 31, 2016 and 2017. As Jifen VIE and its subsidiary were incorporated as limited liability Company under the PRC Company Law, the creditors do not have recourse to the general credit of the Company for all the liabilities of Jifen VIE.
There were no pledges or collateralization of the Affiliated Entities assets. As the Company is conducting its business mainly through the Affiliated Entities, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.
There is no VIE where the Company has variable interest but is not the primary beneficiary.
The Group believes that the contractual arrangements among its shareholders and Quyun WFOE comply with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit the Companys ability to enforce these contractual arrangements and if the shareholders of Jifen VIE were to reduce their interest in the Company, their interests may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms.
The Companys ability to control the Jifen VIE also depends on the voting rights proxy and the effect of the share pledge under the Share Pledge Agreement and Quyun WFOE has to vote on all matters requiring shareholder approval in Jifen VIE. As noted above, the Company believes this voting right proxy is legally enforceable but may not be as effective as direct equity ownership.
2. |
Principal Accounting Policies |
(a) |
Basis of preparation |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).
The Reorganization is accounted for as a common control transaction under the pooling of interest method. Accordingly, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods.
Significant accounting policies followed by the Company in the preparation of the accompanying consolidated financial statements are summarized below.
(b) |
Use of estimates |
The preparation of the Groups consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from such estimates.
F-13
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(b) |
Use of estimates (Continued) |
The Company believes that revenue recognition, liabilities related to loyalty programs, consolidation of VIE, determination of share-based compensation and impairment assessment of long-lived assets that reflect more significant judgments and estimates used in the preparation of its consolidated financial statements.
Management bases the estimates on historical experience and on various other assumptions as discussed elsewhere to the consolidated financial statements that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could materially differ from these estimates.
(c) |
Consolidation |
The Groups consolidated financial statements include the financial statements of the Company, its subsidiaries, its VIE and a VIEs subsidiaries for which the Company or its subsidiary is the primary beneficiary. All transactions and balances among the Company, its subsidiaries, its VIEs have been eliminated upon consolidation.
A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting powers; or has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
A VIE is an entity in which the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity. In determining whether the Company or its subsidiaries are the primary beneficiary, the Company considered whether it has the power to direct activities that are significant to the VIEs economic performance, and also the Groups obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Quyun WFOE and ultimately the Company hold all the variable interests of the VIE and its subsidiary, and has been determined to be the primary beneficiary of the VIE.
(d) |
Functional Currency and Foreign Currency Translation |
The Group uses Renminbi (RMB) as its reporting currency. The functional currency of the Company and its subsidiaries incorporated outside of PRC is the United States dollar (US$), while the functional currency of the PRC entities in the Group is RMB as determined based on the criteria of ASC 830, Foreign Currency Matters.
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Financial assets and liabilities denominated in other than the functional currency are re-measured at the balance sheet date exchange rate. The resulting exchange differences are included in the consolidated statements of comprehensive loss as foreign exchange related gains / loss.
The financial statements of the Group are translated from the functional currency to the reporting currency, RMB. Assets and liabilities of the Company and its subsidiaries incorporated outside of PRC are translated into RMB at fiscal year-end exchange rates, Income and expense items are translated at average exchange rates prevailing during the fiscal year, representing the index rates stipulated by the Peoples Bank of China.
F-14
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(d) |
Functional Currency and Foreign Currency Translation (Continued) |
Translation adjustments arising from these are reported as foreign currency translation adjustments and are shown as a separate component of shareholders deficit on the consolidated financial statement. The exchange rates used for translation on December 31, 2016 and 2017 were US$1.00=RMB 6.9370 and RMB 6.5342, respectively, representing the index rates stipulated by the Peoples Bank of China.
(e) |
Convenience Translation |
The unaudited United States dollar (US$) amounts disclosed in the accompanying financial statements are presented solely for the convenience of the readers. Translations of amounts from RMB into US$ for the convenience of the reader were calculated at the rate of US$1 = RMB6.5063 on December 29, 2017, representing the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2017, or at any other rate.
(f) |
Fair value of financial instruments |
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The three levels of inputs that may be used to measure fair value include:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable, market-based inputs, other than quoted prices, in active markets for identical assets or liabilities.
Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
The Group does not have any non-financial assets or liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
F-15
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(f) |
Fair value of financial instruments (Continued) |
The Groups financial instruments consist principally of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, advance from advertising customers, registered users loyalty payable and other liabilities.
As of December 31, 2016 and 2017, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, advance from customers, registered users loyalty payable and other liabilities approximated their fair values reported in the consolidated balance sheets due to the short term maturities of these instruments.
On a recurring basis, the Group measures its short-term investments at fair value.
The following table sets forth the Groups assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
As of December 2016 | Level 1 | Level 2 | Level 3 |
Balance at
fair value |
||||||||||||
Assets |
||||||||||||||||
Short-term investments Wealth management products |
| 12,370,000 | | 12,370,000 | ||||||||||||
|
|
|
|
|
|
|
|
As of December 2017 | Level 1 | Level 2 | Level 3 |
Balance at
fair value |
||||||||||||
Assets |
||||||||||||||||
Short-term investments Wealth management products |
| 129,770,000 | | 129,770,000 | ||||||||||||
|
|
|
|
|
|
|
|
The Group values its investments in wealth management products issued by certain banks using quoted subscription/redemption prices published by these banks, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 2.
(g) |
Cash and Cash Equivalents |
Cash and cash equivalents include cash in bank and time deposits placed with banks or other financial institutions, which have original maturities of three months or less at the time of purchase and are readily convertible to known amounts of cash.
(h) |
Short-term investments |
Short-term investments include investments in wealth management products issued by certain banks which are redeemable by the Company at any time. The wealth management products are unsecured with variable interest rates and primarily invested in debt securities issued by the PRC government, corporate debt securities and central bank bills. The Company measures the short-term investments at fair value using the quoted subscription or redemption prices published by these banks. The change in fair value is recorded as interest income amounted to RMB 49,354 and RMB 666,233 in the consolidated statements of comprehensive loss for the years ended 2016 and 2017, respectively.
F-16
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(i) |
Accounts receivable, net |
Accounts receivable are presented net of allowance for doubtful accounts. The Group uses specific identification in providing for bad debts when facts and circumstances indicate that collection is doubtful and based on factors listed in the following paragraph. If the financial conditions of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required.
The Company maintains an allowance for doubtful accounts which reflects its best estimate of amounts that potentially will not be collected. The Company determines the allowance for doubtful accounts on general basis taking into consideration various factors including but not limited to historical collection experience and credit-worthiness of the customers as well as the age of the individual receivables balance. Additionally, the Company makes specific bad debt provisions based on any specific knowledge the Company has acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require the Company to use substantial judgment in assessing its collectability.
(j) |
Property and equipment, net |
Property and equipment are stated at historical cost less accumulated depreciation and impairment loss, if any. Depreciation is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:
Leasehold improvements |
Over the shorter of lease term or 2 5 years | |
Office equipment |
3 5 years |
Expenditures for maintenance and repairs are expensed as incurred. The gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of comprehensive loss.
(k) |
Impairment of long-lived assets |
For other long-lived assets including property and equipment and other non-current assets, the Group evaluates for impairment whenever events or changes (triggering events) indicate that the carrying amount of an asset may no longer be recoverable. The Group assesses the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to receive from use of the assets and their eventual disposition. Such assets are considered to be impaired if the sum of the expected undiscounted cash flows is less than the carrying amount of the assets. The impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
(l) |
Advances from advertising customers |
Certain third party advertising customers pay in advance to purchase advertising services. Cash proceeds received from customers are initially recorded as advances from advertising customers and are recognized as revenues when revenue recognition criteria are met.
F-17
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(m) |
Revenue recognition |
A. |
Significant accounting policy |
The Group has adopted the new revenue standard, ASC 606, by applying the full retrospective method. See Section (ac) Recently issued accounting pronouncements. Revenues are recognized when or as the control of a good or service is transferred to the customer. Depending on the terms of the contract and the laws that apply to the contract, control of the goods and services may be transferred over time or at a point in time. Control of the goods and services is transferred over time if the Groups performance:
|
provides all of the benefits received and consumed simultaneously by the customer; |
|
creates and enhances an asset that the customer controls as the Group performs; or |
|
does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. |
If control of the goods and services transfers over time, revenue is recognized over the period of the contract by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognized at a point in time when the customer obtains control of the goods and services.
The progress towards complete satisfaction of the performance obligation is measured based on one of the following methods that best depict the Groups performance in satisfying the performance obligation:
|
direct measurements of the value transferred by the Group to the customer; or |
|
the Groups efforts or inputs to the satisfaction of the performance obligation. |
B. |
Nature of services |
The following is a description of principal activities of the Group from which the Group generates its revenue.
(i) Advertising
The Groups main revenue generating activity is the provision of online advertising services. The Group generates revenue from performing specified actions, i.e. a Cost Per thousand impressions (CPM), Cost Per Click (CPC) basis. Revenue is recognized on a CPM or CPC basis as impressions or clicks are delivered.
The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Group is acting as the principal or an agent in the transaction. In determining whether the Group acts as the principal or an agent, the Group follows the accounting guidance for principal-agent considerations. Such determination involves judgement and is based on evaluation of the terms of each arrangement.
a. Advertising services provided to advertising customers
(i) The Group currently engages certain advertising customers through a third-party advertising agent (advertising agent). In the arrangement with this advertising agent, it served as the Groups sales agent in selling the Groups advertising solutions to other second-tier advertising agents. The end advertisers are the customers of the Group as they specifically select Qutoutiao to display its advertisement and the performance obligation of the Group is to provide the underlying advertising display services. The
F-18
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(m) |
Revenue recognition (Continued) |
B. |
Nature of services (Continued) |
(i) Advertising (Continued)
a. Advertising services provided to advertising customers (Continued)
advertising agent earns a commission of 2% of the advertising revenue in the arrangement in return for providing bidding system for placement on Qutoutiao. The Group provides advertising services to advertising customers and recognizes advertising revenue on a gross basis as clicks are delivered.
The Group receives refundable advance payments from advertising customers through this advertising agent and reconciles the advertising revenue with this advertising agent on a weekly basis. If the advance payment deposited in the Group is not ultimately used for the advertisement on Qutoutiao, the Group refunds the advance payment back to advertising customers through this advertising agent.
In February 2018, the Group acquired 100% equity interests of this advertising agent with a total consideration of RMB15 million (Note 18).
The Group also engaged advertising customers through other third party advertising agents where revenue was accounted for on a gross basis during the year end December 31, 2017. Those arrangements have been terminated as of December 31, 2017.
(ii) The Group also provides advertising service to advertising customers directly. The Group recognizes revenue on a gross basis as impressions are delivered.
b. Advertising services provided to advertising platforms
The Group also provides advertising services to other third-party advertising platforms. In the arrangement with these advertising platforms, these advertising platforms are the customers of the Group and the performance obligation of the Group is to provide traffic service to these advertising platforms. Therefore, the Group recognizes revenue based on the net amount as impressions or clicks are delivered.
The Group reconciles and settles the advertising revenue with these advertising platforms on a monthly basis.
(ii) Other services
The Group operates an online marketplace which users can access merchandise offered by third-party merchandise suppliers. The suppliers are the customers of the Group as these suppliers are the primary obligor to provide goods and delivery service to the users and the performance obligation of the Group is to provide matching service for the suppliers. The Group acts as an agent in this transaction and recognize revenue when the matching service is completed. The Group settles the payment with suppliers on a monthly basis.
F-19
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(m) |
Revenue recognition (Continued) |
C. Disaggregation of revenue
In the following table, revenue is disaggregated by major service line and gross vs net recognition.
For the years ended December 31, | ||||||||||||
2016 | 2017 | |||||||||||
RMB | RMB | US$ (Note 2(e)) | ||||||||||
Major service line |
||||||||||||
Advertising service provided to advertising customers, recorded gross |
16,938,996 | 264,471,551 | 40,648,533 | |||||||||
Advertising service provided to advertising platforms, recorded net |
40,941,342 | 248,410,930 | 38,180,061 | |||||||||
Other service |
73,974 | 4,170,469 | 640,989 | |||||||||
|
|
|
|
|
|
|||||||
57,954,312 | 517,052,950 | 79,469,583 | ||||||||||
|
|
|
|
|
|
(n) |
Cost of revenues |
The Groups cost of revenues consists primarily of (i) agent fees retained by the third party advertising agents which are recognized as cost of revenue for revenue recorded on gross basis, (ii) content procurement costs paid to third-party professional media companies or freelancers, (iii) direct cost related to in-house content editing cost, rental cost, depreciation and other miscellaneous costs, (iv) bandwidth cost and (v) cultural development fee and surcharges. The cultural development fee and surcharges in cost of revenues for the years ended December 31, 2016 and 2017 were RMB 1,950,498 and RMB 17,019,711, respectively. The Group is subject to a cultural development fee on the provision of advertising services in the PRC. The applicable tax rate is 3% of the net advertising revenues.
(o) |
Research and development expenses |
Research and development expenses consist primarily of (i) salary and welfare for research and development personnel, (ii) office rental expenses and (iii) depreciation of office premise and servers utilized by research and development personnel. Costs incurred during the research stage are expensed as incurred. Costs incurred in the development stage, prior to the establishment of technological feasibility, which is when a working model is available, are expensed when incurred.
The Company accounts for internal use software development costs in accordance with guidance on intangible assets and internal use software. This requires capitalization of qualifying costs incurred during the softwares application development stage and to expense costs as they are incurred during the preliminary project and post implementation/operation stages. For the years ended December 31, 2016 and 2017, the Company has not capitalized any costs related to internal use software because the inception of the Group software development costs qualified for capitalization have been insignificant.
(p) |
Sales and marketing expenses |
Sales and marketing expenses consist primarily of (i) reward payable to registered users related to loyalty programs, (ii) advertising and marketing expenses, (iii) charges for short mobile message service to registered users and (iv) salary and welfare for sales and marketing personnel. The advertising and
F-20
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(p) |
Sales and marketing expenses (Continued) |
marketing expenses amounted to RMB 171,496 and RMB 41,909,059 during the years ended December 31, 2016 and 2017, respectively.
(q) |
General and administrative expenses |
General and administrative expenses consist primarily of (i) salary and welfare for general and administrative personnel, (ii) office expense and (iii) professional service fees.
(r) |
User loyalty programs |
The Group has loyalty programs for its registered users in its mobile platforms Qutoutiao and Quduopai to enhance user stickiness and incentivize word-of-mouth referrals. The Group offers rewards mainly for signing up as a new-registered user as well as rewards to existing registered users for referring new users to become the Groups registered users, and also rewards for participating in various activities held in platforms including uploading videos on Quduopai. The cost of users rewards are recognized as sales and marketing expenses in the consolidated statements of comprehensive loss.
On Qutoutiao, the Groups users can redeem earned rewards, which is in a form of cash credits reflecting the same amount of cash value, upon request. The Group offers its users the flexibility to choose a number of rewards payment options, including i) online cash out, when the cash credits balance exceeding a certain cash out threshold, ii) purchasing products mainly through online marketplace.
On Quduopai, the Groups users can also earn cash credits (reflecting the same amount of cash value) that they may cash out when the cash credits balance exceeding a certain threshold. Additionally the Groups users on the Quduopai can earn loyalty points, which can only be exchanged for coupons issued to the Group by a third-party, which can be used to purchase goods or service on that third-partys group buying website. The Group does not recognize any expenses or liability for those loyalty points earned on Quduopai since the Group does not bear any additional cost to settle these loyalty points awarded to its users.
The Groups experience indicates that a certain portion of rewards is never redeemed by its users, which the Group refers to as a breakage. The liability accrued for the reward is reduced by the estimated breakage that is expected to occur. The Group estimates breakage based upon its analysis of relevant reward history and redemption pattern as well as considering the expiration period of the rewards under the users agreement. In the assessment of breakage, each individual users account is categorized into certain pools of different range of outstanding rewards, and then further grouped into certain sub-groups on the basis of inactivity days. The past reward redemption pattern in those sub-groups was used to estimate the respective breakage for the outstanding rewards in each sub-group at each period end. For the years ended December 31, 2016 and 2017, total costs related to the users rewards granted amounted to RMB53 million and RMB528 million, and total rewards redeemed amounted to RMB14 million and RMB245 million, respectively. As of December 31, 2016 and 2017, the total estimated breakage not accrued approximated to RMB 13 million and RMB 113 million, respectively.
Once the accumulated unredeemed rewards for individual user with amount exceeding the cash out threshold is reached, the Group reclassifies the balance into registered users payable in consolidated balance sheet as a monetary liability and reverses the amount of breakage originally assumed. The registered user payable is derecognized only if (1) the Group pays the user and is relieved of its obligation for the liability by paying the users includes delivery of cash or (2) the Group is legally released from the liability.
F-21
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(r) |
User loyalty programs (Continued) |
The users agreement provides that rewards expire after one month. However, the Group may, at its discretion, provide rewards to its users even after one month expiration period.
The actual cost to settle the estimated liability may differ from the estimated liability recorded. As of December 31, 2016 and 2017, users reward recorded in Registered users loyalty payable are RMB 1,023,230 and RMB 20,977,138, respectively. Estimated users rewards recorded in Accrued liabilities related to users loyalty programs are RMB 24,508,556 and RMB 187,003,469, respectively.
(s) |
Operating leases |
Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods. The Group had no capital leases for the years ended December 31, 2016 and 2017.
(t) |
Employee social security and welfare benefits |
Employees of the Group in the PRC are entitled to staff welfare benefits including pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund plans through a PRC government-mandated multi-employer defined contribution plan. The Group is required to contribute to the plan based on certain percentages of the employees salaries, up to a maximum amount specified by the local government.
The PRC government is responsible for the medical benefits and the pension liability to be paid to these employees and the Groups obligations are limited to the amounts contributed and no legal obligation beyond the contributions made.
(u) |
Income taxes |
Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.
Deferred income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive loss in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
Uncertain tax positions
The guidance on accounting for uncertainties in income taxes prescribes a more likely than not threshold for financial statements recognition and measurement of a tax position taken or expected to be taken in a tax
F-22
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(u) |
Income taxes (Continued) |
Uncertain tax positions (Continued)
return. Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating the Groups uncertain tax positions and determining its provision for income taxes. The Group recognizes interests and penalties, if any, under accrued expenses and other current liabilities on its consolidated balance sheets and under other expenses in its statements of operations and comprehensive loss. The Group did not recognize any significant interest and penalties associated with uncertain tax positions for the years ended December 31, 2016 and 2017. As of December 31, 2016 and 2017, the Group did not have any significant unrecognized uncertain tax positions.
(v) |
Share-based compensation |
Share-based compensation costs are measured at the grant date. The share-based compensation expenses have been categorized as either cost of revenue, general and administrative expenses, selling and marketing expenses or research and development expenses, depending on the job functions of the grantees.
Option granted to employees
For the options granted to employees, the compensation expense is recognized using the straight-line method over the requisite service period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimate. In determining the fair value of the Companys share options, the binomial option pricing model has been applied.
Option granted to non-employee
For share-based awards granted to non-employees, the Group accounts for the related share-based compensation expenses in accordance with ASC subtopic, 505-50 (ASC 505-50), Equity-Based Payments to Non-Employees. Under the provision of ASC 505-50, options of the Company issued to non-employees are measured based on fair value of the options which are determined by using the binomial option pricing model. These options are measured as of the earlier of the date at which either: (1) commitment for performance by the non-employee has been reached; or (2) the non-employees performance is complete. Subsequent to the completion of the performance, the share-based award is assessed in accordance with ASC 815 to determine whether the award meets the definition of a derivative.
Restricted shares
In January 2018, the founders entered into Share Restriction Deeds with the Company such that a total of 15,937,500 ordinary shares of the Company held by the founders became restricted and will be vested in periods from 24 months to 34 months. Prior to the end of the vesting periods, all the remaining restricted shares shall vest immediately and no longer constitute restricted shares upon a Deemed Liquidation Event or IPO of the Company. In the event that the founder voluntarily and unilaterally terminates his employment/service contract with any applicable Group entities or his employment or service relationship is terminated
F-23
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(v) |
Share-based compensation (Continued) |
Restricted shares (Continued)
by any applicable Group entities for cause as stated in the Deed, the related founder shall sell to the Company, and the Company shall repurchase from the founder, all of the restricted shares (not vested shares) at a price of US$0.0001 per share. For accounting purposes, this transaction has been reflected retrospectively similar to a reverse stock split, with a grant of the 15,937,500 restricted shares to be recognized in January 2018 at their then fair value and recognized as compensation expense over the vesting periods.
(w) |
Statutory reserves |
The Groups subsidiaries, consolidated VIE and its subsidiaries incorporated in the PRC are required on an annual basis to make appropriations of retained earnings set at certain percentage of after-tax profit determined in accordance with PRC accounting standards and regulations (PRC GAAP).
Appropriation to the statutory general reserve should be at least 10% of the after tax net income determined in accordance with the legal requirements in the PRC until the reserve is equal to 50% of the entities registered capital. The Group is not required to make appropriation to other reserve funds and the Group does not have any intentions to make appropriations to any other reserve funds.
The general reserve fund can only be used for specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered capital. Appropriations to the general reserve funds are classified in the consolidated balance sheets as statutory reserves.
There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Group was not done so.
Relevant laws and regulations permit payments of dividends by the PRC subsidiaries and affiliated companies only out of their retained earnings, if any, as determined in accordance with respective accounting standards and regulations. Accordingly, the above balances are not allowed to be transferred to the Company in terms of cash dividends, loans or advances.
(x) |
Related parties |
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence, such as a family member or relative, shareholder, or a related corporation.
(y) |
Dividends |
Dividends are recognized when declared. No dividends were declared for the years ended December 31, 2016 and 2017, respectively. The Group does not have any present plan to pay any dividends on ordinary shares in the foreseeable future. The Group currently intends to retain the available funds and any future earnings to operate and expand its business.
F-24
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(z) |
Loss per share |
Basic loss per share is computed by dividing net loss attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year using the two class method. Using the two class method, net loss is allocated between ordinary shares and other participating securities (i.e. preferred shares) based on their participating rights.
Diluted loss per share is calculated by dividing net loss attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalents shares outstanding during the year. Dilutive equivalent shares are excluded from the computation of diluted loss per share if their effects would be anti-dilutive. Ordinary share equivalents consist of the ordinary shares issuable in connection with the Groups convertible redeemable preferred shares using the if-converted method, and ordinary shares issuable upon the conversion of the stock options, using the treasury stock method.
(aa) |
Comprehensive loss |
Comprehensive loss is defined as the change in shareholders deficit of the Company during a period arising from transactions and other events and circumstances excluding transactions resulting from investments by shareholders and distributions to shareholders.
Comprehensive loss is reported in the consolidated statements of comprehensive loss. Accumulated other comprehensive losses of the Group include the foreign currency translation adjustments.
(ab) |
Segment reporting |
Operating segments are defined as components of an enterprise engaging in businesses activities for which separate financial information is available that is regularly evaluated by the Groups chief operating decision makers in deciding how to allocate resources and assess performance. The Groups chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results including revenue, gross profit and operating profit at a consolidated level only. The Group does not distinguish between markets for the purpose of making decisions about resources allocation and performance assessment. Hence, the Group has only one operating segment and one reportable segment.
(ac) |
Recently issued accounting pronouncements |
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a new standard on revenue which will supersede the revenue recognition requirements in ASC 605. The new standard, as amended, sets forth a single comprehensive model for recognizing and reporting revenues. The new guidance requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. The standard is effective for us for fiscal years, and interim
F-25
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(ac) |
Recently issued accounting pronouncements (Continued) |
periods within those years, beginning on or after January 1, 2018. Early adoption is permitted but not before the original effective date of January 1, 2017. The Company has adopted the standard using the full retrospective method.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The main objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. The Company will adopt ASU 2016-01 in the first quarter of year 2018 and does not believe the adoption will have material impact on the Companys consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02). Under the new guidance, lessees will be required to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. The Company expects to adopt the new standard in the first quarter of 2019 on a modified retrospective basis and is currently in the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (ASU 2016-13), which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of ASU 2016-13 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASBs Emerging Issues Task Force (ASU 2016-15). The new guidance is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method.
F-26
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
2. |
Principal Accounting Policies (Continued) |
(ac) |
Recently issued accounting pronouncements (Continued) |
The Company has early adopted ASU 2016-15 in the current year and the adoption had no material impact on the Companys consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (ASU 2016-18). This ASU affects all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update will become effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and early adoption is permitted in any interim or annual period. Company has early adopted ASU 2016-18 in the current year and the adoption had no material impact on the Companys consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation Stock compensation (Topic 718): Scope of modification accounting (ASU 2017-09), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 is effective prospectively for all companies for annual periods beginning on or after December 15, 2017, and early adoption is permitted. The Company has early adopted ASU 2017-05 in the current year and the adoption had no material impact on the Companys consolidated financial statements.
3. |
Risks and Concentration |
(a) |
PRC regulations |
(1) Jifen VIE
Though the PRC has, since 1978, implemented a wide range of market-oriented economic reforms, continued reforms and progress towards a full market-oriented economy are uncertain. In addition, the telecommunication, information, and media industries remain highly regulated. Restrictions are currently in place and are unclear with respect to which segments of these industries foreign owned entities, like the Company, may operate. The Chinese government may issue from time to time new laws or new interpretations on existing laws to regulate areas such as telecommunication, information and media. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, and the Groups legal structure and scope of operations in the PRC, which could be subject to further restrictions resulting in limitations on the Companys ability to conduct business in the PRC. There are uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements with consolidated VIE. The Company believes that the structure for operating its business in China (including the ownership structure and the contractual arrangements with the consolidated VIE) is in compliance with all applicable existing PRC laws, rules and regulations, and does not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations. However, the Company cannot assure that the PRC regulatory authorities will not adopt any new regulation to restrict or prohibit foreign investments in the online marketing business through contractual arrangements in the future or that it will not determine that the ownership structure and contractual arrangements violate PRC laws, rules or regulations. If the Company and its consolidated VIE are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
|
revoking the business licenses of such entities; |
F-27
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
3. |
Risks and Concentration (Continued) |
(a) |
PRC regulations (Continued) |
(1) Jifen VIE (Continued)
|
discontinuing or restricting the conduct of any transactions between the Companys PRC subsidiaries and the Jifen VIE; |
|
imposing fines, confiscating the income of the Jifen VIE or the Companys PRC subsidiaries, or imposing other requirements with which the Company or its PRC subsidiaries and consolidated VIEs may not be able to comply; |
|
requiring the Company to restructure its ownership structure or operations, including terminating the contractual arrangements with Jifen VIE and deregistering the equity pledges of Jifen VIE, which in turn would affect its ability to consolidate, derive economic interests from, or exert effective control over Jifen VIE; or |
|
restricting or prohibiting its use of the proceeds of any offering to finance its business and operations in China. |
If the imposition of any of these penalties precludes the Company from operating its business, it would no longer be in a position to generate revenue or cash from it. If the imposition of any of these penalties causes the Company to lose its rights to direct the activities of its consolidated VIEs or its rights to receive its economic benefits, the Company would no longer be able to consolidate these entities, and its financial statements would no longer reflect the results of operations from the business conducted by VIEs except to the extent that the Company receives payments from VIEs under the contractual arrangements. Either of these results, or any other significant penalties that might be imposed on the Company in this event, would have a material adverse effect on its financial condition and results of operations. Nevertheless, the laws and regulations that imposed restrictions on foreign ownership in advertising companies, including the Administrative Provisions on Foreign-Invested Advertising Enterprises were abolished in June 2015. To the extent any current or future business of Jifen VIE can be directly operated by the Companys wholly owned subsidiaries under PRC law, the Company expect to transfer such business to the Companys wholly owned subsidiaries. When permissible by the PRC laws and regulations, the Company expects that Quyun WFOE will replace Jifen VIE and its subsidiary as contracting party for their business that are operated by Jifen VIE and its subsidiary.
On January 19, 2015, the Ministry of Commerce of the PRC, or (the MOFCOM) released on its Website for public comment a proposed PRC law (the Draft FIE Law) that appears to include VIEs within the scope of entities that could be considered to be foreign invested enterprises (or FIEs) that would be subject to restrictions under existing PRC law on foreign investment in certain categories of industry. Specifically, the Draft FIE Law introduces the concept of actual control for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity, the Draft FIE Law includes control through contractual arrangements within the definition of actual control. If the Draft FIE Law is passed by the Peoples Congress of the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed to reach the Groups VIE arrangement, and as a result the Groups VIE could become explicitly subject to the current restrictions on foreign investment in certain categories of industry. The Draft FIE Law includes provisions that would exempt from the definition of foreign invested enterprises entities where the ultimate controlling shareholders are either entities organized under PRC law or individuals who are PRC citizens.
The Draft FIE Law does not make clear how control would be determined for such purpose, and is silent as to what type of enforcement action might be taken against existing VIEs that operate in restricted industries and are not controlled by entities organized under PRC law or individuals who are PRC citizens.
F-28
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
3. |
Risks and Concentration (Continued) |
(a) |
PRC regulations (Continued) |
(1) Jifen VIE (Continued)
If a finding were made by PRC authorities under the Draft FIE Law if it becomes effective, that the Companys operation of certain of its operations and businesses through VIE violates the Draft FIE Law, regulatory authorities with jurisdiction over the licensing and operation of such operations and businesses may require the Company to take various actions as discussed in the paragraph above. The Groups management considers the possibility of such a finding by PRC regulatory authorities under the Draft VIE law, if it becomes effective, to be remote.
Jifen VIE holds assets that are important to the operation of the Groups business, including patents for proprietary technology and trademarks. If Jifen VIE falls into bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, the Group may be unable to conduct major part of its business activities in China, which could have a material adverse effect on the Groups future financial position, results of operations or cash flows. However, the Group believes this is a normal business risk many companies face. The Group will continue to closely monitor the financial conditions of Jifen VIE.
Jifen VIEs assets comprise both recognized and unrecognized revenue-producing assets. The recognized revenue-producing assets include leasehold improvements, computers and network equipment and self-developed computer software which are recognized in the Companys consolidated balance sheet. The unrecognized revenue-producing assets mainly consist of patents, trademarks and assembled workforce which are not recorded in the financial statements of Jifen VIE as it did not meet the recognition criteria set in ASC 350-30-25.
In accordance with the VIE arrangements, the Group has power to direct activities of the Jifen VIE, and can have assets transferred out of the Jifen VIE. Therefore, the Group considers that there is no assets of the Jifen VIE can be used only to settle their obligations.
(2) Lack of Internet audio-visual program transmission license
Pursuant to the Administrative Provisions on Internet Audio-visual Program Service, or the Audio-visual Program Provisions, which was issued by the State Administration of Radio, Film and Television (the predecessor of GAPPRFT), or SARFT, and MIIT on December 20, 2007 and came into effect on January 31, 2008 and was amended on August 28, 2015, online transmission of audio and video programs requires an Internet audio-visual program transmission license and online audio-visual service providers must be either wholly state-owned or state-controlled. In a press conference jointly held by SARFT and MIIT to answer questions with respect to the Audio-visual Program Provisions in February 2008, SARFT and MIIT clarified that online audio-visual service providers that had already been operating lawfully prior to the issuance of the Audiovisual Program Provisions may re-register and continue to operate without becoming state-owned or controlled, provided that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after the Audio-visual Program Provisions was issued.
The Group currently does not possess an Internet audio-visual program transmission license. As a result, the relevant regulatory authorities may find the Groups operations to be in violation of the applicable laws and regulations. The Group may receive a warning and be ordered to pay a fine of not more than RMB30,000. In the case of severe contravention, the Group may be ordered to cease transmission of audio and video programs, be subject to a penalty equal to one to two times our total investment in the affected business and the devices the Group used for such operation may be confiscated. Furthermore, according to the Audio-visual Program Provisions, the telecommunications administrative authorities may, based on written
F-29
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
3. |
Risks and Concentration (Continued) |
(a) |
PRC regulations (Continued) |
(2) Lack of Internet audio-visual program transmission license (Continued)
opinions of the State Administration of Radio and Television, or the SART, and in accordance with the relevant laws and regulations on supervision of telecommunications and Internet, close the Groups mobile platform, revoke the license for the provision of Internet information services, or the ICP license, and order the relevant network operation entity which provides the Group signal access services to stop such provision of services.
The Group believes that the risks of material loss related to discontinuing transmission of audio and video business due to lack of Internet audio-visual program transmission license and fines or penalties are remote.
(3) Lack of an Internet news license
The PRC government regulates the Internet industry extensively, including foreign ownership of, and the licensing requirements pertaining to, companies in the Internet industry. A number of regulatory agencies, including the Ministry of Culture, or the MOC, the Ministry of Industry and Information Technology, or MIIT, the Cyberspace Administration of China, or CAOC, the SART, the State Council Information Office, or the SCIO, and other governmental authorities, jointly regulate all major aspects of the Internet industry. Operators are required to obtain various government approvals and licenses prior to providing the relevant Internet information services.
The Groups platform primarily focuses on light entertainment content. Nonetheless, certain content related to finance, society and economy provided on Qutoutiao mobile application may be deemed to be news content. According to the Provisions for the Administration of Internet News Information Services issued by the national CAOC on May 2, 2017 that became effective on June 1, 2017, an Internet news license shall be obtained for the provision of Internet news information services to the public in a variety of ways, including through the offering of platforms for the dissemination of Internet news. As such, the Group may be required to obtain an Internet news license from CAOC for the dissemination of news through mobile application. As a result of lack of an Internet news license, the CAOC or its applicable office at the provincial level may order us to cease disseminating news and impose a fine on us of not less than RMB10,000 but not more than RMB30,000. In the event the Group were ordered to cease the business of disseminating news, results of operations and financial condition could be materially and adversely affected.
The Group believes that the risks of material loss related to discontinuing business of disseminating news due to lack of an Internet news license and fines or penalties are remote.
(b) |
Foreign exchange risk |
The Groups sales, purchase and expense transactions are generally denominated in RMB and a significant portion of the Groups liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies.
In the PRC, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the Peoples Bank of China. In addition, the Groups cash denominated in US$ subject the Group to risks associated with changes in the exchange rate of RMB against US$ and may affect the Groups results of operations going forward.
F-30
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
3. |
Risks and Concentration (Continued) |
(c) |
Credit and Concentration risk |
The Groups credit risk arises from cash and cash equivalents, short-term investments, prepayments and other current assets, and accounts receivable. The carrying amounts of these financial instruments represent the maximum amount of loss due to credit risk.
The Group expects that there is no significant credit risk associated with the cash and cash equivalents and short-term investments which are held by reputable financial institutions in the jurisdictions where the Company, its subsidiaries and the Affiliated Entities are located. The Group believes that it is not exposed to unusual risks as these financial institutions have high credit quality.
The Group has no significant concentrations of credit risk with respect to its prepayments.
Accounts receivable are typically unsecured and are derived from revenue earned through third party advertising platforms and customers. The risk with respect to accounts receivable is mitigated by credit evaluations performed on them.
(i) Concentration of revenues
For the years ended December 31, 2016 and 2017, Customer A contributed 70% and 44% of total net revenue of the Group, respectively.
For the year ended December 31, 2017, the Company, as a principal, earned net revenue, representing 13% of total revenue, through a third party advertising agent D. The arrangement with advertising agent D has been terminated as of December 31, 2017.
For the year ended December 31, 2017, the Company, as a principal, earned net revenue, representing 26% of total revenue, through a third party advertising agent E. In February 2018, the Group acquired 100% equity interests of this advertising agent E with a total consideration of RMB15 million (Note 18).
(ii) Concentration of accounts receivable
The Group has not experienced any significant recoverability issue with respect to its accounts receivable. The Group conducts credit evaluations on its platforms and customers and generally does not require collateral or other security from such platforms and customers.
The Group periodically evaluates the creditworthiness of the existing platforms in determining an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers.
The following table summarized customers with greater than 10% of the accounts receivables:
As of
December 31, |
||||||||
2016 | 2017 | |||||||
Customer A advertising platform |
90 | % | 60 | % | ||||
Customer B advertising platform |
* | 19 | % | |||||
Customer C advertising customer |
* | 14 | % |
* |
Less than 10% |
F-31
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
4. |
Cash and cash equivalents |
Cash and cash equivalents represent cash on hand and demand deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal or use. The following table sets forth a breakdown of cash and cash equivalents by currency denomination and jurisdiction as of December 31, 2016 and 2017:
5. |
Accounts receivable, net |
As of December 31, | ||||||||
2016 | 2017 | |||||||
Accounts receivable, gross |
11,150,600 | 43,250,595 | ||||||
Less: allowance for doubtful accounts |
| | ||||||
|
|
|
|
|||||
Accounts receivable, net |
11,150,600 | 43,250,595 | ||||||
|
|
|
|
6. |
Other assets |
The other assets consist of the following:
As of December 31, | ||||||||
2016 | 2017 | |||||||
Prepayment and other current assets |
||||||||
Prepayments of advertisement fee (1) |
100,000 | 6,732,410 | ||||||
Prepayment to third-party payment service providers (2) |
733,290 | 3,334,983 | ||||||
Prepayments of IT service fee |
52,156 | 2,081,844 | ||||||
Value-added tax receivable |
2,131 | 1,103,742 | ||||||
Prepayments of rental fee |
| 573,638 | ||||||
Cash advanced to employees |
14,219 | 133,689 | ||||||
Deposits |
| 58,000 | ||||||
Others |
67,036 | 710,428 | ||||||
|
|
|
|
|||||
968,832 | 14,728,734 | |||||||
|
|
|
|
|||||
Non-current |
||||||||
Long-term prepaid server fee |
| 4,073,114 | ||||||
Long-term lease deposits |
| 1,685,832 | ||||||
|
|
|
|
|||||
| 5,758,946 | |||||||
|
|
|
|
(1) |
Prepayments of advertisement fee represent prepayments made to service providers for future services to promote the Companys mobile applications through online advertising. Such service providers charge monthly expenses based on activities during the month, and once confirmed by the Company, the monthly expenses will be deducted from the prepayments already made by the Company. |
F-32
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
6. |
Other assets (Continued) |
Prepayments of advertising fee is recorded when prepayments are made to service providers and are expensed as incurred. |
(2) |
Prepayment to third party payment service providers represent cash prepaid to the Groups third party on-line payment service providers, which will be used to settle the Groups obligation for outstanding user loyalty payable or content procurement fee to professional third party media companies and freelancers. As of December 31, 2016 and 2017, no allowance for doubtful accounts was provided for the prepayment. |
7. |
Property and equipment, net |
Property and equipment consist of the following:
As of December 31, | ||||||||
2016 | 2017 | |||||||
Cost: |
||||||||
Office equipment |
174,860 | 2,501,368 | ||||||
Leasehold improvements |
| 2,479,672 | ||||||
|
|
|
|
|||||
Total cost |
174,860 | 4,981,040 | ||||||
Less: Accumulated depreciation |
(36,740 | ) | (366,978 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
138,120 | 4,614,062 | ||||||
|
|
|
|
Depreciation expense recognized for the years ended December 31, 2016 and 2017 are summarized as follows:
For the years ended
December 31, |
||||||||
2016 | 2017 | |||||||
Cost of revenues |
4,389 | 95,948 | ||||||
Research and development |
6,071 | 21,850 | ||||||
Sales and marketing expenses |
2,707 | 92,642 | ||||||
General and administrative expenses |
8,193 | 119,798 | ||||||
|
|
|
|
|||||
Total |
21,360 | 330,238 | ||||||
|
|
|
|
8. |
Tax payable |
As of December 31, | ||||||||
2016 | 2017 | |||||||
Value added tax |
1,329,181 | 20,157,051 | ||||||
Individual income tax withholding |
84,078 | 463,848 | ||||||
Urban maintenance and construction tax |
29,111 | 435,398 | ||||||
Stamp duty |
| 287,303 | ||||||
|
|
|
|
|||||
Total |
1,442,370 | 21,343,600 | ||||||
|
|
|
|
The Groups revenues are subject to value-added tax at a rate of approximately 6%.
F-33
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
9. |
Accrued liabilities and other current liabilities |
As of December 31, | ||||||||
2016 | 2017 | |||||||
Cultural development fee and other tax surcharges |
1,773,395 | 17,455,833 | ||||||
Accrued professional fees |
350,000 | 3,500,000 | ||||||
Accrued marketing and operation expense |
| 454,649 | ||||||
Others |
956 | 11,157 | ||||||
|
|
|
|
|||||
Total |
2,124,351 | 21,421,639 | ||||||
|
|
|
|
The Group is subject to a cultural development fee on the provision of advertising services in the PRC. The applicable tax rate is 3% of the net advertising revenues.
10. |
Convertible redeemable preferred shares |
On September 29, 2017, the Company issued 4,945,055 shares of Series A convertible redeemable preferred shares (the Series A Shares) for US$6.5520 per share for cash of US$32,400,000. On November 14, 2017, the Company issued 1,373,626 shares of Series A1 convertible redeemable preferred shares (the Series A1 Shares) for US$7.2800 per share for cash of US$10,000,000. The Series A and Series A1 shares are collectively referred to as the Preferred Shares.
The key terms of the Series A and A1 preferred shares are as follows:
Conversion rights
Each Preferred Share shall be convertible into such number of ordinary shares at the Preferred Share-to-Ordinary Share conversion ratio equal to Preferred Share Purchase Price for such Preferred Share divided by the then-effective Conversion Price (as defined below) for such Preferred Share. The Conversion Price for such Preferred Share shall initially be the Preferred Share Purchase Price for such Preferred Share, resulting in an initial conversion ratio for the Preferred Shares of 1:1, and shall be subject to adjustment and readjustment from time to time, including but not limited to additional equity securities issuance, share dividends, distribution, subdivisions, redemptions, combinations, or consolidation of ordinary shares. The conversion price is also subject to adjustment in the event the Company issues additional ordinary shares at a price per share that is less than such conversion price. In such case, the conversion price shall be reduced to adjust for dilution on a weighted average basis.
Each Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such Preferred Shares into Ordinary Shares based on the then-effective Conversion Price.
In addition, each share of the Series A, A1 preferred shares would automatically be converted into ordinary shares of the Company (i) upon the closing of an initial public offering of the Companys shares or (ii) upon the date specified by written consent or agreement of its shareholders.
The Company determined that there were no beneficial conversion features identified for any of the Preferred Shares during any of the periods. In making this determination, the Company compared the fair value of the ordinary shares into which the Preferred Shares are convertible with the respective effective conversion price at the issuance date. In all instances, the effective conversion price was greater than the fair value of the ordinary shares. To the extent a conversion price adjustment occurs, as described above, the Company will re-evaluate whether or not a beneficial conversion feature should be recognized.
F-34
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
10. |
Convertible redeemable preferred shares (Continued) |
Dividend rights
The Preferred Shareholders shall be entitled to receive, in preference to any dividend on the ordinary shares, non-cumulative dividends for each Preferred Share at the rate equal to 8% of, as the case may be, the Series A Preferred Share Purchase Price and the Series A1 Preferred Share Purchase Price, for each respective preferred shareholder. Except the Exempted Dividends (as defined below), no dividend, whether in cash, in property, in shares in the Company or otherwise may be declared or paid on any other class or series of shares unless and until the Preferred Dividends are first paid in full.
Exempted Dividends means (1) a dividend payable solely in Ordinary Shares and to all shareholders of the Company on a pro rata basis, (2) the purchase, repurchase or redemption of Ordinary Shares by the Company at no more than cost from terminated employees, officers or consultants in accordance with the ESOP, or pursuant to written contractual arrangements with the Company approved by the Board (so long as such approval includes the approval of the Series A Director), (3) the purchase, repurchase or redemption of Preferred Shares (including in connection with the conversion of such Preferred Shares into Ordinary Shares), and (4) the payment of dividends to the holders of Preferred Shares.
Voting rights
The holders of the Series A, and A1 preferred shares shall be entitled to such number of votes equal to the whole number of ordinary shares into which such Series A and A1 preferred shares are convertible.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company, all assets and funds of the Company legally available for distribution to the shareholders shall, by reason of the shareholders ownership of the shares, be distributed as follows:
First, the holders of the Series A Preferred Shares and Series A1 Preferred Shares shall be entitled to receive for each such Preferred Share held by such holder, on parity with each other and prior and in preference to any distribution of any of the assets or funds of the Company to the holders of the Ordinary Shares by reason of their ownership of such shares, the amount equal to one hundred percent (100%) of the applicable Series A and A1 Issue Price, plus all accrued but unpaid dividends on such Preferred Shares. If the assets and funds available for distribution among the Preferred Shareholders shall be insufficient to permit the payment to such holders of the full amount, then the entire remaining assets and funds of the Company legally available for distribution to such shareholders shall be distributed ratably among the shareholders in proportion.
Second, if there are any assets or funds remaining after the aggregate amount have been distributed or paid in full to the applicable holders of Series A Preferred Shares and Series A1 Preferred Shares, the remaining assets and funds of the Company available for distribution shall be distributed ratably among all shareholders according to the relative number of Ordinary Shares held by such holders on an as if converted basis.
A Deemed Liquidation Event shall be deemed to be any change of control event such as a liquidation, dissolution or winding up, merger and acquisition, reorganization of the Company, a sale, transfer, lease or other disposition of all or substantially all of the assets of any Group Company or the exclusive, irrevocable licensing of all or substantially all of any Group Companys intellectual property to a third party. Any proceeds, whether in cash or properties, resulting from a Deemed Liquidation Event shall be distributed in accordance with the liquidation preference above.
F-35
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
10. |
Convertible redeemable preferred shares (Continued) |
Redemption right
For Series A or Series A1 shares, at the written request of any Series A or Series A1 Shareholder(s) who individually or in the aggregate hold(s) at least fifty one percent (51%) of all the issued and outstanding Series A or Series A1 Shares (Initial Redemption Notice), the Company shall redeem all or portion of the outstanding Series A or Series A1 Shares respectively held by such Series A or Series A1 Shareholder(s) upon the following redemption event: (i) the Companys failure to complete a Qualified IPO within six (6) years following the issue date of Series A or Series A1 Shares; (ii) any material breach by any Warrantor (as defined in the Series A or Series A1 Purchase Agreement) in the Transaction Documents (as defined in the Series A or Series A1 Purchase Agreement, including those duly amended and restated versions from time to time) which causes a Material Adverse Effect (as defined in the Series A or Series A1 Purchase Agreement) on the business of the Group Companies or any holder of the Series A or Series A1 Preferred Shares, or in the event any Warrantor gives any material misrepresentation or engages in wilful or fraudulent misconducts, which causes a Material Adverse Effect on the business of the Group Companies or any holder of the Series A or Series A1 Preferred Shares.
In addition, the Company shall (1) promptly thereafter provide all of the other holders of Preferred Shares notice of the Initial Redemption Notice and of their right to participate in such redemption, which right is exercisable by each such holder in their own discretion by delivering a written notice (each, a Redemption Notice) by hand or letter mail or courier service to the Company at its principal executive offices within fifteen (15) days of the giving of such notice by the Company, requesting and specifying redemption of all or part of their Preferred Shares, and (2) pay to each holder (each, a Redeeming Preferred Shareholder) of a Preferred Share for which an Initial Redemption Notice or a Redemption Notice has been timely submitted (each, a Redeeming Preferred Share).
The redemption price for each Series A or Series A1 Shares shall be determined in accordance with the following formula:
IP x (110 %) N + D, where
IP = Series A or Series A1 Issue Price;
N = a fraction the numerator of which is the number of calendar days between date the Series A or Series A1 Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series A or Series A1 Preferred Share up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers.
The Company classified the Preferred Shares in the mezzanine section of the consolidated balance sheets because they were convertible at the holders option any time after the date of issuance of such shares and were contingently redeemable upon the occurrence of certain liquidation events outside of the Companys control, that being the Companys failure to complete a Qualified IPO within six years following the issue date of each series of Preferred Shares. A Qualified IPO is defined as a firm commitment underwritten public offering of the Ordinary Shares of the Company (or depositary receipts or depositary shares therefor) in the United States pursuant to an effective registration statement under the United States Securities Act of 1933, as amended, with a pre-offering price per share (net of underwriting commissions and expenses) that equals at least five (5) times the Series A1 Issue Price (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events) and that results in minimum gross proceeds to the Company of the greater of (i) US$180,000,000 and (ii) ten percent (10%) of the pre-offering implied valuation of the Company, or in a public offering of the Ordinary Shares of the Company in another jurisdiction which results in the Ordinary Shares trading publicly on a recognized international securities
F-36
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
10. |
Convertible redeemable preferred shares (Continued) |
Redemption right (Continued)
exchange approved by the Majority Preferred Holders, so long as the offering price per share (net of underwriting commissions and expenses) equals at least five (5) times the Series A1 Issue Price (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events) and results in gross proceeds to the Company of at least the greater of (i) US$180,000,000 and (ii) ten percent (10%) of the pre-offering implied valuation of the Company. The Preferred Shares are recorded initially at fair value, net of issuance costs.
For the year ended December 31, 2017, the issuance costs incurred were RMB 9,168,171.
The Qualified Public Offering deadline for Series A and Series A1 shareholders is six years following the issue date of Series A preferred shares and Series A1 preferred shares, respectively. As such, the failure to complete a Qualified Public Offering by September 28, 2023 for Series A and November 13, 2023 for Series A1, which is the date after six years following the issue date of Series A and Series A1 Preferred Shares respectively, would be considered the earliest redemption date for such shares.
The Company recognized accretion to the respective redemption value of the Preferred Shares over the period starting from issuance date to the earliest redemption date according to the redemption price calculation described above.
The Companys convertible redeemable preferred shares activities for the year ended December 31, 2017 are summarized below:
Series A Shares | Series A1 Shares | |||||||||||||||
Number of
shares |
Amount
(RMB) |
Number of
shares |
Amount
(RMB) |
|||||||||||||
Balances as of January 1, 2017 |
| | | | ||||||||||||
Issuance of convertible redeemable preferred shares, net of issuance costs. |
4,945,055 | 208,490,509 | 1,373,626 | 63,630,530 | ||||||||||||
Foreign exchange impacts |
| (3,226,201 | ) | | (1,012,930 | ) | ||||||||||
Accretion on convertible redeemable preferred shares to redemption value |
| 5,213,802 | | 798,981 | ||||||||||||
Balances as of December 31, 2017 |
4,945,055 | 210,478,110 | 1,373,626 | 63,416,581 |
11. |
Ordinary Share |
On July 17, 2017, Qutoutiao Inc. was incorporated as Limited Liability Company with authorized share capital of US$50,000 divided into 50,000 shares with par value US$1.00 each. On September 1, 2017, the authorized share capital of US$50,000, which represented 50,000 issued shares, was subdivided into 500,000,000 shares. As of December 31, 2017, the authorized ordinary shares are 493,681,319 shares, of which 50,000,000 shares were issued and 40,000,000 shares were outstanding, and the authorized, issued and outstanding Series A and A1 convertible redeemable preferred shares are 4,945,055 shares and 1,373,626 shares respectively.
In November 2017, a shareholder of the Company sold certain ordinary shares to third party investors at US$7.28 per share. The sale of ordinary shares is a transaction amongst shareholders and did not impact the Groups consolidated financial statements.
F-37
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
11. |
Ordinary Share (Continued) |
In January 2018, the founders entered into Share Restriction Deeds with the Company such that a total of 15,937,500 ordinary shares of the Company held by the founders became restricted and will be vested in periods from 24 months to 34 months. Prior to the end of the vesting periods, all the remaining restricted shares shall vest immediately and no longer constitute restricted shares upon a Deemed Liquidation Event or IPO of the Company. In the event that the founder voluntarily and unilaterally terminates his employment/service contract with any applicable Group entities or his employment or service relationship is terminated by any applicable Group entities for cause as stated in the Deed, the related founder shall sell to the Company, and the Company shall repurchase from the founder, all of the restricted shares (not vested shares) at a price of US$0.0001 per share. For accounting purposes, this transaction has been reflected retrospectively similar to a reverse stock split and presented in the balance sheet and statement of shareholders equity as a reduction of the numbers of issued and outstanding ordinary shares.
In February 2018, the Company established a trust to hold 10,000,000 of the Companys issued shares. These ordinary shares were contributed by the founder and held in trust for the benefit of the employees who are under the 2017 Plan (Note 12) to be issued based on the discretion of the board of directors of the Company. The ordinary shares issued to the trust are accounted for as treasury shares of the Company and presented as such for all periods presented. The trust does not hold any other assets or liabilities as at December 31, 2016 and 2017, nor earn any income nor incur any expenses for the years ended December 31, 2016 and 2017.
12. |
Share-based compensation |
In 2016, Jifens controlling shareholder authorized grants of incentive awards owned by him to the employees, non-employee directors, officers and consultants. The incentive awards provide for the issuance of up to 20% of the equity interests in Jifen, or equivalent to 10,000,000 ordinary shares of the Company (after adjustment to give effect to the recapitalization described below to reflect the exchange of two Jifen shares for one ordinary share of the Company).
In 2016 and 2017, Jifen granted options to the employees of Jifen and its subsidiaries to purchase 5,969,427 and 1,642,745 shares, respectively (after adjustment to give effect to the recapitalization described below to reflect the exchange of two Jifen shares for one ordinary share of the Company). The options can be exercised within 10 years from the grant date. These options granted are vested upon satisfaction of service condition, which is generally satisfied over four years.
In 2016 and 2017, Jifen granted options to the employees of companies under common control of the founder to purchase 1,654,082 and 233,746 shares, respectively (after adjustment to give effect to the recapitalization described below to reflect the exchange of two Jifen shares for one ordinary share of the Company). The options can be exercised within 10 years from the grant date. The fair value of these options are recognized as dividends to founder in full at grant date. Note that the companies under common control of the founder are providing administrative services to Jifen and Jifen pays a fee charged at market rates for the services received, so no compensation expense is reflected for these grants.
In 2016, Jifen granted options to third party consultants to purchase 500,000 shares (after adjustment to give effect to the recapitalization described below to reflect the exchange of two Jifen shares for one ordinary share of the Company). The options were vested immediately upon the grant as the related services have been completed upon the grant dates.
As part of the restructuring in 2017, in February 2018, the Board of Directors of the Company approved the 2017 Equity Incentive Plan, which assumed Jifens obligations and duties under the options granted by Jifen
F-38
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
12. |
Share-based compensation (Continued) |
from 2016 to 2017. As a result, the options granted by Jifen were replaced with options of the Company. Such new options replaced the options granted under Jifens existing options in its entirety by exchanging of two options granted by Jifen for one option of the Company while maintaining their respective terms and vesting schedules unchanged. This replacement represents a modification of the awards under the accounting guidance, but no incremental compensation cost is required to be recognized because there was no change in fair value of the awards as measured immediately before and after the modification.
Share-based compensation expense related to the option awards granted to the employees amounted to approximately RMB 235,606 and RMB 3,378,827 for the years ended December 31, 2016 and 2017.
Share-based compensation expense related to the option awards granted to the third party consultants amounted to approximately RMB 158,160 for the year ended December 31, 2016.
Share-based awards related to the option awards granted to the employees of companies under common control of the founder were measured at fair value at the grant dates and amounts of RMB 640,765 and RMB 4,358,681 was recognized as dividends distributed to the founder in 2016 and in 2017, respectively.
The following table summarizes the share option activity for the years ended December 31, 2016 and 2017 and all option amounts and exercise prices have been adjusted for the 2017 restructure:
Number of
options |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life |
Aggregate
Intrinsic Value |
Weighted
Average Grant Date Fair Value |
||||||||||||||||
RMB | In Years | RMB000 | RMB | |||||||||||||||||
Outstanding at January 1, 2016 |
| |||||||||||||||||||
Granted |
8,123,509 | 0.0007 | 0.35 | |||||||||||||||||
Outstanding at December 31, 2016 |
8,123,509 | 0.0007 | 9.5 | 42,321 | 0.35 | |||||||||||||||
Outstanding at January 1, 2017 |
8,123,509 | 0.0007 | 9.5 | 42,321 | 0.35 | |||||||||||||||
Granted |
1,876,491 | 0.0007 | 19.19 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Outstanding at December 31, 2017 |
10,000,000 | 0.0007 | 8.7 | 525,086 | 3.89 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Vested and expected to vest at December 31, 2017 |
10,000,000 | 0.0007 | 8.7 | 525,086 | 3.89 | |||||||||||||||
Exercisable at December 31, 2017 |
2,479,396 | 0.0007 | 8.6 | 130,190 | 0.30 |
The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the estimated fair value of the underlying shares of RMB5.21 and RMB52.51 at December 31, 2016 and 2017.
The total fair value of share options vested during the years ended December 31, 2016 and 2017 was RMB 152,863 and RMB 680,725 respectively.
As of December 31, 2017, there were RMB 30,190,435 of unrecognized share-based compensation expenses related to share options granted by Jifen to the employees, which were expected to be recognized over a weighted-average vesting period of 2.5 and 4 years, respectively. To the extent the actual forfeiture rate is different from the Companys estimate, the actual share-based compensation related to these awards may be different from the expectation.
F-39
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
12. |
Share-based compensation (Continued) |
The binomial option pricing model is used to determine the fair value of the share options granted to employees and non-employees. The fair values of share options granted during the years ended December 31, 2016 and 2017.
2016 | 2017 | |||||||
Expected volatility (i) |
53.16%~53.96% | 51.61%~52.41% | ||||||
Risk-free interest rate (ii) |
2.74%~3.02% | 3.28%~3.62% | ||||||
Exercise multiple |
2.8 | 2.8 | ||||||
Expected dividend yield (iii) |
0% | 0% | ||||||
Contractual term |
10 | 10 | ||||||
Expected forfeiture rate (post-vesting) |
0% | 0% | ||||||
Fair value of the common share on the date of option grant (RMB) |
0.31~5.21 | 8.44~23.98 |
Notes:
(i) |
Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation dates. |
(ii) |
The risk-free interest rate of periods within the contractual life of the share option is based on the market yield of the Chinese sovereign bond with a maturity life equal to the expected life to expiration. |
(iii) |
The Company has no history or expectation of paying dividends on its ordinary shares. |
13. |
Employee benefits |
The full-time employees of the Companys subsidiaries and VIEs that are incorporated in the PRC are entitled to staff welfare benefits including medical insurance, basic pensions, unemployment insurance, work injury insurance, maternity insurance and housing funds. These companies are required to contribute to these benefits based on certain percentages of the employees salaries in accordance with the relevant regulations and charge the amount contributed to these benefits to the consolidated statements of comprehensive loss. The total amounts charged to the consolidated statements of comprehensive loss for such employee benefits amounted to RMB 945,742 and RMB 7,386,320 for the years ended December 31, 2016 and 2017, respectively. The PRC government is responsible for the welfare and medical benefits and ultimate pension liability to these employees.
14. |
Income Taxes |
(a) |
Cayman Islands |
Under the current tax laws of Cayman Islands, the Company is not subject to income, corporation or capital gains tax, and no withholding tax is imposed upon the payment of dividends.
(b) |
Hong Kong Profits Tax |
One of the Companys subsidiary incorporated in Hong Kong is subject to Hong Kong profits tax rate of 16.5% on its estimated assessable profit for the years ended December 31, 2016 and 2017. Dividends income received from subsidiaries in China are not subject to Hong Kong profits tax.
F-40
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
14. |
Income Taxes (Continued) |
(c) |
PRC Enterprise Income Tax (EIT) |
On March 16, 2007, the National Peoples Congress of the PRC enacted an Enterprise Income Tax Law (EIT Law), under which Foreign Investment Enterprises (FIEs) and domestic companies would be subject to EIT at a uniform rate of 25%. The EIT law became effective on January 1, 2008.
The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose de facto management body is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The implementing Rules of the EIT Law merely define the location of the de facto management body as the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.
The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a FIE to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding companys jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where the Company incorporated, does not have such tax treaty with China. According to the arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by a FIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% if the immediate holding company in Hong Kong owns directly at least 25% of the shares of the FIE and could be recognized as a Beneficial Owner of the dividend from PRC tax perspective.
Jifen obtained in 2016 its HNTE certificate with a valid period of three years. Therefore, Jifen is eligible to enjoy a preferential tax rate of 15% from 2016 to 2018 to the extent it has taxable income under the EIT Law, as long as it maintains the HNTE qualification and duly conducts relevant EIT filing procedures with the relevant tax authority. Jifen also obtained a software company certificate in 2017. Pursuant to such certificate, Jifen qualifies for a tax holiday during which it is entitled to an exemption from enterprise income tax for two years commencing from its first profit-making year of operation and a 50% reduction of enterprise income tax for the following three years. However Jifen has not yet enjoyed the above-mentioned preferential tax treatments due to its loss position and as such there is no impact of these tax holidays on earnings or earnings per share.
A reconciliation between the effective income tax rate and the PRC statutory income tax rate is as follows:
For the Years Ended
December 31, |
||||||||
2016 | 2017 | |||||||
% | % | |||||||
PRC Statutory income tax rates |
25 | % | 25 | % | ||||
Change in valuation allowance |
(29.5 | %) | (25.6 | %) | ||||
Permanent book tax difference |
4.5 | % | 1.6 | % | ||||
Difference in EIT rates of certain subsidiaries |
0 | % | (1 | %) | ||||
Effect of tax holiday |
0 | % | 0 | % | ||||
|
|
|
|
|||||
Total |
0 | % | 0 | % | ||||
|
|
|
|
F-41
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
14. |
Income Taxes (Continued) |
(c) |
PRC Enterprise Income Tax (EIT) (Continued) |
Composition of income tax expense
The current and deferred portions of income tax expense included in the consolidated statements of comprehensive loss are as follows:
As of December 31, | ||||||||
2016 | 2017 | |||||||
Current income tax expense |
| | ||||||
Deferred tax benefits |
(3,204,212 | ) | (24,279,679 | ) | ||||
Valuation allowance |
3,204,212 | 24,279,679 | ||||||
|
|
|
|
|||||
Income tax (benefit)/expense |
| | ||||||
|
|
|
|
Deferred tax assets and liabilities
Deferred taxes were measured using the enacted tax rates for the periods in which they are expected to be reversed. The tax effects of temporary differences that give rise to the deferred tax asset balances as of December 31, 2016 and 2017 are as follows:
As of December 31, | ||||||||
2016 | 2017 | |||||||
Deferred tax assets current |
||||||||
Accruals and others |
1,621,503 | 4,725,654 | ||||||
Less: Valuation allowance |
(1,621,503 | ) | (4,725,654 | ) | ||||
|
|
|
|
|||||
Subtotal |
| | ||||||
|
|
|
|
|||||
Deferred tax assets non-current |
||||||||
Tax losses carried forward |
1,875,261 | 23,050,789 | ||||||
Less: Valuation allowance |
(1,875,261 | ) | (23,050,789 | ) | ||||
|
|
|
|
|||||
Subtotal |
| | ||||||
|
|
|
|
|||||
Total of deferred tax assets |
| | ||||||
|
|
|
|
As of December 31, 2016 and 2017, the PRC entities of the Group had tax loss carryforwards of approximately RMB 7,501,043 and RMB 92,203,154 respectively, which can be carried forward to offset taxable income. The carryforwards period for net operating losses under the EIT Law is five years. The net operating loss carry forward of the Group will start to expire in 2019 for the amount of RMB 170,350 if not utilized. The remaining net operating loss carryforwards will expire in varying amounts between 2020 and 2023. Other than the expiration, there are no other limitations or restrictions upon the Groups ability to use these operating loss carryforwards. There is no expiration for the advertising expenses carryforwards.
Valuation allowance is provided against deferred tax assets when the Group determines that it is more likely than not that the deferred tax assets will not be utilized in the future. In making such determination, the Group considered factors including future taxable income exclusive of reversing temporary differences and tax loss carry forwards. Valuation allowance was provided for net operating loss carry forward because it was more likely than not that such deferred tax assets will not be realized due to lack of profitable history to
F-42
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
14. |
Income Taxes (Continued) |
(c) |
PRC Enterprise Income Tax (EIT) (Continued) |
Deferred tax assets and liabilities (Continued)
support the Groups estimate of its future taxable income. If events occur in the future that allow the Group to realize part or all of its deferred income tax, an adjustment to the valuation allowances will result in a decrease in tax expense when those events occur.
As of December 31, 2016 and 2017, valuation allowances of RMB 3,496,764 and RMB 27,776,443 were provided because it was more likely than not that the Group will not be able to utilize certain tax losses carry forwards and other deferred tax assets generated by its subsidiaries and Affiliated Entities. If events occur in the future that allow the Group to realize more of its deferred tax assets than the presently recorded amount, an adjustment to the valuation allowances will increase income when those events occur.
Movement of valuation allowance is as follows:
December 31, | ||||||||
2016 | 2017 | |||||||
Beginning balance |
292,552 | 3,496,764 | ||||||
Additions |
3,204,212 | 24,279,679 | ||||||
|
|
|
|
|||||
Ending balance |
3,496,764 | 27,776,443 | ||||||
|
|
|
|
15. |
Related Party transactions |
As of December 31, 2016 and 2017, the transaction and balance amount due to a related party was as follows:
December 31, | ||||||||
2016 | 2017 | |||||||
Transaction amount with a related party |
||||||||
Prepaid to a related party 1 |
5,000,000 | | ||||||
Received from a related party 1 |
| 5,000,000 | ||||||
Service fee charged from a related party 2 |
3,024,000 | 16,788,160 |
December 31, | ||||||||
2016 | 2017 | |||||||
Balance amount with a related party |
||||||||
Amount due from a related party 1 |
5,000,000 | | ||||||
Account due to a related party 2 |
3,024,000 | |
1. |
Amount due from a related party represented cash prepaid to a company under common control of the founder for a cooperation of a potential business project. However, as the project was canceled, the money was refunded to the Company in 2017. |
2. |
The service fee charged from a related party represented the costs charged from a company under common control of the founder which provided the Group with financial accounting, office space sharing and other IT and administrative support services. |
F-43
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
16. |
Basic and diluted net loss per share |
(a) |
Basic and diluted net loss per share |
Basic loss per share and diluted loss per share have been calculated in accordance with ASC 260 on computation of earnings per share for the years ended December 31, 2016 and 2017 as follows:
Year Ended
December 31, 2016 |
Year Ended
December 31, 2017 |
|||||||
Numerator: |
||||||||
Net loss |
(10,862,379 | ) | (94,759,689 | ) | ||||
Accretion on Series A convertible redeemable preferred shares redemption value |
| (5,213,802 | ) | |||||
Accretion on Series A1 convertible redeemable preferred shares redemption value |
| (798,981 | ) | |||||
|
|
|
|
|||||
Net loss attributable to ordinary shareholders-Basic and diluted |
(10,862,379 | ) | (100,772,472 | ) | ||||
|
|
|
|
|||||
Denominator: |
||||||||
Denominator for basic and diluted loss per share Weighted-average ordinary shares outstanding (Note) |
||||||||
Basic and diluted |
24,062,500 | 24,062,500 | ||||||
Basic and diluted loss per share |
(0.45 | ) | (4.19 | ) | ||||
|
|
|
|
Note: |
As disclosed in Note 18, in January 2018, the founders entered into Share Restriction Deeds with the Company such that a total of 15,937,500 ordinary shares of the Company held by the founders became restricted and will be vested in periods from 24 months to 34 months. Prior to the end of the vesting periods, all the remaining restricted shares shall vest immediately and no longer constitute restricted shares upon a Deemed Liquidation Event or IPO of the Company. For accounting purposes, this transaction has been reflected retrospectively similar to a reverse stock split, with a grant of the 15,937,500 restricted shares to be recognized in January 2018 at their then fair value. As a result, a total of 15,937,500 ordinary shares subject to the restriction are excluded from the issued and outstanding shares at the respective balance sheet dates, and are likewise excluded from the weighted average outstanding ordinary shares for basic loss per share calculation. |
For the years ended December 31, 2016 and 2017, assumed conversion of the Preferred Shares have not been reflected in the dilutive calculations pursuant to ASC 260, Earnings Per Share, due to the anti-dilutive effect as a result of the Groups net loss. The effects of all outstanding share options have also been excluded from the computation of diluted loss per share for the years ended December 31, 2016 and 2017 due to their anti-dilutive effect.
The following ordinary shares equivalent were excluded from the computation of diluted net loss per ordinary share for the periods presented because including them would have had an anti-dilutive effect:
Years Ended December 31, | ||||||||
2016 | 2017 | |||||||
Preferred shares weighted average |
| 1,425,137 | ||||||
Share options weighted average |
7,444,973 | 8,496,225 |
F-44
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
17. |
Commitments and contingencies |
(a) |
Operating lease commitments |
The Group leases facilities under non-cancellable operating leases expiring on different dates. The terms of substantially all of these leases are two years or less. Payments under operating leases are expensed on a straight-line basis over the periods of the respective leases.
Total office rental expenses under all operating leases was RMB 464,000 and RMB 3,687,694 for the year ended December 31, 2016 and 2017 respectively.
As of December 31, 2017, future minimum payments under non-cancellable operating leases for office rental consist of the following:
RMB | US$ (Note 2(e)) | |||||||
Years Ending December 31, |
||||||||
2018 |
8,581,837 | 1,319,004 | ||||||
2019 |
7,179,393 | 1,103,452 | ||||||
2020 |
743,016 | 114,200 | ||||||
2021 |
| | ||||||
2022 and thereafter |
| | ||||||
|
|
|
|
|||||
Total |
16,504,246 | 2,536,656 | ||||||
|
|
|
|
(b) |
Purchase commitments |
As of December 31, 2016 and 2017, no purchase commitments was related to the content procurement from third party profession media.
(c) |
Capital Commitments |
As of December 31, 2017, no capital commitments was related to leasehold improvement and purchase of equipment.
(d) |
Litigation |
In the ordinary course of the business, the Group is subject to periodic legal or administrative proceedings. As of December 31, 2016 and 2017, the Group is not a party to any legal or administrative proceedings which will have a material adverse effect on the Groups business, financial position, results of operations and cash flows.
18. |
Subsequent events |
The Group evaluated subsequent events through March 9, 2018, the date on which these financial statements were issued.
On January 3, 2018, the founders entered into Share Restriction Deeds with the Company for a total of 15,937,500 ordinary shares of the Company held by the founders that became restricted and will be vested in periods from 24 months to 34 months starting from January 2018. Prior to the end of the vesting periods, all the remaining restricted shares shall vest immediately and no longer constitute restricted shares upon a
F-45
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
18. |
Subsequent events (Continued) |
Deemed Liquidation Event or IPO of the Company. In the event that the founder voluntarily and unilaterally terminates his employment/service contract with any applicable Group entities or his employment or service relationship is terminated by any applicable Group entities for cause as stated in the Deed, the related founder shall sell to the Company, and the Company shall repurchase from the founder, all of the restricted shares (not vested shares) at a price of US$0.0001 per share. For accounting purpose, this transaction has been reflected retrospectively similar to a reverse stock split, with a new grant of the 15,937,500 restricted shares to be recognized in January 2018 at the fair value. The grant will be treated as share-based compensation over the vesting periods, and the estimated grant date fair value of the 15,937,500 ordinary shares approximated to US$128 million. Upon a Deemed Liquidation Event or IPO happens prior to the end of the vesting periods, the entire remaining unrecognized compensation expenses out of US$128 million will be expensed immediately in the quarter when such event or IPO happens.
In the first quarter of 2018, shareholders of the Company sold certain ordinary shares to various external investors at US$23.6 per share on average. The founders also granted these investors repurchase right that if the Companys series B financing do not achieve at certain valuation, the investors have the right to request the founders to repurchase the shares at the same prices.
In February 2018, the Group acquired 100% equity interests of an advertising agent with a total consideration of RMB15 million. For the year ended December 31, 2017, the Company, as a principal, earned net revenue, representing 26% of total revenue, through this advertising agent (Note 3).
In March 2018, the Company entered into a Series B1 Preferred Share Purchase Agreement with an external investor to issue 5,420,144 shares of Series B1 convertible redeemable preferred shares for cash of US$105 million. At the same time, the investor, who is a leading provider of Internet Value-added Services, and the Companys PRC entities also entered into an cooperation agreement that the investor will promote the Companys mobile application and will charge the Company a service fee.
In March 2018, the Company entered into a Series B2 Preferred Share Purchase Agreement with certain external investors to issue 3,684,004 shares of Series B2 convertible redeemable preferred shares for cash of US$87 million. In addition, an investor has obtained a warrant to purchase 211,724 Series B2 convertible redeemable preferred shares for a consideration of US$5 million.
In February 2018, the board of the directors of the Company approved a 2018 incentive plan. Under this plan, the Company is authorized to issue 2,964,141 ordinary shares of the Company. As of the financial statement issuance date, options to purchase 2,004,725 ordinary shares have been granted under this plan.
19. |
Restricted net assets |
Relevant PRC laws and regulations permit payments of dividends by the Groups subsidiary and the VIE incorporated in the PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Groups subsidiary and the VIE in the PRC are required to annually appropriate 10% of their net after-tax income to the statutory general reserve fund prior to payment of any dividends, unless such reserve funds have reached 50% of their respective registered capital. As a result of these and other restrictions under PRC laws and regulations, the Groups subsidiary and the VIE subsidiary incorporated in the PRC are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances. There are no significant differences between US GAAP and PRC accounting standards in connection with the reported net assets of the legally owned subsidiary in the PRC and the VIE. Even though the Company currently does not require any such dividends, loans or advances from the PRC entities for working capital and other funding
F-46
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
19. |
Restricted net assets (Continued) |
purposes, the Company may in the future require additional cash resources from them due to changes in business conditions, to fund future acquisitions and development, or merely to declare and pay dividends or distributions to our shareholders. Except for the above, there is no other restriction on use of proceeds generated by the Groups subsidiary and the VIE to satisfy any obligations of the Company.
As of December 31, 2016 and 2017, the total restricted net assets of the Companys subsidiaries, Jifen VIE and its subsidiary incorporated in PRC and subjected to restriction amounted to approximately RMB 100,000 and RMB 13,120,000, respectively. Even though the Company currently does not require any such dividends, loans or advances from the PRC entities for working capital and other funding purposes, the Company may in the future require additional cash resources from them due to changes in business conditions, to fund future acquisitions and development, or merely to declare and pay dividends or distributions to its shareholders. There is no other restriction on the use of proceeds generated by the Companys subsidiaries, VIEs and VIE subsidiaries to satisfy any obligations of the Company.
F-47
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
ADDITIONAL INFORMATION: CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Rules 12-04(a) and 4-08(e)(3) of Regulation S-X require condensed financial information as to the financial position, cash flows and results of operations of a parent company as of and for the same periods for which the audited consolidated financial statements have been presented when the restricted net assets of the consolidated and unconsolidated subsidiaries together exceed 25% of consolidated net assets as of the end of the most recently completed fiscal year.
The following condensed financial statements of the Parent Company have been prepared using the same accounting policies as set out in the Companys consolidated financial statements except that the Parent Company used the equity method to account for its investment in its subsidiaries and VIEs. Such investment is presented on the separate condensed balance sheets of the Parent Company as Payables to subsidiaries and VIEs. The Parent Company, its subsidiaries and VIEs were included in the consolidated financial statements whereby the inter-company balances and transactions were eliminated upon consolidation. The Parent Companys share of income from its subsidiaries and VIEs is reported as share of income from subsidiaries and VIEs in the condensed financial statements.
The Parent Company is a Cayman Islands company and, therefore, is not subjected to income taxes for all years presented. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the consolidated financial statements of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
As of December 31, 2017, there were no material commitments or contingencies, significant provisions for long-term obligations or guarantees of the Company, except for those which have been separately disclosed in the consolidated financial statements, if any.
As the Groups business was operated through Jifen VIE prior to the Parent Company being incorporated in 2017, no Parent Company financial information of 2016 is presented. The consolidated financial statements have been prepared as if the equity structure of the Parent Company had been in existence throughout the periods, but 100% of consolidated net assets and all of results of operations for the year ended December 31, 2016 were restricted.
F-48
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
Condensed Financial Information of the Parent Company
BALANCE SHEETS
F-49
QUTOUTIAO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(RMB, except share data and per share data, or otherwise noted)
Condensed Financial Information of the Parent Company (Continued)
STATEMENTS OF COMPREHENSIVE LOSS
For the period from the
inception to December 31, 2017 |
||||||||
RMB | US$(Note 2(e)) | |||||||
Operating expenses: |
||||||||
General and administrative |
(3,933,590 | ) | (604,582 | ) | ||||
|
|
|
|
|||||
Total operating expenses |
(3,933,590 | ) | (604,582 | ) | ||||
|
|
|
|
|||||
Loss from operations |
(3,933,590 | ) | (604,582 | ) | ||||
|
|
|
|
|||||
Investment income |
36,082 | 5,546 | ||||||
Interest income |
471 | 72 | ||||||
Loss from subsidiaries and VIEs |
(47,242,850 | ) | (7,261,093 | ) | ||||
|
|
|
|
|||||
Loss before provision for income taxes |
(51,139,887 | ) | (7,860,057 | ) | ||||
|
|
|
|
|||||
Provision for income taxes |
| | ||||||
|
|
|
|
|||||
Net loss |
(51,139,887 | ) | (7,860,057 | ) | ||||
Preferred share redemption value accretion |
(6,012,783 | ) | (924,148 | ) | ||||
|
|
|
|
|||||
Net loss attributable to ordinary shareholders |
(57,152,670 | ) | (8,784,205 | ) | ||||
|
|
|
|
|||||
Net loss |
(51,139,887 | ) | (7,860,057 | ) | ||||
Foreign currency translation adjustment, net of nil tax |
24,651 | 3,789 | ||||||
|
|
|
|
|||||
Comprehensive loss |
(51,115,236 | ) | (7,856,268 | ) | ||||
|
|
|
|
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31, 2017 |
||||||||
RMB | US$(Note 2(e)) | |||||||
Cash flows used in operating activities |
(747,037 | ) | (114,817 | ) | ||||
Cash flows used in investing activities |
(9,454 | ) | (1,453 | ) | ||||
Cash flows from financing activities |
272,121,039 | 41,824,238 | ||||||
Effect of exchange rate changes on cash |
(4,239,131 | ) | (651,543 | ) | ||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
267,125,417 | 41,056,425 | ||||||
Cash and cash equivalents, beginning of year |
| | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of year |
267,125,417 | 41,056,425 | ||||||
|
|
|
|
F-50
QUTOUTIAO INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and June 30, 2018
(RMB, except share data and per share data, or otherwise noted)
F-51
QUTOUTIAO INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and June 30, 2018
(RMB, except share data and per share data, or otherwise noted)
Note |
As of
December 31, 2017 |
As of June 30, 2018 |
As of June 30, 2018
Pro-forma |
|||||||||||||||||||
RMB | RMB |
US$ (Note 2(e)) |
RMB (Note 18) |
US$ (Note 2(e)) |
||||||||||||||||||
Tax payable (including tax payable of the consolidated variable interest entity (VIE) and VIEs subsidiaries without recourse to the Company of RMB 21,343,600 and RMB 26,910,157 as of December 31, 2017 and June 30, 2018, respectively) |
21,343,600 | 32,508,491 | 4,912,800 | 32,508,491 | 4,912,800 | |||||||||||||||||
Accrued liabilities related to users loyalty programs (including Accrued liabilities related to users loyalty program of the consolidated variable interest entity (VIE) and VIEs subsidiaries without recourse to the Company of RMB 187,003,469 and RMB 149,011,030 as of December 31, 2017 and June 30, 2018, respectively) |
2(k) | 187,003,469 | 149,011,030 | 22,519,084 | 149,011,030 | 22,519,084 | ||||||||||||||||
Accrued liabilities and other current liabilities (including Accrued liabilities and other current liabilities of the consolidated variable interest entity (VIE) and VIEs subsidiaries without recourse to the Company of RMB 18,271,639 and RMB 61,908,511 as of December 31, 2017 and June 30, 2018, respectively) |
9 | 21,421,639 | 67,906,968 | 10,262,346 | 67,906,968 | 10,262,346 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
311,246,070 | 545,027,794 | 82,366,565 | 545,027,794 | 82,366,565 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
311,246,070 | 545,027,794 | 82,366,565 | 545,027,794 | 82,366,565 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commitments and contingencies (Notes 17) |
||||||||||||||||||||||
Mezzanine equity: |
||||||||||||||||||||||
Series A convertible redeemable preferred shares (US$0.0001 par value; 4,945,055 shares authorized, issued and outstanding as of December 31,2017 and June 30, 2018; none outstanding on a pro-forma basis as of June 30, 2018 ; redemption amount of RMB 375,151,726 and RMB 359,706,132 as of December 31, 2017 and June 30, 2018, respectively) |
10 | 210,478,110 | 223,855,431 | 33,829,840 | | | ||||||||||||||||
Series A1 convertible redeemable preferred shares (US$0.0001 par value; 1,373,626 shares authorized, issued and outstanding as of December 31, 2017 and June 30, 2018; none outstanding on a pro-forma basis as of June 30, 2018; redemption amount of RMB 115,787,570 and RMB 109,694,845 as of December 31, 2017 and June 30, 2018, respectively) |
10 | 63,416,581 | 67,541,688 | 10,207,143 | | | ||||||||||||||||
Series B1 convertible redeemable preferred shares (US$0.0001 par value; 5,420,144 shares authorized, issued and outstanding as of June 30, 2018; none outstanding on a pro-forma basis as of June 30, 2018; redemption amount of RMB 1,072,640,728 as of June 30, 2018) |
10 | | 701,411,911 | 105,999,896 | | |
F-52
QUTOUTIAO INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and June 30, 2018
(RMB, except share data and per share data, or otherwise noted)
Note |
As of
December 31, 2017 |
As of June 30, 2018 |
As of June 30, 2018
Pro-forma |
|||||||||||||||||||
RMB | RMB |
US$ (Note 2(e)) |
RMB (Note 18) |
US$ (Note 2(e)) |
||||||||||||||||||
Series B2 convertible redeemable preferred shares (US$0.0001 par value; 3,895,728 shares authorized, issued and outstanding as of June 30, 2018; none outstanding on a pro-forma basis as of June 30, 2018 ; redemption amount of RMB 936,259,060 as of June 30, 2018) |
10 | | 613,917,689 | 92,777,454 | | | ||||||||||||||||
Series B3 convertible redeemable preferred shares (US$0.0001 par value; 1,751,539 shares authorized, issued and outstanding as of June 30, 2018; none outstanding on a pro-forma basis as of June 30, 2018; redemption amount of RMB 455,043,064 as of June 30, 2018) |
10 | | 300,199,176 | 45,367,181 | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total mezzanine equity |
273,894,691 | 1,906,925,895 | 288,181,514 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Shareholders (deficit)/equity: |
||||||||||||||||||||||
Ordinary shares (US$0.0001 par value; 493,681,319 and 482,613,908 shares authorized as of December 31, 2017 and June 30, 2018 respectively, 34,062,500 and 50,000,000 shares issued as of December 31, 2017 and June 30, 2018, respectively, 24,062,500 and 24,562,500 shares outstanding as of December 31, 2017 and June 30, 2018, respectively; 41,948,592 Ordinary Shares on a pro-forma basis as of June 30, 2018) |
11 | 15,723 | 16,040 | 2,424 | 27,544 | 4,163 | ||||||||||||||||
Additional paid-in capital |
8,856,316 | 202,994,036 | 30,677,190 | 2,109,908,427 | 318,856,965 | |||||||||||||||||
Treasury stock (US$0.0001 par value; 10,000,000 and 9,500,000 shares as of December 31, 2017 and June 30, 2018, respectively; 10,000,000 and 9,500,000 on a pro-forma basis as of June 30, 2018) |
| | | | | |||||||||||||||||
Accumulated other comprehensive income/(loss) |
24,651 | (12,537,479 | ) | (1,894,709 | ) | (12,537,479 | ) | (1,894,709 | ) | |||||||||||||
Accumulated deficit |
(117,456,701 | ) | (699,610,002 | ) | (105,727,585 | ) | (699,610,002 | ) | (105,727,585 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total shareholders (deficit)/equity |
(108,560,011 | ) | (509,137,405 | ) | (76,942,680 | ) | 1,397,788,490 | 211,238,834 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities, mezzanine equity and shareholders (deficit)/equity |
476,580,750 | 1,942,816,284 | 293,605,399 | 1,942,816,284 | 293,605,399 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
F-53
QUTOUTIAO INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
For six months ended June 30, 2017 and 2018
(RMB, except share data and per share data, or otherwise noted)
Six months ended June 30, | ||||||||||||||
Note | 2017 | 2018 | ||||||||||||
RMB | RMB | US$(Note 2(e)) | ||||||||||||
Advertising revenue |
106,347,989 | 668,687,403 | 101,054,449 | |||||||||||
Advertising revenue- related party |
15 | | 1,183,492 | 178,855 | ||||||||||
Other revenue |
925,396 | 42,670,745 | 6,448,557 | |||||||||||
Other revenue-related party |
15 | | 5,293,092 | 799,911 | ||||||||||
|
|
|
|
|
|
|||||||||
Net revenues |
107,273,385 | 717,834,732 | 108,481,772 | |||||||||||
Cost of revenues |
(10,177,148 | ) | (142,625,585 | ) | (21,554,092 | ) | ||||||||
Cost of revenues-related party |
15 | (144,641 | ) | (3,367,626 | ) | (508,928 | ) | |||||||
|
|
|
|
|
|
|||||||||
Gross profit |
96,951,596 | 571,841,521 | 86,418,752 | |||||||||||
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||
Research and development expenses |
(2,908,664 | ) | (62,912,378 | ) | (9,507,545 | ) | ||||||||
Research and development expenses-related party |
15 | (65,800 | ) | | | |||||||||
Sales and marketing expenses |
(113,785,173 | ) | (832,021,879 | ) | (125,738,145 | ) | ||||||||
Sales and marketing expenses-related party |
15 | (283,948 | ) | (4,917,963 | ) | (743,220 | ) | |||||||
General and administrative expenses |
(2,484,220 | ) | (193,885,977 | ) | (29,300,748 | ) | ||||||||
General and administrative expenses-related party |
15 | (6,400,809 | ) | | | |||||||||
|
|
|
|
|
|
|||||||||
Total operating expenses |
(125,928,614 | ) | (1,093,738,197 | ) | (165,289,658 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Loss from operations |
(28,977,018 | ) | (521,896,676 | ) | (78,870,906 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Interest income |
307,388 | 5,388,699 | 814,360 | |||||||||||
Foreign exchange related gains, net |
| 2,098,062 | 317,067 | |||||||||||
Others, net |
(5,651 | ) | (25,598 | ) | (3,868 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Loss before income tax expenses |
(28,675,281 | ) | (514,435,513 | ) | (77,743,347 | ) | ||||||||
Income tax expense |
14 | | | | ||||||||||
|
|
|
|
|
|
|||||||||
Net loss |
(28,675,281 | ) | (514,435,513 | ) | (77,743,347 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Accretion to convertible redeemable preferred shares redemption value |
| (58,963,543 | ) | (8,910,783 | ) | |||||||||
Deemed dividend to preferred shareholders |
10 | | (1,916,871 | ) | (289,684 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Net loss attributable to Qutoutiao Inc.s ordinary shareholders |
(28,675,281 | ) | (575,315,927 | ) | (86,943,814 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Net loss |
(28,675,281 | ) | (514,435,513 | ) | (77,743,347 | ) | ||||||||
Other comprehensive loss |
||||||||||||||
Foreign currency translation adjustment, net of nil tax |
| (12,562,130 | ) | (1,898,434 | ) | |||||||||
|
|
|
|
|
|
|||||||||
Comprehensive loss attributable to Qutoutiao Inc. |
(28,675,281 | ) | (526,997,643 | ) | (79,641,781 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Net loss per share attributable to Qutoutiao Inc. |
||||||||||||||
Basic and diluted |
16 | (1.19 | ) | (23.74 | ) | (3.59 | ) | |||||||
Weighted average number of ordinary shares used in per share calculation: |
||||||||||||||
Basic and Diluted |
16 | 24,062,500 | 24,238,324 | 24,238,324 | ||||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
F-54
QUTOUTIAO INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS DEFICIT
For six months ended June 30, 2017 and 2018
(RMB, except share data and per share data, or otherwise noted)
Outstanding ordinary
shares |
Additional
paid-in capital |
Treasury stocks |
Accumulated
other comprehensive income/(loss) |
Accumulated
deficit |
Statutory
reserves |
Total
shareholders deficit |
||||||||||||||||||||||||||||||
Number of
Shares |
Amount |
Number of
Shares |
Amount | |||||||||||||||||||||||||||||||||
Balance as of January 1, 2017 |
24,062,500 | 15,723 | 1,118,808 | 10,000,000 | | | (12,325,548 | ) | | (11,191,017 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Share-based compensation expense (Note 12) |
| | 356,797 | | | | | | 356,797 | |||||||||||||||||||||||||||
Distribution to the founder (Note 12) |
| | 1,332,206 | | | | (1,332,206 | ) | | | ||||||||||||||||||||||||||
Net loss |
| | | | | | (28,675,281 | ) | | (28,675,281 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance as of June 30, 2017 |
24,062,500 | 15,723 | 2,807,811 | 10,000,000 | | | (42,333,035 | ) | | (39,509,501 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance as of January 1, 2018 |
24,062,500 | 15,723 | 8,856,316 | 10,000,000 | | 24,651 | (117,456,701 | ) | | (108,560,011 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Share-based compensation expense (Note 12) |
| | 185,383,475 | | | | | | 185,383,475 | |||||||||||||||||||||||||||
Distribution to the founder (Note 12) |
| | 6,837,374 | | | | (6,837,374 | ) | | | ||||||||||||||||||||||||||
Accretion on Series A convertible redeemable preferred shares to redemption value |
| | | | | | (10,643,883 | ) | | (10,643,883 | ) | |||||||||||||||||||||||||
Accretion on Series A1 convertible redeemable preferred shares to redemption value |
| | | | | | (3,274,935 | ) | | (3,274,935 | ) | |||||||||||||||||||||||||
Accretion on Series B1 convertible redeemable preferred shares to redemption value |
| | | | | | (21,349,500 | ) | | (21,349,500 | ) | |||||||||||||||||||||||||
Accretion on Series B2 convertible redeemable preferred shares to redemption value |
| | | | | | (18,092,345 | ) | | (18,092,345 | ) | |||||||||||||||||||||||||
Accretion on Series B3 convertible redeemable preferred shares to redemption value |
| | | | | | (5,602,880 | ) | | (5,602,880 | ) | |||||||||||||||||||||||||
Deemed dividend to preferred shareholders (Note 10) |
| | 1,916,871 | | | | (1,916,871 | ) | | | ||||||||||||||||||||||||||
Exercise of share options |
500,000 | 317 | | (500,000 | ) | | | | | 317 | ||||||||||||||||||||||||||
Net loss |
| | | | | | (514,435,513 | ) | | (514,435,513 | ) | |||||||||||||||||||||||||
Foreign currency translation |
| | | | | (12,562,130 | ) | | | (12,562,130 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance as of June 30, 2018 |
24,562,500 | 16,040 | 202,994,036 | 9,500,000 | | (12,537,479 | ) | (699,610,002 | ) | | (509,137,405 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
F-55
QUTOUTIAO INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For six months ended June 30, 2017 and 2018
(RMB, except share data and per share data, or otherwise noted)
Six months ended June 30, | ||||||||||||
2017 | 2018 | |||||||||||
RMB | RMB | US$(Note 2(e)) | ||||||||||
Cash flows from operating activities |
||||||||||||
Net loss |
(28,675,281 | ) | (514,435,513 | ) | (77,743,347 | ) | ||||||
Adjustments for: |
||||||||||||
Depreciation of property and equipment |
29,873 | 1,549,432 | 234,156 | |||||||||
Share-based compensation |
356,797 | 185,383,475 | 28,015,819 | |||||||||
Changes in assets and liabilities net of impact of acquisition: |
||||||||||||
Accounts receivable |
(29,279,129 | ) | 9,497,772 | 1,435,338 | ||||||||
Prepayment to a related party |
| (27,792,710 | ) | (4,200,135 | ) | |||||||
Prepayments and other current assets |
(2,599,705 | ) | (11,769,599 | ) | (1,778,664 | ) | ||||||
Other non-current assets |
(16,057 | ) | (737,690 | ) | (111,482 | ) | ||||||
Accounts payable |
591,627 | 7,103,222 | 1,073,464 | |||||||||
Amount due to a related party |
6,895,198 | 7,570,862 | 1,144,136 | |||||||||
Registered users loyalty payable |
4,485,588 | 116,060,910 | 17,539,543 | |||||||||
Salary and welfare payable |
1,147,686 | 7,570,229 | 1,144,040 | |||||||||
Tax payable |
2,322,160 | 1,231,483 | 186,106 | |||||||||
Accrued liabilities related to users loyalty programs |
42,229,469 | (37,992,439 | ) | (5,741,554 | ) | |||||||
Accrued liabilities and other current liabilities |
4,781,962 | 42,482,144 | 6,420,055 | |||||||||
Advances from advertising customers |
(232,865 | ) | 72,539,949 | 10,962,498 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by/(used in) operating activities |
2,037,323 | (141,738,473 | ) | (21,420,027 | ) | |||||||
|
|
|
|
|
|
|||||||
Cash flows from investing activities: |
||||||||||||
Purchase of short-term investments |
(129,510,000 | ) | (761,200,000 | ) | (115,035,287 | ) | ||||||
Prepayment for purchase of online audio/video content platform |
| (43,018,464 | ) | (6,501,105 | ) | |||||||
Cash paid for acquisitions, net of cash acquired |
| (10,729,825 | ) | (1,621,530 | ) | |||||||
Proceeds from maturity of short-term investments |
128,080,000 | 890,610,000 | 134,592,193 | |||||||||
Purchase of property and equipment |
(270,133 | ) | (5,794,062 | ) | (875,620 | ) | ||||||
Proceeds from disposal of property and equipment |
| 175,634 | 26,542 | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used in)/provided by investing activities |
(1,700,133 | ) | 70,043,283 | 10,585,193 | ||||||||
|
|
|
|
|
|
|||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of Series B1 Convertible redeemable Preferred Shares, net of issuance costs |
| 651,736,522 | 98,492,772 | |||||||||
Proceeds from issuance of Series B2 Convertible redeemable Preferred Shares, net of issuance costs |
| 569,316,830 | 86,037,211 | |||||||||
Proceeds from issuance of Series B3 Convertible redeemable Preferred Shares, net of issuance costs |
| 284,561,245 | 43,003,920 | |||||||||
Cash paid for initial public offering related costs |
| (4,281,169 | ) | (646,986 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by financing activities |
| 1,501,333,428 | 226,886,917 | |||||||||
|
|
|
|
|
|
|||||||
Net increase in cash and cash equivalents |
337,190 | 1,429,638,238 | 216,052,083 | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
| 58,202,210 | 8,795,728 | |||||||||
Cash and cash equivalents at the beginning of period |
268,628 | 278,458,413 | 42,081,639 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at the end of period |
605,818 | 1,766,298,861 | 266,929,450 | |||||||||
|
|
|
|
|
|
F-56
QUTOUTIAO INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For six months ended June 30, 2017 and 2018
(RMB, except share data and per share data, or otherwise noted)
Six months ended June 30, | ||||||||||||
2017 | 2018 | |||||||||||
RMB | RMB | US$(Note 2(e)) | ||||||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Accounts payable related to the purchase of property and equipment |
| 263,000 | 39,746 | |||||||||
Accrued preferred share issuance cost |
| 2,311,276 | 349,288 | |||||||||
Accretion to Series A preferred shares redemption
|
| 10,643,883 | 1,608,542 | |||||||||
Accretion to Series A1 preferred shares redemption value |
| 3,274,935 | 494,920 | |||||||||
Accretion to Series B1 preferred shares redemption value |
| 21,349,500 | 3,226,413 | |||||||||
Accretion to Series B2 preferred shares redemption value |
| 18,092,345 | 2,734,180 | |||||||||
Accretion to Series B3 preferred shares redemption value |
| 5,602,880 | 846,727 | |||||||||
Deemed dividend to preferred shares shareholders |
| 1,916,871 | 289,684 | |||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
F-57
QUTOUTIAO INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(RMB, except share data and per share data, or otherwise noted)
1. |
Organization and Principal Activities |
Principal activities
Qutoutiao Inc. (the Company), an exempted company with limited liability incorporated in the Cayman Islands, (i) its various equity-owned consolidated subsidiaries, (ii) its controlled affiliate Shanghai Jifen Culture Communications Co., Ltd. (Jifen or Jifen VIE), and (iii) the subsidiaries of its controlled affiliate are collectively referred to as the Group. The Groups principal activity is to operate mobile platforms Qutoutiao (QTT) and Quduopai (QDP) for the distribution, consumption and sharing of light entertainment content. The Group generates revenue primarily by providing cost-effective and targeted advertising solutions through the mobile platforms in the Peoples Republic of China (PRC), through Jifen and its wholly-owned subsidiaries thereof. Jifen and its wholly-owned subsidiaries are collectively referred to as the Affiliated Entities.
As of June 30, 2018, the Companys principal subsidiaries and consolidated Affiliated Entities are as follows:
Name of subsidiaries and VIE |
Date of establishment/
|
Place of
|
Percentage of
direct or indirect economic ownership |
|||||
Wholly owned subsidiaries of the Company: |
||||||||
InfoUniversal Limited (InfoUniversal) |
Established on August 15, 2017 | Hong Kong | 100 | % | ||||
Shanghai Quyun Internet Technology Co., Ltd. (Quyun WFOE) |
Established on October 13, 2017 | PRC | 100 | % | ||||
Shanghai Dianguan Network Technology Co., Ltd. (Dianguan) Established on April 13, 2017 PRC% (Qukandian) |
Acquired on February 2, 2018 | PRC | 100 | % | ||||
QTT Asia Ltd.(QTT Asia) |
Established on April 10, 2018 | British Virgin Islands(BVI) | 100 | % | ||||
Variable Interest Entity (VIE) |
||||||||
Shanghai Jifen Culture Communications Co., Ltd. (Jifen or Jifen VIE) |
Established on January 10, 2012 | PRC | 100 | % | ||||
Subsidiaries of Variable Interest Entity (VIE subsidiaries) |
||||||||
Shanghai Xike Information Technology Service Co., Ltd. (Xike) |
Established on July 14, 2016 | PRC | 100 | % | ||||
Shanghai Tuile Information Technology Service Co., Ltd. (Tuile) |
Established on July 14, 2016 | PRC | 100 | % | ||||
Anhui Zhangduan Internet Technology Co., Ltd. (Zhangduan) |
Established on March 31, 2017 | PRC | 100 | % | ||||
Beijing Qukandian Internet Technology Co., Ltd. (Qukandian) |
Established on April 13, 2017 | PRC | 100 | % |
F-58
2. |
Principal Accounting Policies |
(a) Basis of preparation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with US GAAP have been condensed or omitted consistent with Article 10 of Regulation S-X. In the opinion of management, our consolidated interim financial statements and accompanying notes included all adjustments (consisting of normal recurring adjustments) considered necessary by management to a fair statement of the results of operations, financial position and cash flows for the interim periods presented. Interim results of operations are not necessarily indicative of the results for the full year or for any future periods. These financial statements should be read in conjunction with the annual financial statements and notes thereto also included herein.
Significant accounting policies followed by the Company in the preparation of the accompanying consolidated financial statements are summarized below.
(b) Consolidation
The condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and a consolidated VIE, including the VIEs subsidiaries, for which the Company is the primary beneficiary. Subsidiaries are entities in which the Company, directly or indirectly, controls more than one half of the voting powers; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A consolidated VIE is an entity in which the Company, or its subsidiaries, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore the Company or one of its subsidiaries is the primary beneficiary of the entity.
All transactions and balances among the Company, its subsidiaries, the VIE and the VIEs subsidiaries have been eliminated upon consolidation.
In accordance with the VIE Agreements, Quyun WFOE has the power to exercise effective control over VIE, receives substantially all of the economic benefits and residual returns, and absorbs substantially all the risks and expected losses from VIE as if it were its sole shareholder and have an exclusive option to purchase all of the equity interests in the VIE.
F-59
The following table sets forth the assets, liabilities, results of operations and cash flows of Jifen and its subsidiaries are included in the Groups consolidated financial statements. Transactions between the VIE and its subsidiaries are eliminated in the balances presented below:
As of | ||||||||
December 31, 2017 | June 30, 2018 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
11,317,670 | 99,427,740 | ||||||
Short-term investments |
129,770,000 | 10,300,000 | ||||||
Accounts receivable, net |
43,250,595 | 33,736,754 | ||||||
Amount due from subsidiaries of the Company |
| 33,251,064 | ||||||
Prepayment to a related party |
| 27,792,710 | ||||||
Prepayments and other current assets |
14,728,734 | 23,093,769 | ||||||
|
|
|
|
|||||
Total current assets |
199,066,999 | 227,602,037 | ||||||
|
|
|
|
|||||
Non-current assets |
||||||||
Property and equipment, net |
4,614,062 | 8,553,359 | ||||||
Other non-current assets |
5,758,946 | 27,496,636 | ||||||
|
|
|
|
|||||
Total non-current assets |
10,373,008 | 36,049,995 | ||||||
|
|
|
|
|||||
Total assets |
209,440,007 | 263,652,032 | ||||||
|
|
|
|
|||||
Liabilities |
||||||||
Current liabilities |
||||||||
Accounts payable |
14,992,741 | 22,460,205 | ||||||
Amount due to subsidiaries of the Company |
| 275,200,311 | ||||||
Amount due to a related party |
| 7,570,862 | ||||||
Registered users loyalty payable |
20,977,138 | 137,038,048 | ||||||
Advance from advertising customers |
39,864,599 | 1,378,295 | ||||||
Salary and welfare payable |
5,642,884 | 13,013,294 | ||||||
Tax payable |
21,343,600 | 26,910,157 | ||||||
Accrued liabilities related to users loyalty programs |
187,003,469 | 149,011,030 | ||||||
Accrued liabilities and other current liabilities |
18,271,639 | 61,908,511 | ||||||
|
|
|
|
|||||
Total current liabilities |
308,096,070 | 694,490,713 | ||||||
|
|
|
|
|||||
Total liabilities |
308,096,070 | 694,490,713 | ||||||
|
|
|
|
Six months ended June 30, | ||||||||
2017 | 2018 | |||||||
Net revenues |
107,273,385 | 712,036,682 | ||||||
Net loss |
(28,675,281 | ) | (514,632,981 | ) |
Six months ended June 30, | ||||||||
2017 | 2018 | |||||||
Net cash provided by/(used in) operating activities |
2,037,323 | (280,080,346 | ) | |||||
Net cash (used in)/provided by investing activities |
(1,700,133 | ) | 92,990,105 | |||||
Net cash provided by financing activities |
| 275,200,311 | ||||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
337,190 | 88,110,070 | ||||||
|
|
|
|
F-60
(c) Use of estimates
The preparation of the Groups consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from such estimates.
The Company believes that revenue recognition, liabilities related to loyalty programs, consolidation of VIE, determination of share-based compensation and impairment assessment of long-lived assets that reflect more significant judgments and estimates used in the preparation of its consolidated financial statements.
Management bases the estimates on historical experience and on various other assumptions as discussed elsewhere to the consolidated financial statements that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could materially differ from these estimates.
(d) Functional Currency and Foreign Currency Translation
The Group uses Renminbi (RMB) as its reporting currency. The functional currency of the Company and its subsidiaries incorporated outside of PRC is the United States dollar (US$), while the functional currency of the PRC entities in the Group is RMB as determined based on the criteria of ASC 830, Foreign Currency Matters.
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Financial assets and liabilities denominated in other than the functional currency are re-measured at the balance sheet date exchange rate. The resulting exchange differences are recorded in the consolidated statements of comprehensive loss as foreign exchange related gain / loss.
The financial statements of the Group are translated from the functional currency to the reporting currency, RMB. Assets and liabilities of the subsidiaries are translated into RMB using the exchange rate in effect at each balance sheet date. Income and expense items are generally translated at the average exchange rates prevailing during the fiscal year. Foreign currency translation adjustments arising from these are accumulated as a separate component of shareholders deficit on the consolidated financial statement. The exchange rates used for translation on December 31, 2017 and June 30, 2018 were US$1.00=RMB 6.5342 and RMB 6.6166, respectively, representing the index rates stipulated by the Peoples Bank of China.
(e) Convenience Translation
Translations of balances in the Groups consolidated balance sheet, consolidated statement of operations and comprehensive loss and consolidated statement of cash flows from RMB into US$ as of and for the six months ended June 30, 2018 are solely for the convenience of the readers and were calculated at the rate of US$1 = RMB6.6171, representing the noon buying rate set forth in the H.10 statistical release of the US Federal Reserve Board on June 29, 2018. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on June 29, 2018, or at any other rate.
F-61
(f) Fair value of financial instruments
The following table sets forth the Groups assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
As of December 31, 2017 | Level 1 | Level 2 | Level 3 |
Balance at
fair value |
||||||||||||
Assets |
||||||||||||||||
Short-term investments Wealth management products |
| 129,770,000 | | 129,770,000 | ||||||||||||
|
|
|
|
|
|
|
|
As of June 30, 2018 | Level 1 | Level 2 | Level 3 |
Balance at
fair value |
||||||||||||
Assets |
||||||||||||||||
Short-term investments Wealth management products |
| 10,300,000 | | 10,300,000 | ||||||||||||
|
|
|
|
|
|
|
|
The Group values its investments in wealth management products issued by certain banks using quoted subscription/redemption prices published by these banks, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 2.
(g) Short-term investments
Short-term investments include investments in wealth management products issued by certain banks which are redeemable by the Company at any time. The wealth management products are unsecured with variable interest rates and primarily invested in debt securities issued by the PRC government, corporate debt securities and central bank bills. The Company measures the short-term investments at fair value using the quoted subscription or redemption prices published by these banks. The change in fair value is recorded as interest income amounted to RMB305,367 and RMB4,803,278 in the consolidated statements of comprehensive loss for the six months ended June 30, 2017 and 2018, respectively.
(h) Revenue recognition
A. |
Significant accounting policy |
The Group has adopted the new revenue standard, ASC 606, by applying the full retrospective method. See Section (ac) Recently issued accounting pronouncements. Revenues are recognized when or as the control of a good or service is transferred to the customer. Depending on the terms of the contract and the laws that apply to the contract, control of the goods and services may be transferred over time or at a point in time. Control of the goods and services is transferred over time if the Groups performance:
|
provides all of the benefits received and consumed simultaneously by the customer; |
|
creates and enhances an asset that the customer controls as the Group performs; or |
|
does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. |
If control of the goods and services transfers over time, revenue is recognized over the period of the contract by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognized at a point in time when the customer obtains control of the goods and services.
The progress towards complete satisfaction of the performance obligation is measured based on one of the following methods that best depict the Groups performance in satisfying the performance obligation:
|
direct measurements of the value transferred by the Group to the customer; or |
|
the Groups efforts or inputs to the satisfaction of the performance obligation. |
F-62
B. |
Nature of services |
The following is a description of principal activities of the Group from which the Group generates its revenue.
(i) Advertising
The Groups main revenue generating activity is the provision of online advertising services. The Group generates revenue from performing specified actions, i.e. a Cost Per thousand impressions (CPM), Cost Per Click (CPC) basis. Revenue is recognized on a CPM or CPC basis as impressions or clicks are delivered.
The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Group is acting as the principal or an agent in the transaction. In determining whether the Group acts as the principal or an agent, the Group follows the accounting guidance for principal-agent considerations. Such determination involves judgement and is based on evaluation of the terms of each arrangement.
a. Advertising services provided to advertising customers
(i) Before February 2018, the Group engaged certain advertising customers through a third-party advertising agent (advertising agent). In the arrangement with this advertising agent, it served as the Groups sales agent in selling the Groups advertising solutions to other second-tier advertising agents. The end advertisers are the customers of the Group as they specifically select Qutoutiao to display its advertisement and the performance obligation of the Group is to provide the underlying advertising display services. The advertising agent earns a commission of 2% of the advertising revenue in the arrangement in return for providing bidding system for placement on Qutoutiao which the Company recognized as cost of revenue. The Group provides advertising services to advertising customers and recognizes advertising revenue on a gross basis as clicks are delivered.
The Group receives refundable advance payments from advertising customers through this advertising agent and reconciles the advertising revenue with this advertising agent on a weekly basis. If the advance payment deposited in the Group is not ultimately used for the advertisement on Qutoutiao, the Group refunds the advance payment back to advertising customers through this advertising agent.
In February 2018, the Group acquired 100% equity interests of this advertising agent with a total consideration of RMB15 million (Note 4). After the acquisition, the Group effectively provides advertising services to these advertising customers directly and continues to recognize revenue on a gross basis as impressions are delivered.
The Group also engaged advertising customers through other third party advertising agents where revenue was accounted for on a gross basis during the six months ended June 30, 2017. Those arrangements have been terminated as of December 31, 2017.
(ii) The Group also provides advertising service to advertising customers directly. The Group recognizes revenue on a gross basis as impressions are delivered.
b. Advertising services provided to advertising platforms
The Group provides advertising services to other third-party advertising platforms. In the arrangement with these advertising platforms, these advertising platforms are the customers of the Group and the performance obligation of the Group is to provide traffic service to these advertising platforms. Therefore, the Group recognizes revenue based on the net amount as impressions or clicks are delivered.
The Group reconciles and settles the advertising revenue with these advertising platforms on a monthly basis.
F-63
(ii) Other services
a. Online marketplace service
The Group operates an online marketplace which users can access merchandise offered by third-party merchandise suppliers. The suppliers are the customers of the Group as these suppliers are the primary obligor to provide goods and delivery service to the users and the performance obligation of the Group is to provide matching service for the suppliers. The Group acts as an agent in this transaction and recognize revenue when the matching service is completed. The Group settles the payment with suppliers on a monthly basis.
b. Agent and platform service
After the acquisition of the advertising agent in February 2018 (Note 4), the Group also provides agent and platform service by facilitating the advertising customers to select third-party advertising platforms to display their advertisements. The Group recognizes revenue from the advertising customers based on the net amount equal to certain agreed percentage of the gross revenue earned by the third-party advertising platforms when impressions or clicks are successfully delivered.
c. Disaggregation of revenue
In the following table, revenue is disaggregated by major service line and gross vs net recognition.
Six months ended | ||||||||||||
June 30, 2017 | June 30, 2018 | |||||||||||
RMB | RMB | US$ (Note 2(e)) | ||||||||||
Major service line |
||||||||||||
Advertising service provided to advertising customers, recorded gross |
22,444,199 | 533,983,843 | 80,697,563 | |||||||||
Advertising service provided to advertising platforms, recorded net |
83,903,790 | 135,887,052 | 20,535,741 | |||||||||
Other service |
925,396 | 47,963,837 | 7,248,468 | |||||||||
|
|
|
|
|
|
|||||||
107,273,385 | 717,834,732 | 108,481,772 |
For the six months ended June 30, 2018, revenue in other service include the agent and platform service amounted to RMB44 million.
(i) Cost of revenues
The Groups cost of revenues consists primarily of (i) agent fees retained by the third party advertising agents which are recognized as cost of revenue for revenue recorded on gross basis, (ii) content procurement costs paid to third-party professional media companies or freelancers, (iii) direct cost related to in-house content editing cost, rental cost, depreciation and other miscellaneous costs, (iv) bandwidth cost and (v) cultural development fee and surcharges. The cultural development fee and surcharges in cost of revenues for the six months ended June 30, 2017 and 2018 were RMB 3,679,757 and RMB 16,586,240, respectively. The Group is subject to a cultural development fee on the provision of advertising services in the PRC. The applicable tax rate is 3% of the net advertising revenues.
(j) Research and development expenses
Research and development expenses consist primarily of (i) salary and welfare for research and development personnel, (ii) office rental expenses and (iii) depreciation of office premise and servers utilized by research and development personnel. Costs incurred during the research stage are expensed as incurred. Costs incurred in the development stage, prior to the establishment of technological feasibility, which is when a working model is available, are expensed when incurred.
F-64
The Company accounts for internal use software development costs in accordance with guidance on intangible assets and internal use software. This requires capitalization of qualifying costs incurred during the softwares application development stage and to expense costs as they are incurred during the preliminary project and post implementation/operation stages. For the six months ended June 30, 2017 and 2018, the Company has not capitalized any costs related to internal use software because the inception of the Group software development costs qualified for capitalization have been insignificant.
(k) Sales and marketing expenses
Sales and marketing expenses consist primarily of (i) rewards to registered users related to loyalty programs, (ii) advertising and marketing expenses, (iii) charges for short mobile message service to registered users and (iv) salary and welfare for sales and marketing personnel. The advertising and marketing expenses amounted to RMB 1,991,364 and RMB184,423,941 during the six months ended June 30, 2017 and 2018, respectively.
(l) User loyalty programs
The Group has loyalty programs for its registered users in its mobile platforms Qutoutiao and Quduopai to enhance user stickiness and incentivize word-of-mouth referrals. The Group offers rewards mainly for signing up as a new-registered user as well as rewards to existing registered users for referring new users to become the Groups registered users, and also rewards for participating in various activities held in platforms including uploading videos on Quduopai. The cost of users rewards are recognized as sales and marketing expenses in the consolidated statements of comprehensive loss.
On Qutoutiao, the Groups users can redeem earned rewards, which is in a form of cash credits reflecting the same amount of cash value, upon request. The Group offers its users the flexibility to choose a number of rewards payment options, including i) online cash out, when the cash credits balance exceeding a certain cash out threshold or at a lower cash out threshold if the users log on Qutoutiao for a certain number of consecutive days, ii) purchasing products mainly through online marketplace.
On Quduopai, the Groups users as content provider to Qutoutiao can also earn cash credits (reflecting the same amount of cash value) that they may cash out when the cash credits balance exceeding a certain threshold. Before April 9 2018, the Groups users on Quduopai could also earn loyalty points, which could only be exchanged for coupons issued to the Group by a third-party, which can be used to purchase goods or service on that third-partys group buying website. The Group does not recognize any expenses or liability for those loyalty points earned on Quduopai since the Group does not bear any additional cost to settle these loyalty points awarded to its users before April 9, 2018. Starting from April 9, 2018, the Groups users on Quduopai who are not content providers, can also start to earn and redeem earned rewards, which is in a form of cash credits reflecting the same amount of cash value, upon request. Users can cash out the rewards when the cash credits balance exceeding a certain cash out threshold. All the outstanding loyalty point granted to users on Quduopai were converted to rewards upon the enacting of the revised loyalty program in April 2018. As a result, the Company recorded costs of RMB62,359 in the sales and marketing expenses in April 2018.
The users agreement provides that rewards expire after one month. However, the Group may, at its discretion, provide rewards to its users even after one month expiration period. Starting from May 2018, rewards to its users are cleared from their accounts and will not be redeemed when the users are inactive for 90 consecutive days.
The Groups experience indicates that a certain portion of rewards is never redeemed by its users, which the Group refers to as a breakage. The liability accrued for the reward is reduced by the estimated breakage that is expected to occur. The Group estimates breakage based upon its analysis of relevant reward history and redemption pattern as well as considering the expiration period of the rewards under the users agreement. In the assessment of breakage, each individual users account is categorized into certain pools of
F-65
different range of outstanding rewards, and then further grouped into certain sub-groups on the basis of inactivity days. The past reward redemption pattern in those sub-groups was used to estimate the respective breakage for the outstanding rewards in each sub-group at each period end. For the six months ended June 30, 2017 and 2018, total costs related to the users rewards granted amounted to RMB131 million and RMB707 million, and total rewards redeemed amounted to RMB48 million and RMB548 million, respectively. The Company also reversed the accrued rewards of the users inactive for 90 consecutive days which amounted to RMB 172 million for the six months ended June 30, 2018 which were recorded as a reduction of sales and marketing expense. As of December 31, 2017 and June 30, 2018, the total estimated breakage not accrued approximated to RMB113 million and RMB23 million, respectively, and the decrease (which results in an increase in the overall accrued loyalty liability) was due to the lower cash out threshold and the reversal for the cleared rewards of the users inactive for 90 days.
Once the accumulated unredeemed rewards for individual user with amount exceeding the cash out threshold or the continuous log-on criteria is reached, the Group reclassifies the balance into registered users payable in consolidated balance sheet as a monetary liability and reverses the amount of breakage originally assumed. The registered user payable is derecognized only if (1) the Group pays the user and is relieved of its obligation for the liability by paying the users includes delivery of cash or (2) the Group is legally released from the liability.
The actual cost to settle the estimated liability may differ from the estimated liability recorded. As of December 31, 2017 and June 30, 2018, users reward recorded in Registered users loyalty payable are RMB 20,977,138 and RMB137,038,048, respectively, and estimated users rewards recorded in Accrued liabilities related to users loyalty programs are RMB 187,003,469 and RMB 149,011,030, respectively.
(m) Income taxes
Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.
Deferred income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive loss in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
Uncertain tax positions
The guidance on accounting for uncertainties in income taxes prescribes a more likely than not threshold for financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating the Groups uncertain tax positions and determining its provision for income taxes. The Group recognizes interests and penalties, if any, under accrued expenses and other current liabilities on its consolidated balance sheets and under other expenses in its statements of operations and comprehensive loss. The Group did not recognize any significant interest and penalties associated with uncertain tax positions for the six months ended June 30, 2017 and 2018. As of December 31, 2017 and June 30, 2018, the Group did not have any significant unrecognized uncertain tax positions.
F-66
(n) Recently issued accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a new standard on revenue which will supersede the revenue recognition requirements in ASC 605. The new standard, as amended, sets forth a single comprehensive model for recognizing and reporting revenues. The new guidance requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. The standard is effective for us for fiscal years, and interim periods within those years, beginning on or after January 1, 2018. Early adoption is permitted but not before the original effective date of January 1, 2017. The Company has adopted the standard using the full retrospective method.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The main objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. The Company adopted ASU 2016-01 on January 1, 2018 and the adoption did not have a material impact on the Companys condensed consolidated financial statements and the related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02). Under the new guidance, lessees will be required to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. The Company expects to adopt the new standard in the first quarter of 2019 on a modified retrospective basis and is currently in the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (ASU 2016-13), which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of ASU 2016-13 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASBs Emerging Issues Task Force (ASU 2016-15). The new guidance is intended to reduce the
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diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has early adopted ASU 2016-15 in the current year and the adoption had no material impact on the Companys consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (ASU 2016-18). This ASU affects all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update will become effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2019, and early adoption is permitted in any interim or annual period. Company has adopted ASU 2016-18 in the current year and the adoption had no material impact on the Companys consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. The Company adopted the new standard effective January 1, 2018 on a prospective basis.
In May 2017, the FASB issued ASU No. 2017-09, Compensation Stock compensation (Topic 718): Scope of modification accounting (ASU 2017-09), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 is effective prospectively for all companies for annual periods beginning on or after December 15, 2017, and early adoption is permitted. The Company has early adopted ASU 2017-09 in the current year and the adoption had no material impact on the Companys consolidated financial statements.
In February 2018, the Financial Accounting Standard Board (FASB) issued ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to allow entities to reclassify the income tax effects of tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act) on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact ASU 2018-02 will have on its consolidated financial statements and associated disclosures.
3. |
Concentration and credit risk |
(i) Concentration of revenues
For the six months ended June 30, 2017 and 2018, Customer B contributed 76% and 12% of total net revenues of the Group, respectively.
(ii) Concentration of accounts receivable
The Group has not experienced any significant recoverability issue with respect to its accounts receivable. The Group conducts credit evaluations on its platforms and customers and generally does not require collateral or other security from such platforms and customers. The Group periodically evaluates the creditworthiness of the existing platforms in determining an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers.
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The following table summarized customers with greater than 10% of the accounts receivables:
As of | ||||||||
December 31,
2017 |
June 30,
2018 |
|||||||
Customer A advertising platform |
19 | % | 59 | % | ||||
Customer B advertising platform |
60 | % | 30 | % | ||||
Customer C advertising customer |
14 | % | * |
* |
Less than 10% |
(iii) Credit risk
The Groups credit risk arises from cash and cash equivalents, short-term investments, prepayments and other current assets, and accounts receivable. The carrying amounts of these financial instruments represent the maximum amount of loss due to credit risk.
The Group expects that there is no significant credit risk associated with the cash and cash equivalents and short-term investments which are held by reputable financial institutions in the jurisdictions where the Company, its subsidiaries and the Affiliated Entities are located. The Group believes that it is not exposed to unusual risks as these financial institutions have high credit quality.
The Group has no significant concentrations of credit risk with respect to its prepayments.
Accounts receivable are typically unsecured and are derived from revenue earned through third party advertising platforms and customers. The risk with respect to accounts receivable is mitigated by credit evaluations performed on them.
4. |
Business acquisition |
The Company accounted for its acquisition in accordance with ASC 805, Business Combination (ASC 805). The result of the acquirees operation has been included in the unaudited interim condensed consolidated financial statements since the acquisition date. The excess of the fair value of the acquired entity over the fair value of net tangible and intangible assets acquired was recorded as goodwill, which is not deductible for corporate income taxation purposes.
Acquisition of Dianguan
In February 2018, the Company acquired 100% equity interests of Dianguan, an advertising agent (Note 2(h)), from its shareholder for a cash consideration of RMB15,000,000.
The acquisition was recorded as a business combination. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Fair value of consideration transferred:
RMB | ||||
Cash |
15,000,000 | |||
|
|
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Recognized amounts of identifiable assets acquired and liabilities assumed:
RMB | ||||
Cash and cash equivalents |
4,270,175 | |||
Short-term investments |
9,940,000 | |||
Prepayments and other current assets |
30,936,027 | |||
Property and equipment, net |
17,978 | |||
Accounts payable |
(364,242 | ) | ||
Salary and welfare payable |
(778,438 | ) | ||
Tax payable |
(9,933,408 | ) | ||
Advance from advertising customers |
(24,664,513 | ) | ||
Accrued liabilities and other current liabilities |
(1,691,909 | ) | ||
|
|
|||
Total identifiable net assets acquired |
(7,731,670 | ) | ||
Goodwill |
7,268,330 | |||
|
|
|||
Total purchase consideration, net of cash acquired |
10,729,825 | |||
|
|
The excess of purchase price over tangible assets and identifiable intangible assets acquired and liabilities assumed was recorded as goodwill. Goodwill associated with acquisition of Dianguan was attribute to the expected synergy arising from the consolidation operations. The acquired goodwill is not deductible for tax purposes. Acquisition-related costs were insignificant and were included in general and administrative expenses for the six months ended June 30, 2018.
Based on the Companys assessment, the revenues and net earnings of Dianguan were not considered material from the acquisition date to June 30, 2018. Pro forma results of operations for the acquisition described above have not been presented because they are not material to the consolidated statements of operations and comprehensive loss, either individually or in aggregate.
5. |
Cash and cash equivalents |
Cash and cash equivalents represent cash on hand and demand deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal or use. The following table sets forth a breakdown of cash and cash equivalents by currency denomination and jurisdiction as of December 31, 2017 and June 30, 2018:
6. |
Accounts receivable, net |
As of | ||||||||
December 31, 2017 | June 30, 2018 | |||||||
Accounts receivable, gross |
43,250,595 | 33,752,823 | ||||||
Less: allowance for doubtful accounts |
| | ||||||
|
|
|
|
|||||
Accounts receivable, net |
43,250,595 | 33,752,823 | ||||||
|
|
|
|
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7. |
Prepayments and other assets |
The other assets consist of the following:
As of | ||||||||
December 31, 2017 | June 30, 2018 | |||||||
Prepayment and other current assets |
||||||||
Prepayments of advertisement fee (1) |
6,732,410 | 11,941,431 | ||||||
Deposit to third-party payment service providers (2) |
3,334,983 | 12,816,423 | ||||||
Loans to employees |
| 3,175,701 | ||||||
Value-added tax receivable |
1,103,742 | 2,346,194 | ||||||
Prepayments of IT service fee |
2,081,844 | 1,035,065 | ||||||
Others |
1,475,755 | 3,591,441 | ||||||
|
|
|
|
|||||
14,728,734 | 34,906,255 | |||||||
|
|
|
|
|||||
Non-current |
||||||||
Long-term prepaid server fee |
4,073,114 | 3,080,189 | ||||||
Long-term lease deposits |
1,685,832 | 3,416,447 | ||||||
Deferred initial public offering costs |
| 4,281,169 | ||||||
Prepayment for purchase of online audio/video content platform (3) |
| 43,018,464 | ||||||
|
|
|
|
|||||
5,758,946 | 53,796,269 | |||||||
|
|
|
|
(1) |
Prepayments of advertisement fee represent prepayments made to service providers for future services to promote the Companys mobile applications through online advertising. Such service providers charge monthly expenses based on activities during the month, and once confirmed by the Company, the monthly expenses will be deducted from the prepayments already made by the Company. Prepayments of advertising fee is recorded when prepayments are made to service providers and are expensed as services are provided. |
(2) |
Deposit to third party payment service providers represent cash prepaid to the Groups third party on-line payment service providers, which will be used to settle the Groups obligation for outstanding user loyalty payable or content procurement fee to professional third party media companies and freelancers. As of December 31, 2017 and June 30, 2018, no allowance for doubtful accounts was provided for the prepayment. |
(3) |
In April 2018, the Group entered into a Share Purchase Agreement to purchase 100% equity interests of a group for a total cash considerations of RMB 70 million. The purchase is expected to be accounted for as an asset acquisition rather than a business combination as the group does not meet the criteria of a business and substantially all of the fair value of the gross assets acquired would be concentrated in a single asset, which met the screen test criteria to be an asset acquisition for the adopted ASU 2017-01. The asset to be acquired is related to the online audio/video content platform. The expected useful life of the asset is 10 years. As of June 30, 2018, the Company has prepaid RMB43 million for this purchase while the transaction has not been completed. |
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8. |
Property and equipment, net |
Property and equipment consist of the following:
As of | ||||||||
December 31, 2017 | June 30, 2018 | |||||||
Cost: |
||||||||
Office equipment |
2,501,368 | 5,286,860 | ||||||
Leasehold improvements |
2,479,672 | 5,331,856 | ||||||
|
|
|
|
|||||
Total cost |
4,981,040 | 10,618,716 | ||||||
Less: Accumulated depreciation |
(366,978 | ) | (1,917,680 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
4,614,062 | 8,701,036 | ||||||
|
|
|
|
Depreciation expense recognized for the six months ended June 30, 2017 and 2018 are summarized as follows:
Six months ended June 30, | ||||||||
2017 | 2018 | |||||||
Cost of revenues |
4,956 | 467,538 | ||||||
Research and development |
2,254 | 683,365 | ||||||
Sales and marketing expenses |
9,728 | 89,986 | ||||||
General and administrative expenses |
12,935 | 308,543 | ||||||
|
|
|
|
|||||
Total |
29,873 | 1,549,432 | ||||||
|
|
|
|
9. |
Accrued liabilities and other current liabilities |
As of | ||||||||
December 31, 2017 | June 30, 2018 | |||||||
Cultural development fee and other tax surcharges |
17,455,833 | 32,068,389 | ||||||
Accrued advertising and marketing expense |
| 30,249,774 | ||||||
Accrued preferred share insurance cost |
| 2,311,276 | ||||||
Accrued employee welfare expense |
| 1,805,055 | ||||||
Accrued professional fees |
3,500,000 | | ||||||
Others |
465,806 | 1,472,474 | ||||||
|
|
|
|
|||||
Total |
21,421,639 | 67,906,968 | ||||||
|
|
|
|
The Group is subject to a cultural development fee on the provision of advertising services in the PRC. The applicable tax rate is 3% of the net advertising revenues.
10. |
Convertible redeemable preferred shares |
On September 29, 2017, the Company issued 4,945,055 shares of Series A convertible redeemable preferred shares (the Series A Shares) for US$6.5520 per share for cash of US$32,400,000. On November 14, 2017, the Company issued 1,373,626 shares of Series A1 convertible redeemable preferred shares (the Series A1 Shares) for US$7.2800 per share for cash of US$10,000,000. On March 4, 2018, the Company issued 5,420,144 shares of Series B1 convertible redeemable preferred shares (the Series B1 Shares) for US$19.3722 per share for cash of US$105,000,000. Subsequent to the Series B1 Closing, the investor, who is a leading provider of Internet Value-added Services, and the Companys PRC entities entered into a cooperation agreement that the investor will promote the Companys mobile application and will charge the Company a service fee. On March 8, 2018, the Company issued 3,895,728 shares of Series B2 convertible
F-72
redeemable preferred shares (the Series B2 Shares) for US$23.6156 per share for cash of US$92,000,000. On April 27, 2018, the Company issued 1,751,539 shares of Series B3 convertible redeemable preferred shares (the Series B3 Shares) for US$25.9772 per share for cash of US$45,500,000. The Series A, Series A1, Series B1, Series B2 and Series B3 shares are collectively referred to as the Preferred Shares.
Upon the Series B1 Shares issuance Closing, several terms of the Series A Shares and Series A1 Shares have been updated to be consistent with the new issued Series B1 Shares rights summarized as follows:
(1) |
The non-cumulative dividend rate for Series A, A1 was modified from 8% to 12%; |
(2) |
The term of redemption requirement for Series A Shares and Series A1 Shares has been changed from six years from the date of relevant Series Closing Date to five years from the date of Series B1 Shares issuance Closing; |
(3) |
The percentage to calculate the liquidation amount was modified from 100% to 120% for Series A Shares and Series A1 Shares; |
(4) |
The definition of a Qualified IPO. |
The Company evaluated the modifications in accordance with its accounting policy and concluded that they are modifications, rather than extinguishment of Preferred Shares because the Company believed that the amendment did not add, remove, significantly change a substantive contractual term or to the nature of the overall instrument. The intention of the modification was to align the redemption rights and dividends right among existing Preferred Shareholders and the incoming Preferred Shareholders.
The modifications that resulted in difference of between the fair value of the modified Series A and Series A1 Preferred Shares and the carrying value of Series A and Series A1 Preferred Shares on the modification date have been recorded as a deemed dividend of RMB1,916,871 against retained earnings.
The key terms of the Series A, Series A1, Series B1, Series B2 and Series B3 Shares after the modifications are as follows:
Conversion rights
Each Preferred Share shall be convertible into such number of ordinary shares at the Preferred Share-to-Ordinary Share conversion ratio equal to Preferred Share Purchase Price for such Preferred Share divided by the then-effective Conversion Price (as defined below) for such Preferred Share. The Conversion Price for such Preferred Share shall initially be the Preferred Share Purchase Price for such Preferred Share, resulting in an initial conversion ratio for the Preferred Shares of 1:1, and shall be subject to adjustment and readjustment from time to time, including but not limited to additional equity securities issuance, share dividends, distribution, subdivisions, redemptions, combinations, or consolidation of ordinary shares. The conversion price is also subject to adjustment in the event the Company issues additional ordinary shares at a price per share that is less than such conversion price. In such case, the conversion price shall be reduced to adjust for dilution on a weighted average basis.
Each Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such Preferred Shares into Ordinary Shares based on the then-effective Conversion Price.
In addition, each share of the Series A, A1, B1, B2 and B3 Shares would automatically be converted into ordinary shares of the Company (i) upon the closing of an initial public offering of the Companys shares or (ii) upon the date specified by written consent or agreement of its shareholders.
The Company determined that there were no beneficial conversion features identified for any of the Preferred Shares during any of the periods. In making this determination, the Company compared the fair value of the ordinary shares into which the Preferred Shares are convertible with the respective effective conversion price at the issuance date. In all instances, the effective conversion price was greater than the fair value of the ordinary shares. To the extent a conversion price adjustment occurs, as described above, the Company will re-evaluate whether or not a beneficial conversion feature should be recognized.
F-73
Dividend rights
The Series B1, B2, B3 Preferred Shareholders shall be entitled to receive, in preference to any dividend on the ordinary shares, non-cumulative dividends for each Preferred Share at the rate equal to 12% of, as the case may be, the Series B1, B2, B3 Preferred Share Purchase Price, for each respective preferred shareholder, payable out of funds or assets when and as such funds or assets become legally available therefor, on parity with each other and prior and in preference to, and satisfied before, any declaration or payment of any dividend on the Series A Preferred Shares, the Series A1 Preferred Shares and the Ordinary Shares. The Series A, A1 Preferred Shareholders shall also be entitled to receive, in preference to any dividend on the ordinary shares, non-cumulative dividends for each Preferred Share at the rate equal to 12% of, as the case may be, the Series A, A1 Preferred Share Purchase Price, for each respective preferred shareholder, payable out of funds or assets when and as such funds or assets become legally available therefor, on parity with each other and prior and in preference to, and satisfied before, any declaration or payment of any dividend on the Ordinary Shares..
Except the Exempted Dividends (as defined below), no dividend, whether in cash, in property, in shares in the Company or otherwise may be declared or paid on any other class or series of shares unless and until the Preferred Dividends are first paid in full.
Exempted Dividends means (1) a dividend payable solely in Ordinary Shares and to all shareholders of the Company on a pro rata basis, (2) the purchase, repurchase or redemption of Ordinary Shares by the Company at no more than cost from terminated employees, officers or consultants in accordance with the ESOP, or pursuant to written contractual arrangements with the Company approved by the Board (so long as such approval includes the approval of the Series A Director and the Series B1 Director), (3) the purchase, repurchase or redemption of Preferred Shares (including in connection with the conversion of such Preferred Shares into Ordinary Shares).
Voting rights
The holders of the Series A, A1, B1, B2 and B3 Shares shall be entitled to such number of votes equal to the whole number of ordinary shares into which such Series A, A1, B1, B2 and B3 Shares are convertible.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company, all assets and funds of the Company legally available for distribution to the shareholders shall, by reason of the shareholders ownership of the shares, be distributed as follows:
First, the holders of the Series B1, B2 and B3 Shares shall be entitled to receive for each such Preferred Share held by such holder, on parity with each other and prior and in preference to any distribution of any of the assets or funds of the Company to the holders of the Series A and A1 Preferred Shareholders by reason of their ownership of such shares, the amount equal to one hundred percent (120%) of the applicable Series B1, B2, B3 Issue Price, plus all accrued but unpaid dividends on such Preferred Shares. Second, the holders of the Series A Preferred Shares and Series A1 Preferred Shares shall be entitled to receive for each such Preferred Share held by such holder, on parity with each other and prior and in preference to any distribution of any of the assets or funds of the Company to the holders of the Ordinary Shares by reason of their ownership of such shares, the amount equal to one hundred percent (120%) of the applicable Series A and A1 Issue Price, plus all accrued but unpaid dividends on such Preferred Shares. If the assets and funds available for distribution among the Preferred Shareholders shall be insufficient to permit the payment to such holders of the full amount, then the entire remaining assets and funds of the Company legally available for distribution to such shareholders shall be distributed ratably among the shareholders in proportion.
Second, if there are any assets or funds remaining after the aggregate amount have been distributed or paid in full to the applicable holders of Series A, A1, B1, B2, B3 Shares, the remaining assets and funds of the
F-74
Company available for distribution shall be distributed ratably among all shareholders according to the relative number of Ordinary Shares held by such holders on an as if converted basis.
A Deemed Liquidation Event shall be deemed to be any change of control event such as a liquidation, dissolution or winding up, merger and acquisition, reorganization of the Company, a sale, transfer, lease or other disposition of all or substantially all of the assets of any Group Company or the exclusive, irrevocable licensing of all or substantially all of any Group Companys intellectual property to a third party. Any proceeds, whether in cash or properties, resulting from a Deemed Liquidation Event shall be distributed in accordance with the liquidation preference above.
Redemption right
For Series A, A1, B1, B2 or B3 Shares, at the written request of any Series A or Series A1 Shareholder(s) who individually or in the aggregate hold(s) at least fifty one percent (51%) of all the issued and outstanding such Preferred Shares (Initial Redemption Notice), the Company shall redeem all or portion of the outstanding Series A, A1, B1, B2 or B3 Shares respectively held by such Shareholder(s) upon the following redemption event: (i) the Companys failure to complete a Qualified IPO within five (5) years after the date of the Series B1 Shares issuance Closing; (ii) any material breach by any Warrantor (as defined in the Series A, A1, B1, B2 or Series B3 Purchase Agreement) in the Transaction Documents (as defined in the such Series Preferred Purchase Agreement, including those duly amended and restated versions from time to time) which causes a Material Adverse Effect (as defined in the such Series Preferred Purchase Agreement) on the business of the Group Companies or any holder of the Series A, A1, B1, B2 or Series B3 Shares, or in the event any Warrantor gives any material misrepresentation or engages in wilful or fraudulent misconducts, which causes a Material Adverse Effect on the business of the Group Companies or any holder of the Series A, A1, B1, B2 or Series B3 Preferred Shares.
In addition, the Company shall (1) promptly thereafter provide all of the other holders of Preferred Shares notice of the Initial Redemption Notice and of their right to participate in such redemption, which right is exercisable by each such holder in their own discretion by delivering a written notice (each, a Redemption Notice) by hand or letter mail or courier service to the Company at its principal executive offices within fifteen (15) days of the giving of such notice by the Company, requesting and specifying redemption of all or part of their Preferred Shares, and (2) pay to each holder (each, a Redeeming Preferred Shareholder) of a Preferred Share for which an Initial Redemption Notice or a Redemption Notice has been timely submitted (each, a Redeeming Preferred Share).
The redemption price for each Series A, A1, B1, B2 or Series B3 Shares shall be determined in accordance with the following formula:
IP x (110 %) N + D, where
IP = Series A, A1, B1, B2 or Series B3 Issue Price;
N = a fraction the numerator of which is the number of calendar days between date the Series A, A1, B1, B2 or Series B3 Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series A, A1, B1, B2 or Series B3 Shares up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers.
Warrant
Before the issuance of Series B2 Shares, one of investors entered into a Loan and Guarantee agreement with the Company on February 12, 2018, pursuant to which the investor lent US$5,000,000 to the VIE while the Company issue a warrant to the investor to the right to purchase 211,724 Series B2 Shares at an exercise
F-75
price of $23.62 per share. On March 21, 2018, the investor exercised the warrant and subscribed to 211,724 Series B2 Preferred Shares. As the US$5,000,000 loan has been settled and converted to the investors 211,724 entitled shares upon the exercise of the warrant. Given that the outstanding period of the loan and warrant was within a month, the value of the conversion feature in the loan and the warrant was determined to be immaterial.
The Company classified the Preferred Shares in the mezzanine section of the consolidated balance sheets because they were convertible at the holders option any time after the date of issuance of such shares and were contingently redeemable upon the occurrence of certain liquidation events outside of the Companys control, including the Companys failure to complete a Qualified IPO within five years following the date of Series B1 Closing. A Qualified IPO is defined as a firm commitment underwritten public offering of the Ordinary Shares of the Company (or depositary receipts or depositary shares therefor) in the United States pursuant to an effective registration statement under the United States Securities Act of 1933, as amended or in another jurisdiction which results in the Ordinary Shares trading publicly on a recognized international securities exchange approved by the majority Preferred Shareholders, with (i) if such public offering takes place within 5 years of the Series B1 Closing, minimum pre-money valuation of $5,000,000,000 and minimum gross proceeds to the Company of $500,000,000, or (ii) if such public offering takes place within the year 2018, minimum post-money valuation of $3,000,000,000 and minimum gross proceeds to the Company of $300,000,000. The Preferred Shares are recorded initially at their respective issuance price, net of issuance costs.
For the six months ended June 30, 2018, the issuance costs incurred were RMB 34,426,647.
The Qualified Public Offering deadline is five years following the Closing of Series B1. As such, the failure to complete a Qualified Public Offering by March 4, 2023 would be considered the earliest redemption date for all Preferred Shares.
Based on the Companys valuation results, the Series B1 Shares were issued on March 4, 2018 at $19.37 per share with an 18% discount compared with the fair value at $22.46 per share of the Series B1 Shares on the issuance date. On March 8, 2018, the Series B2 Shares were issued at $23.62 per share at fair value. Although the Company entered into the cooperation agreement with the B1 investor which would expire in 2021, management believes the terms were not advantageous in terms of prices or payment terms, and the services covered were not exclusive or unique for the Company, that service fees in the agreement were determined based on market value and that the Company could have obtained similar services with similar prices from other service suppliers. As a result, the cooperation agreement with the investors for the Series B1 Shares were accounted for separately from the issuance of the Series B1 Shares. The Company also determined that the conversion price was higher than the estimated fair value of the ordinary shares on the issuance date and as such that there was no beneficial conversion feature embedded in the issuance of the Series B1 Shares. Accordingly the Company did not separately account for the discount on the issuance price of Series B1 Shares.
The Company recognized accretion to the respective redemption value of the Preferred Shares over the period starting from issuance date to the earliest redemption date according to the redemption price calculation described above. Preferred shares are denominated in USD and the reporting currency of the Company is RMB. Therefore, foreign currency translation adjustments arising from the fluctuation of the exchange rate between USD and RMB are recorded as a separate component of shareholders deficit on the consolidated financial statement.
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The Companys convertible redeemable preferred shares activities for the six months ended June 30, 2018 is summarized below. There was no activity for the six month ended June 30, 2017 and no balance at June 30, 2017.
Series A Shares | Series A1 Shares | Series B1 Shares | Series B2 Shares | Series B3 Shares | ||||||||||||||||||||||||||||||||||||
Number of
shares |
Amount
(RMB) |
Number of
shares |
Amount
(RMB) |
Number of
shares |
Amount
(RMB) |
Number of
shares |
Amount
(RMB) |
Number of
shares |
Amount
(RMB) |
|||||||||||||||||||||||||||||||
Balances as of January 1, 2018 |
4,945,055 | 210,478,110 | 1,373,626 | 63,416,581 | | | | | | | ||||||||||||||||||||||||||||||
Issuance of convertible redeemable preferred shares, net of issuance costs. |
| | | | 5,420,144 | 651,736,522 | 3,895,728 | 569,316,830 | 1,751,539 | 282,249,969 | ||||||||||||||||||||||||||||||
Foreign exchange impacts |
| 2,733,438 | | 850,172 | | 28,325,889 | | 26,508,514 | | 12,346,327 | ||||||||||||||||||||||||||||||
Accretion on convertible redeemable preferred shares to redemption value |
| 10,643,883 | | 3,274,935 | | 21,349,500 | | 18,092,345 | | 5,602,880 | ||||||||||||||||||||||||||||||
Balances as of June 30, 2018 |
4,945,055 | 223,855,431 | 1,373,626 | 67,541,688 | 5,420,144 | 701,411,911 | 3,895,728 | 613,917,689 | 1,751,539 | 300,199,176 |
F-77
11. |
Ordinary Share |
On July 17, 2017, Qutoutiao Inc. was incorporated as Limited Liability Company with authorized share capital of US$50,000 divided into 50,000 shares with par value US$1.00 each. On September 1, 2017, the authorized share capital of US$50,000, which represented 50,000 issued shares, was subdivided into 500,000,000 shares. As of December 31, 2017, the authorized ordinary shares are 493,681,319 shares, of which 50,000,000 shares were issued and 40,000,000 shares were outstanding, and the authorized, issued and outstanding Series A and A1 convertible redeemable preferred shares are 4,945,055 shares and 1,373,626 shares respectively.
In 2018, among the total 493,681,319 authorized ordinary shares, 11,067,411 ordinary shares were reallocated as convertible redeemable preferred shares. As of June 30, 2018, the authorized ordinary shares are 482,613,908 shares, of which 50,000,000 shares were issued and 40,500,000 shares were outstanding, and the authorized, issued and outstanding Series A, A1, B1, B2 and B3 convertible redeemable preferred shares are 4,945,055 shares, 1,373,626 shares, 5,420,144 shares, 3,895,728 shares and 1,751,539 shares respectively.
In January 2018, the founders entered into Share Restriction Deeds with the Company such that a total of 15,937,500 ordinary shares of the Company held by the founders became restricted and will vest over periods from 24 months to 34 months. Prior to the end of the vesting periods, all the remaining restricted shares shall vest immediately and no longer constitute restricted shares upon a Deemed Liquidation Event or IPO of the Company. In the event that the founder voluntarily and unilaterally terminates his employment/service contract with any applicable Group entities or his employment or service relationship is terminated by any applicable Group entities for cause as stated in the Deed, the related founder shall sell to the Company, and the Company shall repurchase from the founder, all of the restricted shares (not vested shares) at a price of US$0.0001 per share. For accounting purposes, this transaction has been reflected retrospectively similar to a reverse stock split and presented in the balance sheet as of December 31, 2017 and statement of shareholders deficit as a reduction of the numbers of issued and outstanding ordinary shares. Upon the execution of the Share Restriction Deeds in January 2018, the total 15,937,500 ordinary shares were presented as an increase of the numbers of issued ordinary shares, with the grant to be recognized as share-based compensation over the vesting periods at their then fair value on January 3, 2018(Note 12).
In February 2018, the Company established a trust to hold 10,000,000 of the Companys issued shares. These ordinary shares were contributed by the founder and held in trust for the benefit of the employees who are under the 2017 Plan to be issued based on the discretion of the board of directors of the Company. The ordinary shares issued to the trust are accounted for as treasury shares of the Company and presented as such for all periods presented. As of June 30, 2018, 500,000 granted shares have been exercised and were issued from treasury shares. The trust does not hold any other assets or liabilities as at December 31, 2017 and June 30, 2018, nor earn any income nor incur any expenses for the six months ended June 30, 2017 and 2018.
From January to March 2018, shareholders of the Company sold certain ordinary shares to third party investors at about US$ 23.62 per share. Except for the sale of ordinary share to existing shareholders which resulted into a share-based compensation of RMB1.4 million, the sale of ordinary shares is a transaction amongst shareholders and did not impact the Groups consolidated financial statements.
12. |
Share-based compensation |
(a) Share option plan
In February 2018, the Board of Directors of the Company approved the 2017 Equity Incentive Plan, which assumed Jifens obligations and duties under the options granted by Jifen from 2016 to 2017. As a result, the options granted by Jifen were replaced with options of the Company. Such new options replaced the options granted under Jifens existing options in its entirety by exchanging of two options granted by Jifen for one
F-78
option of the Company while maintaining their respective terms and vesting schedules unchanged. This replacement represents a modification of the awards under the accounting guidance, but no incremental compensation cost is required to be recognized because there was no change in fair value of the awards as measured immediately before and after the modification.
In February 2018, the board of the directors of the Company approved a 2018 Equity incentive plan. Under this plan, the Company is authorized to issue 2,964,141 ordinary shares of the Company.
The following table summarizes the share option activity for the six months ended June 30, 2017 and 2018:
Number of
options |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life |
Aggregate
Intrinsic Value |
Weighted
Average Grant Date Fair Value |
||||||||||||||||
RMB | In Years | RMB000 | RMB | |||||||||||||||||
Outstanding at January 1, 2017 |
8,123,509 | 0.0007 | 9.5 | 42,321 | 0.35 | |||||||||||||||
Granted |
824,114 | 0.0007 | 13.07 | |||||||||||||||||
Outstanding at June 30, 2017 |
8,947,623 | 0.0007 | 9.1 | 128,207 | 1.53 | |||||||||||||||
Outstanding at January 1, 2018 |
10,000,000 | 0.0007 | 8.7 | 525,086 | 3.89 | |||||||||||||||
Granted |
2,893,020 | 0.0007 | 129.34 | |||||||||||||||||
Exercised |
(500,000 | ) | 0.0007 | |||||||||||||||||
Forfeited |
(95,744 | ) | 0.0007 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Outstanding at June 30, 2018 |
12,297,276 | 0.0007 | 8.6 | 1,837,331 | 33.30 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Vested and expected to vest at June 30, 2018 |
12,215,197 | 0.0007 | 8.6 | 1,825,067 | 33.06 | |||||||||||||||
Exercisable at June 30, 2018 |
4,484,787 | 0.0007 | 8.1 | 687,201 | 1.29 |
The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the estimated fair value of the underlying shares of RMB14.59 and RMB153.23 at June 30, 2017 and 2018.
The total fair value of share options vested during the six months ended June 30, 2017 and 2018 was RMB 595,413 and RMB 5,315,067 respectively.
Share-based compensation expense related to the option awards granted to the employees amounted to approximately RMB 356,797 and RMB 25,441,152 for the six months ended June 30, 2017 and 2018, respectively.
Share-based awards related to the option awards granted to the employees of companies under common control of the founder were measured at fair value at the grant dates and amounts of RMB 1,332,206 and RMB 6,837,374 was recognized as dividends distributed to the founder for the six months ended June 30, 2017 and 2018, respectively. On March 31, 2018, some employees of companies under common control of the founder were transferred to be the Companys employee. The related unvested options granted were not modified in connection with the change in status, but future service is still necessary to earn the award over the remaining periods. Accordingly, the share-based compensation expense related to the unvested options were measured as if the related unvested options were newly granted at the date of the change and recognized over the remaining vesting periods. On March 31, 2018 (the date of transfer), total share-based compensation expense measured at fair value amounted to RMB 15,047,029, among which approximately RMB 1,086,731 were recorded as share-based compensation expense for the six months ended June 30, 2018.
As of June 30, 2018, there were RMB 396,430,128 of unrecognized share-based compensation expenses related to share options granted, which were expected to be recognized over a weighted-average vesting period of 2 and 4 years, respectively. To the extent the actual forfeiture rate is different from the Companys estimate, the actual share-based compensation related to these awards may be different from the expectation.
F-79
The binomial option pricing model is used to determine the fair value of the share options granted to employees and non-employees. The fair values of share options granted during the six months ended June 30, 2017 and 2018.
Options Granted in the
six months ended June 30, 2017 |
Options Granted in
the six months ended June 30, 2018 |
|||||||
Expected volatility (i) |
51.78%~52.41% | 51.10%~51.25% | ||||||
Risk-free interest rate (ii) |
3.28%~3.55% | 2.85%~3.00% | ||||||
Exercise multiple |
2.8 | 2.8 | ||||||
Expected dividend yield (iii) |
0% | 0% | ||||||
Contractual term |
10 | 10 | ||||||
Expected forfeiture rate (post-vesting) |
0% | 0%~20% | ||||||
Fair value of the common share on the date of option grant (RMB) |
8.44~14.59 | 122.52~153.23 |
Notes:
(i) |
Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation dates. |
(ii) |
The risk-free interest rate of periods within the contractual life of the share option is based on the market yield of the Chinese sovereign bond/US government bond with a maturity life equal to the expected life to expiration. |
(iii) |
The Company has no history or expectation of paying dividends on its ordinary shares. |
(b) Restricted shares to founders with service conditions
On January 3, 2018, the founders entered into Share Restriction Deeds with the Company such that a total of 15,937,500 ordinary shares of the Company held by the founders became restricted and will vest over periods from 24 months to 34 months starting January 2018. Prior to the end of the vesting periods, all the remaining restricted shares shall vest immediately and no longer constitute restricted shares upon a Deemed Liquidation Event or IPO of the Company. In the event that the founder voluntarily and unilaterally terminates his employment/service contract with any applicable Group entities or his employment or service relationship is terminated by any applicable Group entities for cause as stated in the Deed, the related founder shall sell to the Company, and the Company shall repurchase from the founder, all of the restricted shares (not vested shares) at a price of US$0.0001 per share. This transaction has been reflected retrospectively similar to a reverse stock split, with a grant of the 15,937,500 restricted shares recognized in January 2018 at their fair value. The grant is being treated as share-based compensation over the vesting periods, and the estimated grant date fair value of the 15,937,500 ordinary shares approximated to at RMB818 million (US$128 million). Share-based compensation expense of RMB158 million (US$24.8 million) were recorded as share-based compensation expense for the six months ended June 30, 2018. As of June 30, 2018, no restricted shares were vested, and the unrecognized share-based compensation expense of RMB660 million (US$103 million) was expected to be recognized over a periods from 18 to 28 months. Upon a Deemed Liquidation Event or IPO occurring prior to the end of the vesting periods, the entire remaining unrecognized compensation expenses out of RMB684 million (US$103 million) as of June 30, 2018 will be expensed immediately in the quarter when such event or IPO happens.
13. |
Employee benefits |
The full-time employees of the Companys subsidiaries and VIEs that are incorporated in the PRC are entitled to staff welfare benefits including medical insurance, basic pensions, unemployment insurance, work injury insurance, maternity insurance and housing funds. These companies are required to contribute
F-80
to these benefits based on certain percentages of the employees salaries in accordance with the relevant regulations and charge the amount contributed to these benefits to the consolidated statements of comprehensive loss. The total amounts charged to the consolidated statements of comprehensive loss for such employee benefits amounted to RMB 1,707,613 and RMB 17,675,754 for the six months ended June 30, 2017 and 2018, respectively. The PRC government is responsible for the welfare and medical benefits and ultimate pension liability to these employees.
14. |
Income Taxes |
Reconciliation of the differences between statutory audit rate and the effective tax rate
A reconciliation between the effective income tax rate and the PRC statutory income tax rate is as follows:
Six months ended June 30, | ||||||||
2017 | 2018 | |||||||
% | % | |||||||
PRC Statutory income tax rates |
25 | % | 25 | % | ||||
Change in valuation allowance |
(26 | %) | (27.9 | %) | ||||
Permanent book tax difference |
1 | % | 1.0 | % | ||||
Difference in EIT rates of certain subsidiaries |
| 1.9 | % | |||||
|
|
|
|
|||||
Total |
0 | % | 0 | % | ||||
|
|
|
|
Deferred tax assets
The following table sets forth the significant components of the deferred tax assets:
As of | ||||||||
December 31, 2017 | June 30, 2018 | |||||||
Accruals and others |
4,725,654 | 73,827,787 | ||||||
Tax losses carried forward |
23,050,789 | 96,861,322 | ||||||
Less: Valuation allowance |
(27,776,443 | ) | (170,689,109 | ) | ||||
|
|
|
|
|||||
Total of deferred tax assets |
| | ||||||
|
|
|
|
Movement of valuation allowance is as follows:
Six months ended | ||||||||
June 30, 2017 | June 30, 2018 | |||||||
Beginning balance |
3,496,764 | 27,776,443 | ||||||
Additions |
7,443,803 | 142,912,666 | ||||||
|
|
|
|
|||||
Ending balance |
10,940,567 | 170,689,109 | ||||||
|
|
|
|
F-81
15. |
Related Party transactions |
As of December 31, 2017 and June 30, 2018, the transaction and balance amount due to/from related parties was as follows:
Transaction amount with related parties
Six months ended | ||||||||
June 30, 2017 | June 30, 2018 | |||||||
Services provided by the Group |
||||||||
Agent and platform service provided to a related party 1 |
| 5,293,092 | ||||||
Advertising Service provided to a related party 2 |
| 1,183,492 |
Six months ended | ||||||||
June 30, 2017 | June 30, 2018 | |||||||
Services received by the Group |
||||||||
Service fee charged from a related party 3 |
6,895,198 | | ||||||
iCloud server and other service fee charged from a related party 4 |
| 5,502,298 | ||||||
Advertising Service fee charged from a related party 5 |
| 2,783,291 |
As of | ||||||||
December 31, 2017 | June 30, 2018 | |||||||
Balance amount with a related party |
||||||||
Prepayment to a related party 5 |
| 27,792,710 | ||||||
Account due to a related party 1 |
| 7,570,862 |
1. |
The Group provided agent and platform service between the advertising customers and a company in which the founder of the Company is a key management by facilitating the advertising customers to display their advertisements. |
The account payable as of June 30, 2018 represented the service fee collected from advertising customers but not paid to the related party yet.
2. |
The service fee charged to a related party represented the advertising service provided to a company in which the founder of the Company is a key management. |
3. |
The service fee charged from a related party represented the costs charged from a company under common control of the founder which provided the Group with financial accounting, office space sharing and other IT and administrative support services. |
4. |
The service fee mainly represented iCloud server and short message service fees charged from Series B1 shareholder. |
5. |
The Group entered into a cooperation agreement with Series B1 shareholder to promote the Companys mobile application, and the cooperation agreement requires the Company to prepay a total service fee of RMB31.5 million which will be recognized as expense over 3 years. |
For the six months ended June 30, 2018, total service fee incurred amounted to RMB 2.8 million.
F-82
16. |
Basic and diluted net loss per share |
(a) Basic and diluted net loss per share
Basic loss per share and diluted loss per share have been calculated in accordance with ASC 260 on computation of earnings per share for the six months ended June 30, 2017 and 2018 as follows:
Six months ended
June 30, 2017 |
Six months ended
June 30, 2018 |
|||||||
Numerator: |
||||||||
Net loss |
(28,675,281 | ) | (514,435,513 | ) | ||||
Accretion on Series A convertible redeemable preferred shares redemption value |
| (10,643,883 | ) | |||||
Accretion on Series A1 convertible redeemable preferred shares redemption value |
| (3,274,935 | ) | |||||
Accretion on Series B1 convertible redeemable preferred shares redemption value |
| (21,349,500 | ) | |||||
Accretion on Series B2 convertible redeemable preferred shares redemption value |
| (18,092,345 | ) | |||||
Accretion on Series B3 convertible redeemable preferred shares redemption value |
| (5,602,880 | ) | |||||
Deemed dividend to preferred shareholders (note 10) |
| (1,916,871 | ) | |||||
|
|
|
|
|||||
Net loss attributable to ordinary shareholders-Basic and diluted |
(28,675,281 | ) | (575,315,927 | ) | ||||
|
|
|
|
|||||
Denominator: |
||||||||
Denominator for basic and diluted loss per share Weighted-average ordinary shares outstanding (Note) |
||||||||
Basic and diluted |
24,062,500 | 24,238,324 | ||||||
Basic and diluted loss per share |
(1.19 | ) | (23.74 | ) | ||||
|
|
|
|
Note: |
As disclosed in Note 11 for restricted shares, a total of 15,937,500 ordinary shares subject to the restriction are excluded from the issued and outstanding shares as of December 31, 2017 and were still not outstanding as of June 30, 2018, and are likewise excluded from the weighted average outstanding ordinary shares for basic loss per share calculation. |
For the six months ended June 30, 2017 and 2018, assumed conversion of the Preferred Shares have not been reflected in the dilutive calculations pursuant to ASC 260, Earnings Per Share, due to the anti-dilutive effect as a result of the Groups net loss. The effects of all outstanding share options and restricted shares granted to the founders have also been excluded from the computation of diluted loss per share for the six months ended June 30, 2017 and 2018 due to their anti-dilutive effect.
The following ordinary shares equivalent were excluded from the computation of diluted net loss per ordinary share for the periods presented because including them would have had an anti-dilutive effect:
Six months ended | ||||||||
June 30, 2017 | June 30, 2018 | |||||||
Preferred shares weighted average |
1,425,137 | 12,642,574 | ||||||
Share options weighted average |
8,496,225 | 9,911,869 | ||||||
Restricted shares weighted average |
| 10,569,386 |
F-83
17. |
Commitments and contingencies |
(a) Operating lease commitments
The Group leases facilities under non-cancellable operating leases expiring on different dates. The terms of substantially all of these leases are two years or less. Payments under operating leases are expensed on a straight-line basis over the periods of the respective leases.
Total office rental expenses under all operating leases was RMB 732,455 and RMB 5,058,705 for the six months ended June 30, 2017 and 2018 respectively.
As of June 30, 2018, future minimum payments under non-cancellable operating leases for office rental consist of the following:
RMB | US$ (Note 2(e)) | |||||||
July 1 to December 31, 2018 |
4,290,919 | 648,459 | ||||||
2019 |
7,179,393 | 1,084,976 | ||||||
2020 |
743,016 | 112,287 | ||||||
2021 |
| | ||||||
2022 and thereafter |
| | ||||||
|
|
|
|
|||||
Total |
12,213,328 | 1,845,722 | ||||||
|
|
|
|
(b) Capital and other commitments
As of June 30, 2018, future minimum payments under non-cancellable capital expenditure of the following:
RMB | US$ (Note 2(e)) | |||||||
Purchase of online audio/video content platform |
26,981,536 | 4,077,547 |
(c) Litigation
In the ordinary course of the business, the Group is subject to periodic legal or administrative proceedings. As of June 30, 2018, the Group is not a party to any legal or administrative proceedings which will have a material adverse effect on the Groups business, financial position, results of operations and cash flows.
18. |
Unaudited Pro Forma Balance Sheet and Loss Per Share for Conversion of Convertible Redeemable Preferred Shares |
Upon the completion of a qualified initial public offering as defined in Note 10, the Series A, A1, B1, B2 and B3 convertible redeemable preferred shares shall automatically be converted into ordinary shares. The unaudited pro-forma balance sheet as of June 30, 2018 assumes a qualified initial public offering has occurred and presents an adjusted financial position as if the conversion of all outstanding Series A, A1, B1, B2 and B3 convertible redeemable preferred shares into ordinary shares at the conversion ratio of one for one occurred on June 30, 2018. Accordingly, the carrying values of the Series A, A1, B1, B2 and B3 convertible redeemable preferred shares, in the amounts of RMB223,855,431, RMB67,541,688, RMB701,411,911, RMB 613,917,689 and RMB 300,199,176 respectively, were reclassified from Series A, A1, B1, B2 and B3 convertible redeemable preferred shares to ordinary shares for such pro forma adjustment.
F-84
The unaudited pro-forma loss per share for the six months ended June 30, 2018 after giving effect to the assumed conversion of the Series A and A1 convertible redeemable preferred shares into ordinary shares as of January 1, 2018 and the assumed conversion of Series B1, B2 and B3 convertible redeemable preferred share into ordinary share as of the issuance dates are as follows:
Six months ended
June 30, 2018 |
||||||||
RMB | US$ | |||||||
Numerator: |
||||||||
Net loss attributable to ordinary shareholders |
(575,315,927 | ) | (86,943,814 | ) | ||||
Pro forma adjustment of the accretion on Series A convertible redeemable preferred shares |
10,643,883 | 1,608,542 | ||||||
Pro forma adjustment of the accretion on Series A1 convertible redeemable preferred shares |
3,274,935 | 494,920 | ||||||
Pro forma adjustment of the accretion on Series B1 convertible redeemable preferred shares |
21,349,500 | 3,226,413 | ||||||
Pro forma adjustment of the accretion on Series B2 convertible redeemable preferred shares |
18,092,345 | 2,734,180 | ||||||
Pro forma adjustment of the accretion on Series B3 convertible redeemable preferred shares |
5,602,880 | 846,728 | ||||||
Deemed dividend to preferred shareholders |
1,916,871 | 289,684 | ||||||
|
|
|
|
|||||
Numerator for pro forma basic and diluted net loss per share |
(514,435,513 | ) | (77,743,347 | ) | ||||
|
|
|
|
|||||
Denominator: |
||||||||
Weighted average number of ordinary shares outstanding |
24,238,324 | 24,238,324 | ||||||
Pro forma effect of weighted average number of Series A convertible redeemable preferred shares conversion |
4,945,055 | 4,945,055 | ||||||
Pro forma effect of weighted average number of Series A1 convertible redeemable preferred shares conversion |
1,373,626 | 1,373,626 | ||||||
Pro forma effect of weighted average number of Series B1 convertible redeemable preferred shares conversion |
3,402,646 | 3,402,646 | ||||||
Pro forma effect of weighted average number of Series B2 convertible redeemable preferred shares conversion |
2,305,321 | 2,305,321 | ||||||
Pro forma effect of weighted average number of Series B3 convertible redeemable preferred shares conversion |
615,926 | 615,926 | ||||||
|
|
|
|
|||||
Denominator for pro forma basic and diluted net loss per share |
36,880,898 | 36,880,898 | ||||||
|
|
|
|
|||||
Pro forma basic and diluted net loss per ordinary share: |
(13.95 | ) | (2.11 | ) | ||||
|
|
|
|
The effects of all outstanding share options and restricted shares granted to the founders have been excluded from the computation of pro forma diluted net loss per share for the six months ended June 30, 2018 as their effects would be anti-dilutive.
19. |
Subsequent events |
(a) |
On September 4, 2018, the Company issued to a fund managed by an affiliate of a leading real estate company in China (Series C1 investor A) 1,450,520 shares of Series C1 Preferred Shares for US$37.23 per share for total consideration of US$54,000,000, of which US$50,000,000 represents cash consideration (Series C1 A Cash Price). At the same time, the Companys PRC entity also entered into a cooperation agreement with the Series C1 investor A that the Companys PRC entity will provide advertising service to the investor. |
F-85
In addition, on September 4, 2018, based on the original share subscription agreement and a supplemental agreement that modifies the number of shares to be issued, the Company issued 145,052 shares of Series C1 preferred shares to an indirect subsidiary of People.cn Co. Ltd. (Series C1 investor B) for US$37.23 per share for total consideration of US$5,400,000 (Series C1 B Issuance Price).
The holder of the Series C1 Preferred Shares, Series C1 investor A and Series C1 investor B, is entitled to receive, in preference to any dividend on the ordinary shares, non-cumulative dividends for each Preferred Share at the rate equal to 12% of the Series C1 A Cash Price and Series C1 B Issuance Price, respectively, payable out of funds or assets when and as such funds or assets become legally available therefor, on parity with each other and prior and in preference to, and satisfied before, any declaration or payment of any dividend on the Series B1, B2, B3, A, A1 Preferred Shares and the Ordinary Shares. In the event of a liquidation, dissolution or winding up of the Company, the Series C1 investor A and Series C1 investor B shall be entitled to receive for each such Preferred Share held, an amount equal to one hundred percent (120%) of the applicable Series C1 A Cash Price and Series C1 B Issuance Price, plus all accrued but unpaid dividends on such Preferred Shares, respectively. If the assets and funds available for distribution among the Preferred Shareholders shall be insufficient to permit the payment to such holders of the full amount, then the entire remaining assets and funds of the Company legally available for distribution to such shareholders shall be distributed ratably among the shareholders in proportion. The liquidation preference for the holders of the Series B1, B2, B3, A and A1 Preferred Shares were changed, which is after the distribution or payment in full of the payment to the holders of the Series C1 Preferred Shares. Each Series C1 Preferred Share is convertible at the option of the holder, at any time after the issuance of such shares, and each share can be converted into one ordinary share of the Company. In addition, each Series C1 Preferred Share would automatically be converted into an ordinary share of the Company upon the closing of a qualified IPO. Upon the occurrence of a redemption event as detailed in the redemption right section of Note 10 above and upon written notice of the holders of 50% or more of the then issued and outstanding Series C1 Preferred Shares, the Company shall redeem all or a portion of the Series C1 Preferred Shares held by Series C1 investor A and B at a price equal to the Series C1 A Cash Price and Series C1 B Issuance Price plus accrued non-cumulative daily interest at a rate of 10% per annum and any declared but unpaid dividends on such Series C1 Preferred Shares, respectively.
The Company expects to classify the Series C1 Preferred Shares in the mezzanine section of the consolidated balance sheets because the Series C1 Preferred Shares are redeemable at the option of the holder upon the occurrence of an event that is not solely within the control of the issuer. The Preferred Shares are recorded initially at their respective issuance price, net of issuance costs. The Company will then recognize accretion to the respective redemption value of the Series C1 Preferred Shares over the period starting from issuance date to the earliest redemption date according to the same redemption price calculation formula described in Note 10. Based on the valuation results, the Company determined that the conversion price was higher than the estimated fair value of the ordinary shares on the issuance date and as such that there was no beneficial conversion feature embedded in the issuance of the Series C1 Preferred Shares.
The cash consideration received from Series C1 investor B was US$37.23; however, the cash consideration received from Series C1 investor A was US$34.47 per preferred share. The difference between the fair value per preferred share and the cash consideration received from Series C1 investor A represents reduction/rebate against future revenue generated from this investor who is also the Companys customer through the cooperation agreement in which the Company will provide advertising service to the investor.
(b) |
On August 27, 2018, the Company entered into a share subscription agreement with a subsidiary of Shanghai Dongfang Newspaper Co., Ltd., commonly known as The Paper, a leading online news service provider in China. The Paper is a subsidiary of Shanghai United Media Group, which is a wholly state-owned enterprise. |
F-86
Pursuant to the share subscription agreement, the Company agreed to issue 1,480,123 series C2 preferred shares to The Paper for consideration of US$55,102,019, of which US$20,408,171 or US$13.79 per share (Series C2 Cash Price) and certain business and strategic cooperation between The Paper and the Group. The transaction is subject to regulatory approvals from relevant PRC government authorities and the Company currently expects the transaction to close in the next 12 months. To the extent the closing of the share subscription is after the completion of IPO, the same number of ordinary shares will be issued to The Paper in lieu of series C2 preferred shares. The share subscription agreement also provides that The Paper will have the right to designate one director to the Companys board of directors. In connection to the share subscription agreement, the Company entered into a strategic cooperation framework agreement with The Paper on the same date, pursuant to which the parties agree to cooperate in various areas of online news and content business, including content sourcing and management, marketing, traffic, data and technology.
The holder of the Series C2 Preferred Shares is entitled to receive, in preference to any dividend on the ordinary shares, non-cumulative dividends for each Preferred Share at the rate equal to 12% of the Series C2 Cash Price, payable out of funds or assets when and as such funds or assets become legally available therefor, on parity with each other and prior and in preference to, and satisfied before, any declaration or payment of any dividend on the Series C1, B1, B2, B3, A, A1 Preferred Shares and the Ordinary Shares. In the event of a liquidation, dissolution or winding up of the Company, the holder of the Series C2 Preferred Shares shall be entitled to receive for each such Preferred Share held, an amount equal to one hundred percent (120%) of the applicable Series C2 Cash Price, plus all accrued but unpaid dividends on such Preferred Shares. If the assets and funds available for distribution among the Preferred Shareholders shall be insufficient to permit the payment to such holders of the full amount, then the entire remaining assets and funds of the Company legally available for distribution to such shareholders shall be distributed ratably among the shareholders in proportion. The liquidation preference for the holders of the Series C1, B1, B2, B3, A and A1 Preferred Shares were changed, which is after the distribution or payment in full of the payment to the holders of the Series C2 Preferred Shares. Each Series C2 Preferred Share is convertible at the option of the holder, at any time after the issuance of such shares, and each share can be converted into one ordinary share of the Company. In addition, each Series C2 Preferred Share would automatically be converted into an ordinary share of the Company upon the closing of a qualified IPO. Upon the occurrence of a redemption event as detailed in the redemption right section of Note 10 above and upon written notice of the holders of 50% or more of the then issued and outstanding Series C2 Preferred Shares, the Company shall redeem all or a portion of the Series C2 Preferred Shares held by such holders at a price equal to the Series C2 Cash Price plus accrued non-cumulative daily interest at a rate of 10% per annum and any declared but unpaid dividends on such Series C2 Preferred Shares.
The cash consideration of US$13.79 per preferred share will be received upon issuance of the Series C2 Preferred Shares. The difference between the fair value of the preferred share and cash consideration to be received from The Paper represents the intangible assets obtained through a strategic business cooperation arrangement with The Paper. The Company is still evaluating the accounting for the Series C2 Preferred Shares, any discounts on the issuance price and the related cooperation agreement.
In addition, Shanghai Jifen, the consolidated VIE, has agreed to issue equity interests representing 1% of its enlarged share capital to The Paper at a nominal price. Following the equity issuance, The Paper will assist Shanghai Jifen to enhance the quality and compliance of content on its platforms such as Qutoutiao through secondment of relevant personnel and other relevant measures.
As The Paper will not be a party to the existing VIE contractual arrangements, it will not be bound by such arrangements nor will have any obligation to perform or assume any liability under the contractual arrangements. The voting rights over these 1% equity interests will be exercised by The Paper itself. Accordingly, the Company will not be able to request The Paper to sell or pledge such 1% equity interests in the way agreed under existing contractual arrangements.
F-87
The Paper, Shanghai Jifen and its shareholders agreed (i) The Paper will not have any economic interest such as dividend over these 1% equity interests of Shanghai Jifen; and (ii) unless otherwise instructed and approved by the competent governmental authority, The Paper may not transfer its equity interests in Shanghai Jifen to any third party. The WFOE continues to control Jifen after the issuance of the 1% equity interests and continues to direct and manage all business and daily operational activities of the VIE. In addition, The Paper will not participate in the profits and losses allocation from the VIE and the WFOE will continue have the exclusive right to share all profits and losses of the VIE. Based on the foregoing, the Company believes that its control over the consolidated VIE and its subsidiaries and the economic benefits received from the consolidated VIE will not be adversely affected and will continue to consolidate the VIE after the issuance of such 1% equity interests.
F-88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors and Officers
Cayman Islands law does not limit the extent to which a companys articles of association may provide indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to the public interest, such as providing indemnification against civil fraud or the consequences of committing a crime. The registrants articles of association provide that each officer or director of the registrant shall be indemnified out of the assets of the registrant against any liability incurred by him or her in defending any proceedings, whether civil or criminal, in which judgment is given in his or her favor, or the proceedings are otherwise disposed of without any finding or admission of any material breach of duty on his or her part, or in which he or she is acquitted or in connection with any application in which relief is granted to him or her by the court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the registrant.
Under the form of indemnification agreements to be filed as Exhibit 10.1 to this registration statement, we will agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such a director or executive officer.
The form of underwriting agreement to be filed as Exhibit 1.1 to this registration statement will also provide for indemnification of us and our officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
II-1
Item 7. Recent Sales of Unregistered Securities
We were incorporated in July 2017 and have since then issued and sold the securities described below without registering the securities under the Securities Act. None of these transactions involved any underwriters underwriting discounts or commissions, or any public offering. We believe that each of the following issuances was exempt from registration under the Securities Act in reliance on Regulation S or Rule 701 under the Securities Act or pursuant to Section 4(2) of the Securities Act regarding transactions not involving a public offering.
Purchaser |
Date of Issuance |
Number of Securities |
Consideration in
U.S. Dollars |
Underwriting
Discount and Commission |
||||||||
Vistra (Cayman) Limited |
July 2017 |
1 ordinary shares |
|
US$1 |
|
|
n/a |
(1) |
||||
Innotech Group Holdings Ltd. |
July 2017 |
42,499 ordinary shares |
|
US$42,499 |
|
|
n/a |
(1) |
||||
News Optimizer (BVI) Ltd. |
July 2017 |
7,500 ordinary shares |
|
US$7,500 |
|
|
n/a |
(1) |
||||
CW_toutiao Limited |
September 2017 | 3,296,703 Series A convertible redeemable preferred shares | US$21,600,000 | n/a | ||||||||
ACE Redpoint Ventures China I, L.P. |
September 2017 |
1,539,560 Series A convertible redeemable preferred shares |
|
US$10,087,200 |
|
|
n/a |
|
||||
ACE Redpoint Associates China I, L.P. |
September 2017 |
87,363 Series A convertible redeemable preferred shares |
|
US$572,400 |
|
|
n/a |
|
||||
ACE Redpoint China Strategic I, L.P. |
September 2017 |
21,429 Series A convertible redeemable preferred shares |
|
US$140,400 |
|
|
n/a |
|
||||
CMC Queen Holdings Limited |
September 2017 |
1,373,626 Series A1 convertible redeemable preferred shares |
|
US$10,000,000 |
|
|
n/a |
|
||||
Image Flag Investment (HK) Limited |
March 2018 |
5,420,144 Series B1 convertible redeemable preferred shares |
|
US$105,000,000 |
|
|
n/a |
|
||||
Long Range L.P. |
March 2018 | 1,371,974 Series B2 convertible redeemable preferred shares | US$32,400,000 | n/a | ||||||||
People Better Limited |
March 2018 | 342,993 Series B2 convertible redeemable preferred shares | US$8,100,000 | n/a | ||||||||
Shunwei Growth III Limited |
March 2018 |
342,993 Series B2 convertible redeemable preferred shares |
|
US$8,100,000 |
|
|
n/a |
|
(1) |
We subsequently effected a share split in September 2017 in which each one of these ordinary shares were split into 10,000 ordinary shares. |
II-2
Purchaser |
Date of Issuance |
Number of Securities |
Consideration in
U.S. Dollars |
Underwriting
Discount and Commission |
||||||||
Double Excel Investment Limited |
March 2018 |
716,145 Series B2 convertible redeemable preferred shares |
|
US$16,912,196 |
|
|
n/a |
|
||||
Lighthouse Capital International Inc. |
March 2018 |
127,035 Series B2 convertible redeemable preferred shares |
|
US$3,000,000 |
|
|
n/a |
|
||||
CMC Queen Holdings Limited |
March 2018 |
423,449 Series B2 convertible redeemable preferred shares |
|
US$10,000,000 |
|
|
n/a |
|
||||
ACE Redpoint Ventures China I, L.P. |
March 2018 |
335,693 Series B2 convertible redeemable preferred shares |
|
US$7,927,605 |
|
|
n/a |
|
||||
ACE Redpoint Associates China I, L.P. |
March 2018 |
19,049 Series B2 convertible redeemable preferred shares |
|
US$449,855 |
|
|
n/a |
|
||||
ACE Redpoint China Strategic I, L.P. |
March 2018 |
4,673 Series B2 convertible redeemable preferred shares |
|
US$110,344 |
|
|
n/a |
|
||||
Shanghai ChuangVest Venture Investment Partnership (Limited Partnership) |
April 2018 |
211,724 Series B2 convertible redeemable preferred shares |
|
US$5,000,000 |
|
|
n/a |
|
||||
Hundreds TWC Fund Limited Partnership (now known as Hundreds ANTA Fund Limited Partnership) |
April 2018 |
962,384 Series B3 convertible redeemable preferred shares |
|
US$25,000,000 |
|
|
n/a |
|
||||
Harvest Ceres Fund, LP |
April 2018 | 654,421 Series B3 convertible redeemable preferred shares | US$17,000,000 | n/a | ||||||||
Vision Global Capital Limited |
April 2018 |
134,734 Series B3 convertible redeemable preferred shares |
|
US$3,500,000 |
|
|
n/a |
|
||||
CG Partners Opportunity Fund SP |
September
2018 |
1,450,520 Series C1 preferred shares | US$54,000,000 | n/a | ||||||||
Shimmering Investment (BVI) Ltd. |
September
2018 |
145,052 Series C1 preferred shares | US$5,400,000 | n/a |
Item 8. Exhibits and Financial Statement Schedules
(a) |
Exhibits |
See Exhibit Index beginning on page II-4 of this Registration Statement.
(b) |
Financial Statement Schedules. |
All supplement schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the financial statements or notes thereto.
II-3
Item 9. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant under the provisions described in Item 6, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) |
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(2) |
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-4
EXHIBIT INDEX
II-5
* |
To be filed by amendment. |
** |
Incorporated by reference to the Registration Statement on Form F-6 to be filed with the Securities and Exchange Commission with respect to American depositary shares representing our Class A ordinary shares. |
*** |
Previously filed. |
II-6
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Shanghai, China on September 4, 2018.
QUTOUTIAO INC. | ||||
By: |
/s/ Eric Siliang Tan |
|||
Name: | Eric Siliang Tan | |||
Title: | Executive Chairman |
Signature |
Capacity |
Date |
||
/s/ Eric Siliang Tan |
Executive Chairman | September 4, 2018 | ||
Eric Siliang Tan |
||||
/s/ Lei Li |
Director and Chief Executive Officer | September 4, 2018 | ||
Lei Li |
(principal executive officer) | |||
* |
Director | September 4, 2018 | ||
Shaoqing Jiang |
||||
* |
Director and Co-President | September 4, 2018 | ||
Jianfei Dong |
||||
/s/ Jingbo Wang |
Director and Chief Financial Officer | September 4, 2018 | ||
Jingbo Wang |
(principal financial and accounting officer) | |||
* |
Director and Chief Strategy Officer | September 4, 2018 | ||
Oliver Yucheng Chen |
*By: |
/s/ Eric Siliang Tan |
|||
Name: | Eric Siliang Tan | |||
Attorney-in-fact |
II-7
SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the Securities Act of 1933, as amended, the undersigned, the duly authorized representative in the United States of Qutoutiao Inc. has signed this registration statement or amendment thereto in New York on September 4, 2018.
COGENCY GLOBAL INC. |
||
By: |
/s/ Shek Yuen Ting | |
|
||
Name: Shek Yuen Ting | ||
Title: Assistant Secretary |
II-8
Exhibit 3.1
THE COMPANIES LAW (AS AMENDED)
OF THE CAYMAN ISLANDS
COMPANY LIMITED BY SHARES
FIFTH AMENDED AND RESTATED MEMORANDUM AND ARTICLES
OF
ASSOCIATION
OF
QUTOUTIAO INC.
(adopted by a special resolution passed on August 29, 2018 and effective immediately prior to the consummation of the Series C1 Closing)
TABLE OF CONTENTS
INTERPRETATION |
2 | |||
COMMENCEMENT OF BUSINESS |
16 | |||
ISSUE OF SHARES |
16 | |||
PREFERRED SHARES |
16 | |||
ORDINARY SHARES |
49 | |||
REGISTER OF MEMBERS |
49 | |||
FIXING RECORD DATE |
50 | |||
CERTIFICATES FOR SHARES |
50 | |||
TRANSFER OF SHARES |
50 | |||
REDEMPTION AND REPURCHASE OF SHARES |
51 | |||
VARIATION OF RIGHTS OF SHARES |
51 | |||
COMMISSION ON SALE OF SHARES |
51 | |||
NON-RECOGNITION OF INTERESTS |
52 | |||
TRANSMISSION OF SHARES |
52 | |||
AMENDMENTS OF MEMORANDUM AND ARTICLES OF ASSOCIATION AND ALTERATION OF CAPITAL |
52 | |||
REGISTERED OFFICE |
53 | |||
GENERAL MEETINGS |
53 | |||
NOTICE OF GENERAL MEETINGS |
54 | |||
PROCEEDINGS AT GENERAL MEETINGS |
55 | |||
VOTES OF MEMBERS |
56 | |||
PROXIES |
57 | |||
CORPORATE MEMBERS |
57 | |||
SHARES THAT MAY NOT BE VOTED |
57 | |||
APPOINTMENT OF DIRECTORS; OBSERVERS |
58 | |||
POWERS OF DIRECTORS |
58 |
i
VACATION OF OFFICE AND REMOVAL OF DIRECTOR |
59 | |||
PROCEEDINGS OF DIRECTORS |
59 | |||
DIRECTORS INTERESTS |
61 | |||
MINUTES |
62 | |||
DELEGATION OF DIRECTORS POWERS |
62 | |||
NO MINIMUM SHAREHOLDING |
63 | |||
REMUNERATION OF DIRECTORS |
63 | |||
SEAL |
63 | |||
DIVIDENDS, DISTRIBUTIONS AND RESERVE |
64 | |||
CAPITALIZATION |
65 | |||
BOOKS OF ACCOUNT |
65 | |||
AUDIT |
65 | |||
NOTICES |
66 | |||
WINDING UP |
67 | |||
INDEMNITY |
67 | |||
FINANCIAL YEAR |
68 | |||
TRANSFER BY WAY OF CONTINUATION |
68 | |||
DRAG ALONG RIGHTS |
68 |
ii
THE COMPANIES LAW (AS AMENDED)
OF THE CAYMAN ISLANDS
COMPANY LIMITED BY SHARES
FIFTH AMENDED AND RESTATED MEMORANDUM OF ASSOCIATION
OF
QUTOUTIAO INC.
(adopted by a special resolution passed on August 29, 2018 and effective immediately prior to the consummation of the Series C1 Closing)
1. |
The name of the Company is QUTOUTIAO INC. |
2. |
The Registered Office of the Company shall be at the offices of Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands, or at such other place as the Directors may from time to time decide. |
3. |
The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Law (As Amended) or as the same may be revised from time to time, or any other law of the Cayman Islands. |
4. |
The liability of each Member is limited to the amount from time to time unpaid on such Members Shares. |
5. |
The authorized share capital of the Company is US$50,000 divided into (i) 479,538,213 Ordinary Shares of par value US$0.0001 each, (ii) 4,945,055 Series A Preferred Shares of par value US$0.0001 each, (iii) 1,373,626 Series A1 Preferred Shares of par value US$0.0001 each, (iv) 5,420,144 Series B1 Preferred Shares of par value US$0.0001 each, (v) 3,895,728 Series B2 Preferred Shares of par value US$0.0001 each, (vi) 1,751,539 Series B3 Preferred Shares of par value US$0.0001 each, (vii) 1,595,572 Series C1 Preferred Shares of par value US$0.0001, and (viii) 1,480,123 Series C2 Preferred Shares of par value US$0.0001. |
6. |
If the Company is registered as exempted, its operations will be carried on subject to the provisions of Section 174 of the Companies Law (as amended) and, subject to the provisions of the Companies Law (as amended) and the Fifth Amended and Restated Articles of Association, it shall have the power to register by way of continuation as a body corporate limited by shares under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands. |
7. |
Capitalised terms that are not defined in this Fifth Amended and Restated Memorandum of Association bear the same meaning as those given in the Fifth Amended and Restated Articles of Association of the Company. |
1
THE COMPANIES LAW (AS AMENDED)
OF THE CAYMAN ISLANDS
COMPANY LIMITED BY SHARES
FIFTH AMENDED AND RESTATED ARTICLES OF ASSOCIATION
OF
QUTOUTIAO INC.
(adopted by a special resolution passed on August 29, 2018 and effective immediately prior to the consummation of the Series C1 Closing)
INTERPRETATION
1. |
In these Articles Table A in the First Schedule to the Statute does not apply and, unless there is something in the subject or context inconsistent therewith: |
10% ESOP Quota | shall have the meaning set forth in Article 8.5(B)(1)(6) hereof. | |
Affiliate | means, (a) with respect to a Person other than a natural person, any other Person that, directly or indirectly, Controls, is Controlled by or is under common Control with such Person, and (b) in the case of a natural person, any other Person that is directly or indirectly Controlled by such a Person or is a Relative of such Person; provided that the Company and its Subsidiaries shall be deemed not to be Affiliates of the holders of the Preferred Shares. In the case of a holder of the Preferred Shares, where applicable, the term Affiliate also includes (v) any Controlling shareholder of such holder, (w) any of such Controlling shareholders or holders general partners, (x) the fund manager managing such Controlling shareholder or holder (and general partners and key officers who Controls, or acts as a position of fund partner of, such holder or its Affiliates thereof) and other funds managed by such fund manager, and (y) trusts controlled by or for the benefit of any such Person referred to in (v), (w) or (x). | |
Articles | means these fifth amended and restated articles of association of the Company, as may be amended from time to time. | |
Associate | means, with respect to any Person, (1) a corporation or organization (other than the Group Companies) of which such Person is an officer or partner or is, directly or indirectly, the record or beneficial owner of five percent (5%) or more of any class of Equity Securities of such corporation or organization, (2) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar capacity, or (3) any Relative of such Person and of such Persons spouse. |
2
Auditor |
means the Person for the time being performing the duties of auditor of the Company or Shanghai Jifen Culture Communications Co., Ltd. ( 上海基分文化传播有限公司 ) (as the case may be). | |
Automatic Conversion |
shall have the meaning set forth in Article 8.3(C) hereof. | |
Board or Board of Directors |
means the board of directors of the Company. | |
Business |
has the meaning given to such term in the Shareholders Agreement. | |
Business Day |
means any day that is not a Saturday, Sunday, legal holiday or other day on which commercial banks are required or authorized by law to be closed in the Cayman Islands, the United States, the Hong Kong Special Administrative Region or the PRC. | |
Charter Documents |
means, with respect to a particular legal entity, the articles of incorporation, certificate of incorporation, formation or registration (including, if applicable, certificates of change of name), memorandum of association, articles of association, bylaws, articles of organization, limited liability company agreement, trust deed, trust instrument, operating agreement, joint venture agreement, business license, or similar or other constitutive, governing, or charter documents, or equivalent documents, of such entity. | |
Chengwei |
shall have the meaning set forth in Article 63 hereof. | |
Company |
means the above named company. | |
Control |
of a given Person means the power or authority, whether exercised or not, to direct the business, management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; provided, that such power or authority shall conclusively be presumed to exist upon possession of beneficial ownership or power to direct the vote of more than fifty percent (50%) of the votes entitled to be cast at a meeting of the members or shareholders of such Person or power to control the composition of a majority of the board of directors of such Person. The terms Controlled and Controlling have meanings correlative to the foregoing. |
3
Conversion Shares | means Ordinary Shares issuable upon conversion of any Preferred Shares. | |
Convertible Securities | shall have the meaning set forth in the Shareholders Agreement . | |
Current ESOP | has the meaning set forth in the Series B3 Purchase Agreement. | |
Deemed Liquidation Event | means any of the following events: | |
(1) any consolidation, amalgamation, scheme of arrangement or merger of any Group Company with or into any other Person or other reorganization in which the Members or shareholders of such Group Company immediately prior to such consolidation, amalgamation, merger, scheme of arrangement or reorganization own less than fifty percent (50%) of such Group Companys voting power in the aggregate immediately after such consolidation, merger, amalgamation, scheme of arrangement or reorganization, or any transaction or series of related transactions to which such Group Company is a party or a target in which in excess of fifty percent (50%) of such Group Companys voting power is transferred (a Change of Control ); provided that the foregoing shall not include a bona fide equity financing of any Group Company through issuance of Equity Securities of any Group Company; provided further, that no shareholder of the Company or the Company shall circumvent or otherwise avoid the liquidation preference provisions set forth in Article 8.2 or the intent thereof by structuring a Change of Control as an equity financing but which in substance is a Change of Control; for the avoidance of doubt, Shanghai Xike Information Technology Service Co., Ltd. ( 上海溪客信息技术服务有限公司 ), Shanghai Tuile Information Technology Service Co., Ltd. ( 上海推乐信息技术服务有限公司 ), Anhui Zhangduan Internet Technology Co., Ltd. ( 安徽掌端网络科技有限公司 ) and Beijing Qukandian Internet Technology Co., Ltd. ( 北京趣看点网络科技有限公司 ) shall not be deemed as a Group Company for the purpose of this definition, provided that Shanghai Jifen Culture Communications Co., Ltd. ( 上海基分文化传播有限公司 ) has not transferred and will not transfer any Equity Securities, material business or assets of any of them; |
4
(2) a sale, transfer, lease or other disposition of all or substantially all of the assets of any Group Company (or any series of related transactions resulting in such sale, transfer, lease or other disposition of all or substantially all of the assets of such Group Company); or |
||
(3) the exclusive, irrevocable licensing of all or substantially all of any Group Companys intellectual property to a third party. |
||
Director | means a director serving on the Board for the time being of the Company and shall include an alternate Director appointed in accordance with these Articles. | |
Domestic Companies | means Shanghai Jifen Culture Communications Co., Ltd. ( 上海基分文化传播有限公司 ) (Jifen), Shanghai Xike Information Technology Service Co., Ltd. ( 上海溪客信息技术服务有限公司 ), Shanghai Tuile Information Technology Service Co., Ltd. ( 上海推乐信息技术服务有限公司 ), Anhui Zhangduan Internet Technology Co., Ltd. ( 安徽掌端网络科技有限公司 ) and Beijing Qukandian Internet Technology Co., Ltd. ( 北京趣看点网络科技有限公司 ). | |
Drag-Along Notice | shall have the meaning set forth in Article 118 . | |
Drag-Along Sale | shall have the meaning set forth in Article 118 . | |
Drag Holders | shall have the meaning set forth in Article 118 . | |
Dragged Holders | shall have the meaning set forth in Article 118 . | |
Electronic Record | has the same meaning as given in the Electronic Transactions Law (as amended). | |
Equity Securities | means, with respect to any Person that is a legal entity, any and all shares of capital stock, membership interests, partnership interest, units, profits interests, ownership interests, equity interests, registered capital, and other equity securities of such Person, senior or pari passu, and any right, warrant, option, call, commitment, conversion privilege, preemptive right or other right to acquire any of the foregoing, or security convertible into, exchangeable or exercisable for any of the foregoing (whether or not such derivative securities have actually been issued by such Person), or any contract providing for the acquisition of any of the foregoing. |
5
Exempted Distribution | means (1) a dividend payable solely in Ordinary Shares and to all shareholders of the Company on a pro rata basis, (2) the purchase, repurchase or redemption of Ordinary Shares by the Company at no more than cost from terminated employees, officers or consultants in accordance with the Current ESOP, or pursuant to written contractual arrangements with the Company approved by the Board (so long as such approval includes the approval of the Series A Director, the Series B1 Director and the Series C Director), and (3) the purchase, repurchase or redemption of Preferred Shares pursuant to these Articles (including in connection with the conversion of such Preferred Shares into Ordinary Shares). | |
Governmental Authority | has the meaning given to such term in the Shareholders Agreement. | |
Group Company | means each of the Company, the HK Company, the WFOE, Shanghai Dian Guan Network Technology Co., Ltd. and the Domestic Companies, together with each Subsidiary of any of the foregoing, and Group refers to all of the Group Companies collectively. | |
HK Company | means InfoUniversal Limited, a company incorporated under the laws of the Hong Kong Special Administrative Region by the Company for the purpose of holding equity interests in the WFOE. | |
Indebtedness | of any Person means, without duplication, actual or contingent obligations in respect of each of the following of such Person: (1) all indebtedness for borrowed money, (2) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (3) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (4) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced that are incurred in connection with the acquisition of properties, assets or businesses, (5) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (6) all obligations that are capitalized in accordance with the applicable accounting standards, (7) all obligations under bankers acceptance, letter of credit or similar facilities, (8) all obligations to purchase, redeem, retire, defease or otherwise acquire for value any Equity Securities of such Person, (9) all obligations in respect of any interest rate swap, hedge or cap agreement, and (10) all guarantees issued in respect of the Indebtedness referred to in clauses (1) through (9) above of any other Person, but only to the extent of the Indebtedness guaranteed. |
6
Initial Redemption Notice | shall have the meaning set forth in Article 8.6(A) . | |
Interested Transaction | shall have the meaning set forth in Article 81 hereof. | |
IPO | shall have the meaning given to it in the Shareholders Agreement. | |
Lien | means any claim, charge, easement, encumbrance, lease, covenant, security interest, lien, option, pledge, rights of others, or restriction (whether on voting, sale, transfer, disposition or otherwise), whether imposed by contract, understanding, law, equity or otherwise. | |
Member | has the same meaning as given in the Statute. | |
Memorandum | means the fifth amended and restated memorandum of association of the Company, as amended from time to time. | |
New ESOP | shall have the meaning set forth in Article 8.5(B)(1)(16) hereof. | |
New ESOP Anti-dilution Right | shall have the meaning set forth in Article 8.5(B)(1)(6) hereof. | |
New Securities | shall have the meaning set forth in Article 8.3(E)(4)(a)(iii) hereof. | |
Observer | shall have the meaning set forth in Article 63 hereof. | |
Offeror | shall have the meaning set forth in Article 118 . | |
Options | shall have the meaning set forth in Article 8.3(E)(4)(a)(i) hereof. |
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Ordinary Director | shall have the meaning set forth in Article 63 . | |
Ordinary Resolution | means a resolution of a duly constituted general meeting of the Company passed by a simple majority of the votes cast by, or on behalf of, the Members entitled to vote present in person or by proxy and voting at the meeting, or a written resolution as provided in Article 41 . | |
Ordinary Share | means an ordinary share of US$0.0001 par value per share in the capital of the Company having the rights attaching to it as set out herein. | |
Person means any individual, sole proprietorship, partnership, limited partnership, limited liability company, firm, joint venture, estate, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or governmental or regulatory authority or other enterprise or entity of any kind or nature. | ||
PRC | means the Peoples Republic of China, but solely for the purposes hereof excludes the Hong Kong Special Administrative Region, Macau Special Administrative Region and the island of Taiwan. | |
Preferred Shares | means, collectively, the Series A Preferred Shares, the Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, Series C1 Preferred Shares and Series C2 Preferred Shares, and each, a Preferred Share . | |
Principals | shall have the meaning set forth in the Shareholders Agreement. | |
Qualified IPO | means a firm commitment underwritten public offering of the Ordinary Shares of the Company (or depositary receipts or depositary shares therefor) in the United States pursuant to an effective registration statement under the United States Securities Act of 1933, as amended or in another jurisdiction which results in the Ordinary Shares trading publicly on a recognized international securities exchange approved by the Series A Majority and the Series B Majority, with (i) if such public offering takes place within five (5) years of the Series B1 Closing but after the end of the year of 2018, minimum pre-money valuation of US$5,000,000,000 and minimum gross proceeds to the Company of US$500,000,000, (ii) if such public offering takes place within the year of 2018, minimum post-money valuation of US$3,000,000,000 and minimum gross proceeds to the Company of US$300,000,000, or (iii) a reasonable pre-money valuation and minimum gross proceeds to the Company approved by the Series A Majority and the Series B Majority. |
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Redeeming Preferred Share | shall have the meaning set forth in Article 8.6(A) . | |
Redeeming Preferred Shareholder | shall have the meaning set forth in Article 8.6(A) . | |
Redemption Funds | shall have the meaning set forth in Article 8.6(B) . | |
Redemption Notice | shall have the meaning set forth in Article 8.6(A) . | |
Redemption Price | shall have the meaning set forth in Article 8.6(A) . | |
Redemption Price Payment Date | shall have the meaning set forth in Article 8.6(A) . | |
Register of Members | means the register maintained in accordance with the Statute and includes (except where otherwise stated) any duplicate Register of Members. | |
Registered Office | means the registered office for the time being of the Company. | |
Related Party | means any Affiliate, officer, director, supervisory board member, employee, or holder of any Equity Security of any Group Company, and any Affiliate or Associate of any of the foregoing, in each case, other than the Group Companies. | |
Relative | of a natural person means the spouse of such person and any parent, step-parent, grandparent, child, step-child, grandchild, sibling, step-sibling, cousin, in-law, uncle, aunt, nephew, niece or great-grandparent of such person or spouse. | |
Redpoint | ACE Redpoint Ventures China I, L.P., ACE Redpoint Associates China I, L.P. and ACE Redpoint China Strategic I, L.P. | |
Restructuring | shall have the meaning set forth in the Series B3 Purchase Agreement. | |
Series A Closing | shall have the meaning set forth in the Series A Purchase Agreement. | |
Series A Conversion Price | shall have the meaning set forth in Article 8.3(A) hereof. | |
Series A Director | shall have the meaning set forth in Article 63 . |
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Series A Issue Date | means the date of the first issuance of a Series A Preferred Share. | |
Series A Issue Price | means US$6.5520, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series A Preferred Shares. | |
Series A Majority | means the holders of at least a majority of the voting power of the outstanding Series A Preferred Shares and the Series A1 Preferred Shares (voting together as a single class and on an as converted basis). | |
Series A Preference Amount | shall have the meaning set forth in Article 8.2(A)(3) . | |
Series A Preferred Shares | means a Series A Preferred Share of US$0.0001 par value per share in the capital of the Company having the rights, preference and privileges attaching to it as set out herein. | |
Series A Purchase Agreement | means the Series A Purchase Agreement, dated September 8, 2017 among the Company and certain other parties named therein. | |
Series A1 Closing | shall have the meaning set forth in the Series A1 Purchase Agreement. | |
Series A1 Conversion Price | shall have the meaning set forth in Article 8.3(A) hereof. | |
Series A1 Issue Date | means the date of the first issuance of a Series A1 Preferred Share. | |
Series A1 Issue Price | means US$7.28, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series A1 Preferred Shares. | |
Series A1 Preference Amount | shall have the meaning set forth in Article 8.2(A)(3) . | |
Series A1 Preferred Shares | means a Series A1 Preferred Share of US$0.0001 par value per share in the capital of the Company having the rights, preference and privileges attaching to it as set out herein. | |
Series A1 Purchase Agreement | means the Series A1 Purchase Agreement, dated October 14, 2017 among the Company and certain other parties named therein. | |
Series B Majority | means (i) the holders of at least a majority of the voting power of the outstanding Series B1 Preferred Shares, the Series B2 Preferred Shares and the Series B3 Preferred Shares (voting together as a single class and on an as converted basis) and Tencent (provided that Tencent holds a majority of the voting power of the outstanding Series B1 Preferred Shares and the Series B2 Preferred Shares (voting together as a single class and on an as converted basis)); or (ii) the holders of at least a majority of the voting power of the outstanding Series B1 Preferred Shares, the Series B2 Preferred Shares and the Series B3 Preferred Shares (voting together as a single class and on an as converted basis) provided that Tencent fails to hold a majority of the voting power of the outstanding Series B1 Preferred Shares and the Series B2 Preferred Shares (voting together as a single class and on an as converted basis). |
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Series B1 Closing | shall have the meaning set forth in the Series B1 Purchase Agreement. | |
Series B1 Conversion Price | shall have the meaning set forth in Article 8.3(A) hereof. | |
Series B1 Director | shall have the meaning set forth in Article 63 . | |
Series B1 Issue Date | means the date of the first issuance of a Series B Preferred Share. | |
Series B1 Issue Price | means US$19.3722, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series B1 Preferred Shares. | |
Series B1 Preference Amount | shall have the meaning set forth in Article 8.2(A)(2) . | |
Series B1 Preferred Shares | means a Series B1 Preferred Share of US$0.0001 par value per share in the capital of the Company having the rights, preference and privileges attaching to it as set out herein. | |
Series B1 Purchase Agreement | means the Series B1 Purchase Agreement, dated March 4, 2018 among the Company and certain other parties named therein. | |
Series B2 Closing | shall have the meaning set forth in the respective Series B2 Purchase Agreement. | |
Series B2 Conversion Price | shall have the meaning set forth in Article 8.3(A) hereof. | |
Series B2 Issue Date | means the date of the first issuance of a Series B2 Preferred Share. | |
Series B2 Issue Price | means US$23.6156, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series B2 Preferred Shares. |
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Series B2 Preference Amount | shall have the meaning set forth in Article 8.2(A)(2) . | |
Series B2 Preferred Shares | means a Series B2 Preferred Share of US$0.0001 par value per share in the capital of the Company having the rights, preference and privileges attaching to it as set out herein. | |
Series B2 Purchase Agreement | means the Series B2 Purchase Agreement, dated March 8, 2018 among the Company and certain other parties named therein. | |
Series B3 Closing | shall have the meaning set forth in the respective Series B3 Purchase Agreement. | |
Series B3 Conversion Price | shall have the meaning set forth in Article 8.3(A) hereof. | |
Series B3 Issue Date | means the date of the first issuance of a Series B3 Preferred Share. | |
Series B3 Issue Price | means US$25.9772, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series B3 Preferred Shares. | |
Series B3 Preference Amount | shall have the meaning set forth in Article 8.2(A)(2) . | |
Series B3 Preferred Shares | means a Series B3 Preferred Share of US$0.0001 par value per share in the capital of the Company having the rights, preference and privileges attaching to it as set out herein. | |
Series B3 Purchase Agreement | means the Series B3 Purchase Agreement, dated April 19, 2018 among the Company and certain other parties named therein. | |
Series C Cash Price | means the cash price paid by each Series C1 Investor for each Series C1 Preferred Share or by each Series C2 Investor for each Series C2 Preferred Share, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series C1 Preferred Shares or the Series C2 Preferred Shares, as applicable. | |
Series C1 Closing | means the Closing as provided in the Series C1 Purchase Agreements. | |
Series C2 Closing | means the Closing as provided in the Series C2 Purchase Agreement. | |
Series C Conversion Price | shall have the meaning set forth in Article 8.3(A) hereof. | |
Series C Director | shall have the meaning set forth in Article 63 hereof. |
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Series C1 Investors | means the holders of the Series C1 Preferred Shares of the Company. | |
Series C2 Investor | means the holder of the Series C2 Preferred Shares of the Company. | |
Series C1 Issue Date | means the date of the first issuance of a Series C1 Preferred Share. | |
Series C2 Issue Date | means the date of the first issuance of a Series C2 Preferred Shares. | |
Series C Issue Date | means Series C1 Issue Date or Series C2 Issue Date, as applicable. | |
Series C1 Issue Price | means US$37.2280, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series C1 Preferred Shares. | |
Series C2 Issue Price | means US$37.2280, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series C2 Preferred Shares. | |
Series C Issue Price | means Series C1 Issue Price or Series C2 Issue Price, as applicable. | |
Series C Majority | means (i) the holders of at least a majority of the voting power of the outstanding Series C1 Preferred Shares (voting together as a single class and on an as converted basis) before the Series C2 Closing, or (ii) the holder of at least a majority of the voting power of the outstanding Series C Preferred Shares (voting together as a single class and on an as converted basis) if the Series C2 Closing has been fully consummated. | |
Series C1 Preferred Shares | means a Series C1 Preferred Share of US$0.0001 par value per share in the capital of the Company having the rights, preference and privileges attaching to it as set out herein. | |
Series C2 Preferred Shares | means a Series C2 Preferred Share of US$0.0001 par value per share in the capital of the Company having the rights, preference and privileges attaching to it as set out herein. | |
Series C Preferred Shares | means Series C1 Preferred Shares and/or Series C2 Preferred Shares. | |
Series C Preference Amount | shall have the meaning set forth in Article 8.2(A)(1) . |
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Series C1 Purchase Agreements | means each of the Series C1 Purchase Agreements, dated August 17, 2018 among the Company, the holders of the Series C1 Preferred Shares and certain other parties named therein. | |
Series C2 Purchase Agreement | means the Series C2 Purchase Agreement, dated August 27, 2018 among the Company, the holder of the Series C2 Preferred Shares and certain other parties named therein. | |
Seal | means the common seal of the Company and includes every duplicate seal. | |
Share and Shares | means a share or shares in the capital of the Company and includes a fraction of a share. | |
Share Sale | means a transaction or series of related transactions in which a Person, or a group of related Persons, acquires any Equity Securities of the Company such that, immediately after such transaction or series of related transactions, such Person or group of related Persons holds Equity Securities of the Company representing more than fifty percent (50%) of the outstanding voting power of the Company. | |
Shareholders Agreement | means the Fourth Amended and Restated Shareholders Agreement, dated August 31, 2018 among the Company and certain other parties named therein, as amended from time to time. | |
Special Resolution | subject to Article 8.5 (B), has the same meaning as in the Statute and includes a unanimous written resolution of all Members entitled to vote and expressed to be a special resolution. | |
Statute | means the Companies Law of the Cayman Islands (2018 Revision), as amended and every statutory modification or re-enactment thereof for the time being in effect. | |
Subsidiary | means, with respect to any given Person, any other Person that is Controlled directly or indirectly by such given Person, at any time and from time to time. | |
Tencent | shall have the meaning set forth in Article 63 hereof. | |
WFOE | means Shanghai Quyun Internet Technology Co., Ltd. ( 上海趣蕴网络科技有限公司 ), a wholly foreign owned enterprise formed under the laws of the PRC by the HK Company, which in turn Controls Shanghai Jifen Culture Communications Co., Ltd. ( 上海基分文化传播有限公司 ) by a Captive Structure as defined in the Series B3 Purchase Agreement. |
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2. |
In the Articles: |
2.1 |
words importing the singular number include the plural number and vice-versa; |
2.2 |
words importing the masculine gender include the feminine gender; |
2.3 |
written and in writing include all modes of representing or reproducing words in visible form, including in the form of an Electronic Record; |
2.4 |
references to provisions of any law or regulation shall be construed as references to those provisions as amended, modified, re-enacted or replaced from time to time; |
2.5 |
any phrase introduced by the terms including, include, in particular or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms; |
2.6 |
the term voting power refers to the number of votes attributable to the Shares (on an as converted basis) in accordance with the terms of the Memorandum and Articles; |
2.7 |
the term or is not exclusive; |
2.8 |
the term including will be deemed to be followed by, but not limited to; |
2.9 |
the terms shall, will, and agrees are mandatory, and the term may is permissive; |
2.10 |
the term day means calendar day, and month means calendar month; |
2.11 |
the phrase directly or indirectly means directly, or indirectly through one or more intermediate Persons or through contractual or other arrangements, and direct or indirect has the correlative meaning; |
2.12 |
references to any documents shall be construed as references to such document as the same may be amended, supplemented or novated from time to time; |
2.13 |
all references to dollars or to US$ are to currency of the United States of America and all references to RMB are to currency of the PRC (and each shall be deemed to include reference to the equivalent amount in other currencies); |
2.14 |
headings are inserted for reference only and shall be ignored in construing these Articles; and |
2.15 |
capitalized terms used but not defined herein shall have the meanings given to such terms in the Shareholders Agreement. |
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3. |
For the avoidance of doubt, each other Article herein is subject to the provisions of Article 8, and, subject to the requirements of the Statute, in the event of any conflict, the provisions of Article 8 shall prevail over any other Article herein. |
COMMENCEMENT OF BUSINESS
4. |
The business of the Company may be commenced as soon after incorporation as the Directors shall see fit notwithstanding that any part of the Shares may not have been allotted. The Company shall have perpetual existence until wound up or struck off in accordance with the Statute and these Articles. |
5. |
The Directors may pay, out of the capital or any other monies of the Company, all expenses incurred in or about the formation and establishment of the Company, including the expenses of registration. |
ISSUE OF SHARES
6. |
Subject to the provisions, if any, in the Memorandum (and to any direction that may be given by the Company in a general meeting) and to the provisions of Articles 8 and 9 and the Shareholders Agreement and without prejudice to any rights, preferences and privileges attached to any existing Shares, the Directors may allot, issue, grant options or warrants over or otherwise dispose of any Shares. In the event that any Preferred Shares shall be converted pursuant to Article 8.3 hereof, the Preferred Shares so converted shall be cancelled and shall not be re-issuable by the Company. Further, any Preferred Share acquired by the Company by reason of redemption, repurchase, conversion or otherwise shall be cancelled and shall not be re-issuable by the Company. |
7. |
The Company shall not issue Shares to bearer. |
PREFERRED SHARES
8. |
Certain rights, preferences and privileges of the Preferred Shares of the Company are as follows. |
8.1 |
Dividends Rights . |
(A) |
Preference. |
(1) |
Each holder of Series C Preferred Shares shall be entitled to receive dividends at a simple rate of twelve percent (12%) of the applicable Series C Cash Price respectively, per annum, for each Series C Preferred Shares held by such holder, payable out of funds or assets when and as such funds or assets become legally available therefor, on parity with each other and prior and in preference to, and satisfied before, and declaration or payment of any dividend on the Series B1 Preferred Shares, the Series B2 Preferred Shares, the Series B3 Preferred Shares, the Series A Preferred Shares, the Series A1 Preferred Shares and the Ordinary Shares (except for applicable Exempted Distributions). Such dividends shall be payable only when, as, and if declared by the Board of Directors and shall be noncumulative. |
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(2) |
(i) Each holder of Series B1 Preferred Shares shall be entitled to receive dividends at a simple rate of twelve percent (12%) of the applicable Series B1 Issue Price; (ii) each holder of Series B2 Preferred Shares shall be entitled to receive dividends at a simple rate of twelve percent (12%) of the applicable Series B2 Issue Price; (iii) each holder of Series B3 Preferred Shares shall be entitled to receive dividends at a simple rate of twelve percent (12%) of the applicable Series B3 Issue Price respectively, per annum, for each Series B1 Preferred Share, Series B2 Preferred Share or Series B3 Preferred Share held by such holder, payable out of funds or assets when and as such funds or assets become legally available therefor, on parity with each other and prior and in preference to, and satisfied before, any declaration or payment of any dividend on the Series A Preferred Shares, the Series A1 Preferred Shares and the Ordinary Shares (except for applicable Exempted Distributions). Such dividends shall be payable only when, as, and if declared by the Board of Directors and shall be noncumulative. |
(3) |
Each holder of (i) Series A1 Preferred Shares shall be entitled to receive dividends at a simple rate of twelve percent (12%) of the applicable Series A1 Issue Price, respectively, per annum, for each Series A1 Preferred Share held by such holder, and (ii) Series A Preferred Share shall be entitled to receive dividends at a simple rate of twelve percent (12%) of the applicable Series A Issue Price, respectively, per annum, for each Series A Preferred Share held by such holder, in each case, payable out of funds or assets when and as such funds or assets become legally available therefor on parity with each other, and with the dividends payable pursuant to this Article 8.1(A) , prior and in preference to, and satisfied before, any declaration or payment of any dividend on the Ordinary Shares (except for applicable Exempted Distributions). Such dividends shall be payable only when, as, and if declared by the Board of Directors and shall be noncumulative. |
(B) |
Restrictions; Participation. |
Except for an Exempted Distribution, no dividend or distribution, whether in cash, in property, or in any other shares of the Company, shall be declared, paid, set aside or made with respect to the Ordinary Shares at any time unless (i) all accrued but unpaid dividends on the Preferred Shares set forth in Article 8.1(A) have been paid in full, and (ii) a dividend or distribution is likewise declared, paid, set aside or made, respectively, at the same time with respect to each outstanding Preferred Share such that the dividend or distribution declared, paid, set aside or made to the holder thereof shall be equal to the dividend or distribution that such holder would have received pursuant to this Article 8.1(B) if such Preferred Share had been converted into Ordinary Shares immediately prior to the record date for such dividend or distribution, or if no such record date is established, the date such dividend or distribution is made. For any other dividends remaining after the dividends payable to the applicable holders of Preferred Shares pursuant to Article 8.1(A) above or any similar distribution, the remaining proceeds or such similar distribution of the Company available for distribution to the Members shall be distributed ratably among all Members according to the relative number of Ordinary Shares held by such Member on an as if converted basis.
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8.2 |
Liquidation Rights. |
(A) |
Liquidation Preferences . In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, all assets and funds of the Company legally available for distribution to the Members (after satisfaction of all creditors claims and claims that may be preferred by law) shall be distributed to the Members of the Company as follows: |
(1) |
First, the holders of the Series C Preferred Shares shall be entitled to receive for each Series C Preferred Shares held by such holders, on parity with each other and prior and in preference to any distribution of any of the assets or funds of the Company to the holders of the Series B1 Preferred Shares, the holders of the Series B2 Preferred Shares, the holders of the Series B3 Preferred Shares, and the holders of the Series A Preferred Shares, the Series A1 Preferred Shares and the Ordinary Shares by reason of their ownership of such Shares, one hundred and twenty percent (120%) of the Series C Cash Price, plus all accrued but unpaid dividends on such Series C Preferred Shares (collectively, the Series C Preference Amount ). If the assets and funds available for distribution among the holders of the Series C Preferred Shares shall be insufficient to permit the payment to such holders of the full Series C Preference Amount, then the entire remaining assets and funds of the Company legally available for distribution to the holders of the Series C Preferred Shares, subject always to the terms of these Articles, shall be distributed ratably among the holders of the Series C Preferred Shares, in proportion to the aggregate Series C Preference Amount each such holder is otherwise entitled to receive pursuant to this clause(1) |
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(2) |
Second, the holders of the Series B1 Preferred Shares, the holders of the Series B2 Preferred Shares and the holders of the Series B3 Preferred Shares shall be entitled to receive for each such Series B1 Preferred Share, Series B2 Preferred Share or Series B3 Preferred Shares held by such holders, on parity with each other and prior and in preference to any distribution of any of the assets or funds of the Company to the holders of the Series A Preferred Shares, the Series A1 Preferred Shares and the Ordinary Shares by reason of their ownership of such shares, the amount equal to: (i) for each Series B1 Preferred Share, one hundred and twenty percent (120%) of the applicable Series B1 Issue Price, plus all accrued but unpaid dividends on such Series B1 Preferred Share (collectively, the Series B1 Preference Amount ); (ii) for each Series B2 Preferred Share, one hundred and twenty percent (120%) of the applicable Series B2 Issue Price, plus all accrued but unpaid dividends on such Series B2 Preferred Share (collectively, the Series B2 Preference Amount ); (iii) for each Series B3 Preferred Share, one hundred and twenty percent (120%) of the applicable Series B3 Issue Price, plus all accrued but unpaid dividends on such Series B3 Preferred Share (collectively, the Series B3 Preference Amount ). If the assets and funds available for distribution among the holders of the Series B1 Preferred Shares, the holders of the Series B2 Preferred Shares and the holders of Series B3 Preferred Shares shall be insufficient to permit the payment to such holders of the full Series B1 Preference Amount, the full Series B2 Preference Amount and the full Series B3 Preference Amount, then the entire remaining assets and funds of the Company legally available for distribution to the holders of the Series B1 Preferred Shares, the holders of the Series B2 Preferred Shares and the holders of the Series B3 Preferred Shares, subject always to the terms of these Articles, shall be distributed ratably among the holders of the Series B1 Preferred Shares, the holders of the Series B2 Preferred Shares and the holders of the Series B3 Preferred Shares, in proportion to the aggregate Series B1 Preference Amount, the Series B2 Preference Amount and the Series B3 Preference Amount each such holder is otherwise entitled to receive pursuant to this clause(2). |
(3) |
Third, the holders of the Series A Preferred Shares and Series A1 Preferred Shares shall be entitled to receive for each such Series A Preferred Share or such Series A1 Preferred Share held by such holder, on parity with each other and prior and in preference to any distribution of any of the assets or funds of the Company to the holders of the Ordinary Shares by reason of their ownership of such shares, the amount equal to: (i) for each Series A Preferred Share, one hundred twenty percent (120%) of the applicable Series A Issue Price, plus all accrued but unpaid dividends on such Series A Preferred Share (collectively, the Series A Preference Amount ), and (ii) for each Series A1 Preferred Share, one hundred twenty percent (120%) of the applicable Series A1 Issue Price, plus all accrued but unpaid dividends on such Series A1 Preferred Share (collectively, the Series A1 Preference Amount ). If the assets and funds available for distribution among the holders of the Series A Preferred Shares and Series A1 Preferred Shares shall be insufficient to permit the payment to such holders of the full Series A Preference Amount and Series A1 Preference Amount, then the entire remaining assets and funds of the Company legally available for distribution to the holders of the Series A Preferred Shares and Series A1 Preferred Shares, subject always to the terms of these Articles, shall be distributed ratably among the holders of the Series A Preferred Shares and Series A1 Preferred Shares, in proportion to the aggregate Series A Preference Amount and Series A1 Preference Amount each such holder is otherwise entitled to receive pursuant to this clause (3). |
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(4) |
Third, if there are any assets or funds remaining after the aggregate Series A Preference Amount, Series A1 Preference Amount, Series B1 Preference Amount, Series B2 Preference Amount, Series B3 Preference Amount and Series C Preference Amount have been distributed or paid in full to the applicable holders of Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares and Series C Preferred Shares pursuant to clauses (1) , (2) and (3) above, the remaining assets and funds of the Company available for distribution to the Members shall be distributed ratably among all Members according to the relative number of Ordinary Shares held by such Member on an as if converted basis. |
(B) |
Deemed Liquidation Event. Unless otherwise agreed to in writing by the Series A Majority, the Series B Majority and the Series C Majority, a Share Sale and a Deemed Liquidation Event shall be deemed to be a liquidation, dissolution or winding up of the Company for purposes of Article 8.2(A) , and any proceeds, whether in cash or properties, resulting from such Share Sale or Deemed Liquidation Event shall be distributed in accordance with the terms of Article 8.2(A) . |
(C) |
Valuation of Properties . In the event the Company proposes to distribute assets other than cash in connection with any liquidation, dissolution or winding up of the Company pursuant to Article 8.2(A) or pursuant to a Share Sale or a Deemed Liquidation Event of the Company pursuant to Article 8.2(B) , the value of the assets to be distributed to the Members shall be determined in good faith by the Board; provided that any securities not subject to investment letter or similar restrictions on free marketability shall be valued as follows: |
(1) |
If traded on a securities exchange, the value shall be deemed to be the average of the securitys closing prices on such exchange over the thirty (30) day period ending one (1) day prior to the distribution; |
(2) |
If traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the thirty (30) day period ending three (3) days prior to the distribution; and |
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(3) |
If there is no active public market, the value shall be the fair market value thereof as determined in good faith by the Board; |
provided further that the method of valuation of securities subject to investment letter or other restrictions on free marketability shall be adjusted to make an appropriate discount from the market value determined as above in clauses(1), (2) or (3) to reflect the fair market value thereof as determined in good faith by the Board.
Regardless of the foregoing, any of the Series A Majority, the Series B Majority and the Series C Majority shall have the right to challenge any determination by the Board of value pursuant to this Article 8.2(C) , in which case the determination of value shall be made by an independent appraiser selected jointly by the Board, the Series A Majority, the Series B Majority or the Series C Majority (as applicable), with the cost of such appraisal to be borne equally by the Company on one hand and the holders of the Preferred Shares who are challenging the determination of the Board of value pro rata based on the number of Preferred Shares (on an as-converted basis) such holder holds immediately prior to the liquidation, dissolution or winding up of the Company, on the other hand.
(D) |
Notices . In the event that the Company shall propose at any time to consummate a liquidation, dissolution or winding up of the Company, a Share Sale or a Deemed Liquidation Event, then, in connection with each such event, subject to any necessary approval required in the Statute and these Articles, the Company shall send to the holders of Preferred Shares at least twenty (20) days prior written notice of the date when the same shall take place; provided, however, that the foregoing notice periods may be shortened or waived with the vote or written consent of the Series A Majority, the Series B Majority and the Series C Majority. |
(E) |
Enforcement . In the event the requirements of this Article 8.2 are not complied with, the Company shall forthwith either (i) cause the closing of the applicable transaction to be postponed until such time as the requirements of this Article 8.2 have been complied with, or (ii) cancel such transaction. |
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8.3 |
Conversion Rights |
The holders of Preferred Shares shall have the rights described below with respect to the conversion of the Preferred Shares into Ordinary Shares:
(A) |
Conversion Ratio . The number of Ordinary Shares to which a holder shall be entitled upon conversion of (i) each Series A Preferred Share shall be the quotient of the applicable Series A Issue Price divided by the then effective Series A Conversion Price (the Series A Conversion Price ), which shall initially be the applicable Series A Issue Price, resulting in an initial conversion ratio for Series A Preferred Shares of 1:1, (ii) each Series A1 Preferred Share shall be the quotient of the applicable Series A1 Issue Price divided by the then effective Series A1 Conversion Price (the Series A1 Conversion Price ), which shall initially be the applicable Series A1 Issue Price, resulting in an initial conversion ratio for Series A1 Preferred Shares of 1:1, (iii) each Series B1 Preferred Share shall be the quotient of the applicable Series B1 Issue Price divided by the then effective Series B1 Conversion Price (the Series B1 Conversion Price ), which shall initially be the applicable Series B1 Issue Price, resulting in an initial conversion ratio for Series B1 Preferred Shares of 1:1, (iv) each Series B2 Preferred Share shall be the quotient of the applicable Series B2 Issue Price divided by the then effective Series B2 Conversion Price (the Series B2 Conversion Price ), which shall initially be the applicable Series B2 Issue Price, resulting in an initial conversion ratio for Series B2 Preferred Shares of 1:1, (v) each Series B3 Preferred Share shall be the quotient of the applicable Series B3 Issue Price divided by the then effective Series B3 Conversion Price (the Series B3 Conversion Price ), which shall initially be the applicable Series B3 Issue Price, resulting in an initial conversion ratio for Series B3 Preferred Shares of 1:1; and (vi) each Series C Preferred Share shall be the quotient of the applicable Series C Issue Price divided by the then effective Series C Conversion Price (the Series C Conversion Price ), which shall initially be the applicable Series C Issue Price, resulting in an initial conversion ratio for Series C Preferred Shares of 1:1. |
(B) |
Optional Conversion . Subject to the Statute and these Articles, (i) any Series A Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such shares, without the payment of any additional consideration, into fully-paid and non assessable Ordinary Shares based on the then-effective Series A Conversion Price, (ii) any Series A1 Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such shares, without the payment of any additional consideration, into fully-paid and non assessable Ordinary Shares based on the then-effective Series A1 Conversion Price, (iii) any Series B1 Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such shares, without the payment of any additional consideration, into fully-paid and non assessable Ordinary Shares based on the then-effective Series B1 Conversion Price, (iv) any Series B2 Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such shares, without the payment of any additional consideration, into fully-paid and non assessable Ordinary Shares based on the then-effective Series B2 Conversion Price, (v) any Series B3 Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such shares, without the payment of any additional consideration, into fully-paid and non assessable Ordinary Shares based on the then-effective Series B3 Conversion Price; and (vi) any Series C Preferred Share may, at the option of the holder thereof, be converted at any time after the date of issuance of such shares, without the payment of any additional consideration, into fully-paid and non assessable Ordinary Shares based on the then-effective Series C Conversion Price. |
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(C) |
Automatic Conversion . Each Series A Preferred Share shall automatically be converted, based on the then-effective Series A Conversion Price, each Series A1 Preferred Share shall automatically be converted, based on the then-effective Series A1 Conversion Price, each Series B1 Preferred Share shall automatically be converted, based on the then-effective Series B1 Conversion Price, each Series B2 Preferred Share shall automatically be converted, based on the then-effective Series B2 Conversion Price, each Series B3 Preferred Share shall automatically be converted, based on the then-effective Series B3 Conversion Price, and each Series C Preferred Share shall automatically be converted, based on the then-effective Series C Conversion Price, in each case, without the payment of any additional consideration, into fully-paid and non assessable Ordinary Shares upon (i) the closing of a Qualified IPO, (ii) (a) with respect to the Series A Preferred Shares, the date specified by written consent or agreement of holders of a majority of the Series A Shares, (b) with respect to the Series A1 Preferred Shares, the date specified by written consent or agreement of holders of a majority of the Series A1 Shares, (c) with respect to the Series B1 Preferred Shares, the date specified by written consent or agreement of holders of a majority of the Series B1 Preferred Shares, (d) with respect to the Series B2 Preferred Shares, the date specified by written consent or agreement of holders of a majority of the Series B2 Preferred Shares, (e) with respect to the Series B3 Preferred Shares, the date specified by written consent or agreement of holders of a majority of the Series B3 Preferred Shares, and (g) with respect to the Series C Preferred Shares, the date specified by written consent or agreement of the Series C Majority. Any conversion pursuant to this Article 8.3(C) shall be referred to as an Automatic Conversion . |
(D) |
Conversion Mechanism . The conversion hereunder of any applicable Preferred Shares shall be effected in the following manner: |
(1) |
Except as provided in Articles 8.3(D)(2) and 8.3(D)(3) below, before any holder of any Preferred Shares shall be entitled to convert the same into Ordinary Shares, such holder shall surrender the certificate or certificates therefor (if any) (or in lieu thereof shall deliver an affidavit of lost certificate) at the office of the Company or of any transfer agent for such share to be converted and shall give notice to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for Ordinary Shares are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of applicable Preferred Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Ordinary Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such notice and such surrender of the Preferred Shares to be converted, the Register of Members of the Company shall be updated accordingly to reflect the same, and the Person or Persons entitled to receive the Ordinary Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares as of such date. |
23
(2) |
If the conversion is in connection with an underwritten public offering of securities, the conversion will be conditioned upon the closing with the underwriter(s) of the sale of securities pursuant to such offering and the Person(s) entitled to receive the Ordinary Shares issuable upon such conversion shall not be deemed to have converted the applicable Preferred Shares until immediately prior to the closing of such sale of securities. |
(3) |
Upon the occurrence of an event of Automatic Conversion, all holders of Preferred Shares to be automatically converted will be given at least ten (10) Business Days prior written notice of the date fixed (which date shall in the case of a Qualified IPO be the latest practicable date immediately prior to the closing of the Qualified IPO) and the place designated for automatic conversion of all such Preferred Shares pursuant to this Article 8.3(D) . Such notice shall be given pursuant to Articles 107 through 111 to each record holder of such Preferred Shares at such holders address appearing on the register of members. On or before the date fixed for conversion, each holder of such Preferred Shares shall surrender the applicable certificate or certificates (if any) (or in lieu thereof shall deliver an affidavit of lost certificate and indemnity therefor) for all such shares to the Company at the place designated in such notice. On the date fixed for conversion, the Company shall promptly effect such conversion and update its register of members to reflect such conversion, and all rights with respect to such Preferred Shares so converted will terminate, with the exception of the right of a holder thereof to receive the Ordinary Shares issuable upon conversion of such Preferred Shares, and upon surrender of the certificate or certificates therefor (if any) (or in lieu thereof shall deliver an affidavit of lost certificate and indemnity therefor), to receive certificates (if applicable) for the number of Ordinary Shares into which such Preferred Shares have been converted. All certificates evidencing such Preferred Shares shall, from and after the date of conversion, be deemed to have been retired and cancelled and the Preferred Shares represented thereby converted into Ordinary Shares for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. |
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(4) |
The Company may effect the conversion of Preferred Shares in any manner available under applicable law, including redeeming or repurchasing the relevant Preferred Shares and applying the proceeds thereof towards payment for the new Ordinary Shares. For purposes of the repurchase or redemption, the Company may, subject to the Company being able to pay its debts in the ordinary course of business, make payments out of its capital. |
(5) |
No fractional Ordinary Shares shall be issued upon conversion of any Preferred Shares. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall at the discretion of the Board of Directors either (i) pay cash equal to such fraction multiplied by the fair market value for the applicable Preferred Share as determined and approved by the Board of Directors (so long as such approval includes the approvals of the Series A Director (with respect to the conversion of the Series A Preferred Shares), the Series B1 Director (with respect to the conversion of the Series B Preferred Shares) and the Series C Director (with respect to the conversion of the Series C Preferred Shares)), or (ii) issue one whole Ordinary Share for each fractional share to which the holder would otherwise be entitled. |
(6) |
Upon conversion, all accrued but unpaid share dividends on the applicable Preferred Shares shall be paid in shares and all accrued but unpaid cash dividends on the applicable Preferred Shares shall be paid either in cash or by the issuance of a number of further Ordinary Shares equal to the value of such cash amount, at the option of the holders of the applicable Preferred Shares. |
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(E) |
Adjustment of the Conversion Price . Each Series A Conversion Price, Series A1 Conversion Price, Series B1 Conversion Price, Series B2 Conversion Price, Series B3 Conversion Price, and Series C Conversion Price shall be adjusted and readjusted from time to time as provided below, save that no adjustment shall have the effect that the relevant Series A Conversion Price, Series A1 Conversion Price, Series B1 Conversion Price, Series B2 Conversion Price, Series B3 Conversion Price, or Series C Conversion Price, as applicable, would be less than the par value of the Ordinary Shares into which the applicable Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Conversion Price, Series B2 Conversion Price, Series B3 Conversion Price, or Series C Conversion Price are to be converted: |
(1) |
Adjustment for Share Splits and Combinations . If the Company shall at any time, or from time to time, effect a subdivision of the outstanding Ordinary Shares, the Series A Conversion Price, Series A1 Conversion Price, Series B1 Conversion Price, Series B2 Conversion Price, Series B3 Conversion Price, and Series C Conversion Price in effect immediately prior to such subdivision with respect to each Series A Preferred Share, Series A1 Preferred Share, Series B1 Preferred Share, Series B2 Preferred Share, Series B3 Preferred Share, and Series C Preferred Shares, respectively, shall be proportionately decreased. Conversely, if the Company shall at any time, or from time to time, combine the outstanding Ordinary Shares into a smaller number of shares, the Series A Conversion Price, Series A1 Conversion Price, Series B1 Conversion Price, Series B2 Conversion Price, Series B3 Conversion Price, and Series C Conversion Price in effect immediately prior to such combination with respect to each Series A Preferred Share, Series A1 Preferred Share, Series B1 Preferred Share, Series B2 Preferred Share, Series B3 Preferred Share, Shares and Series C Preferred Shares, respectively, shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. |
(2) |
Adjustment for Ordinary Share Dividends and Distributions. If the Company makes (or fixes a record date for the determination of holders of Ordinary Shares entitled to receive) a dividend or other distribution to the holders of Ordinary Shares payable in additional Ordinary Shares, the Series A Conversion Price then in effect with respect to each Series A Preferred Share, the Series A1 Conversion Price then in effect with respect to each Series A1 Preferred Share, the Series B1 Conversion Price then in effect with respect to each Series B1 Preferred Share, the Series B2 Conversion Price then in effect with respect to each Series B2 Preferred Share, the Series B3 Conversion Price then in effect with respect to each Series B3 Preferred Share, and the Series C Conversion Price then in effect with respect to each Series C Preferred Share, in each case, shall be decreased as of the time of such issuance (or in the event such record date is fixed, as of the close of business on such record date) by multiplying such conversion price by a fraction (i) the numerator of which is the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution. |
26
Notwithstanding the foregoing, (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the applicable Series A Conversion Price, Series A1 Conversion Price, Series B1 Conversion Price, Series B2 Conversion Price, Series B3 Conversion Price, and Series C Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the applicable Series A Conversion Price, Series A1 Conversion Price, Series B1 Conversion Price, Series B2 Conversion Price, Series B3 Conversion Price, and Series C Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions; and (b) that no such adjustment shall be made if the holders of the applicable series of Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, and Series C Preferred Shares simultaneously receive a dividend or other distribution of shares of Ordinary Shares in a number equal to the number of shares of Ordinary Shares as they would have received if all outstanding shares of such series of Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, and Series C Preferred Shares, respectively, had been converted into Ordinary Shares on the date of such event.
(3) |
Adjustments for Reorganizations, Mergers, Consolidations, Reclassifications, Exchanges, Substitutions. If at any time, or from time to time, any capital reorganization or reclassification of the Ordinary Shares (other than as a result of a share dividend, subdivision, split or combination otherwise treated above) occurs or the Company is consolidated, merged or amalgamated with or into another Person (other than a consolidation, merger or amalgamation treated as a liquidation in Article 8.2(B) ), then in any such event, provision shall be made so that, upon conversion of any Preferred Share thereafter, the holder thereof shall receive the kind and amount of shares and other securities and property which the holder of such shares would have received in connection with such event had the relevant Preferred Shares been converted into Ordinary Shares immediately prior to such event. |
(4) |
Adjustments to Conversion Price for Dilutive Issuance . |
(a) |
Special Definition. For purpose of this Article 8.3(E)(4) , the following definitions shall apply: |
(i) |
Options mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Ordinary Shares or Convertible Securities. |
27
(ii) |
Convertible Securities shall have the meaning given to it in the Shareholders Agreement. |
(iii) |
New Securities shall have the meaning given to it in the Shareholders Agreement, and the exceptions set forth in Sections 7.3(a) through (e) of the Shareholders Agreement. |
(b) |
No Adjustment of Conversion Price. No adjustment in the (i) Series A Conversion Price with respect to any Series A Preferred Share, (ii) Series A1 Conversion Price with respect to any Series A1 Preferred Share, (iii) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (iv) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (v) Series B3 Conversion Price with respect to any Series B3 Preferred Share, and (vi) Series C Conversion Price with respect to any Series C Preferred Share, in each case, shall be made in respect of the issuance of New Securities unless the consideration per Ordinary Share (determined pursuant to Article 8.3(E)(4)(e) hereof) for the New Securities issued or deemed to be issued by the Company is less than, (t) with respect to the Series A Preferred Shares, the Series A Conversion Price, (u) with respect to the Series A1 Preferred Shares, the Series A1 Conversion Price, (v) with respect to the Series B1 Preferred Shares, the Series B1 Conversion Price, (w) with respect to the Series B2 Preferred Shares, the Series B2 Conversion Price, (x) with respect to the Series B3 Preferred Shares, the Series B3 Conversion Price, in effect immediately prior to such issuance, or (y) with respect to the Series C Preferred Shares, the Series C Conversion Price in effect immediately prior to such issuance (each, a Dilutive Issuance Event ). Upon the occurrence of a Dilutive Issuance Event, the Series A Conversion Price, the Series A1 Conversion Price, the Series B1 Conversion Price, the Series B2 Conversion Price, the Series B3 Conversion Price, or the Series C Conversion Price (as the case may be) shall be adjusted in accordance with Article 8.3(E)(4)(d) . No adjustment or readjustment in the Series A Conversion Price, Series A1 Conversion Price, Series B1 Conversion Price, Series B2 Conversion Price, the Series B3 Conversion Price, or the Series C Conversion Price with respect to any Series A Preferred Share, Series A1 Preferred Share, Series B1 Preferred Share, Series B2 Preferred Share, Series B3 Preferred Share, or Series C Preferred Share, respectively, otherwise required by this Article 8.3 shall affect any Ordinary Shares issued upon conversion of any applicable Series A Preferred Share, Series A1 Preferred Share, Series B1 Preferred Share, Series B2 Preferred Share, Series B3 Preferred Share, or Series C Preferred Share respectively, prior to such adjustment or readjustment, as the case may be. |
28
(c) |
Deemed Issuance of New Securities. In the event the Company at any time or from time to time shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any series or class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of Ordinary Shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number for anti-dilution adjustments) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities or the exercise of such Options, shall be deemed to be New Securities issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which New Securities are deemed to be issued: |
(i) |
no further adjustment in the (1) Series A Conversion Price with respect to any Series A Preferred Share, (2) Series A1 Conversion Price with respect to any Series A1 Preferred Share, (3) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (4) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (5) Series B3 Conversion Price with respect to any Series B3 Preferred Share, and (6) Series C Conversion Price with respect to any Series C Preferred Share, in each case, shall be made upon the subsequent issue of Convertible Securities or Ordinary Shares upon the exercise of such Options or conversion or exchange of such Convertible Securities or upon the subsequent issue of Options for Convertible Securities or Ordinary Shares; |
29
(ii) |
if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Company, or change in the number of Ordinary Shares issuable, upon the exercise, conversion or exchange thereof, the then effective (1) Series A Conversion Price with respect to any Series A Preferred Share, (2) Series A1 Conversion Price with respect to any Series A1 Preferred Share, (3) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (4) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (5) Series B3 Conversion Price with respect to any Series B3 Preferred Share, and (6) Series C Conversion Price with respect to any Series C Preferred Share, in each case, computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such change becoming effective, be recomputed to reflect such change insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; |
(iii) |
no readjustment pursuant to Article 8.3(E)(4)(c)(ii) shall have the effect of increasing the then effective (1) Series A Conversion Price with respect to any Series A Preferred Share, (2) Series A1 Conversion Price with respect to any Series A1 Preferred Share, (3) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (4) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (5) Series B3 Conversion Price with respect to any Series B3 Preferred Share, or (6) Series C Conversion Price with respect to any Series C Preferred Share, in each case, to an amount which exceeds the Series A Conversion Price with respect to such Series A Preferred Share, Series A1 Conversion Price with respect to such Series A1 Preferred Share, Series B1 Conversion Price with respect to such Series B1 Preferred Share, Series B2 Conversion Price with respect to such Series B2 Preferred Share, Series B3 Conversion Price with respect to such Series B3 Preferred Share, or Series C Conversion Price with respect to such Series C Preferred Share, in each case, that would have been in effect had no adjustments in relation to the issuance of the Options or Convertible Securities as referenced in Article 8.3(E)(4)(c)(ii) been made; |
30
(iv) |
upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities that have not been exercised, the then effective (1) Series A Conversion Price with respect to any Series A Preferred Share, (2) Series A1 Conversion Price with respect to any Series A1 Preferred Share, (3) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (4) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (5) Series B3 Conversion Price with respect to any Series B3 Preferred Share, and (6) Series C Conversion Price with respect to any Series C Preferred Share, in each case, computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon shall, upon such expiration, be recomputed as if: |
(x) |
in the case of Convertible Securities or Options for Ordinary Shares, the only New Securities issued were the Ordinary Shares, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue of such exercised Options plus the consideration actually received by the Company upon such exercise or for the issue of all such Convertible Securities that were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and |
(y) |
in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Company for the New Securities deemed to have been then issued was the consideration actually received by the Company for the issue of such exercised Options, plus the consideration deemed to have been received by the Company (determined pursuant to Article 8.3(E)(4)(e) ) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; and |
31
(v) |
if such record date shall have been fixed and such Options or Convertible Securities are not issued on the date fixed therefor, the adjustment previously made in the Series A Conversion Price with respect to any Series A Preferred Share, Series A1 Conversion Price with respect to any Series A1 Preferred Share, Series B1 Conversion Price with respect to any Series B1 Preferred Share, Series B2 Conversion Price with respect to any Series B2 Preferred Share, Series B3 Conversion Price with respect to any Series B3 Preferred Share, and/or Series C Conversion Price with respect to any Series C Preferred Share, in each case, which became effective on such record date shall be canceled as of the close of business on such record date, and thereafter the Series A Conversion Price with respect to such Series A Preferred Share, the Series A1 Conversion Price with respect to such Series A1 Preferred Share, the Series B1 Conversion Price with respect to such Series B1 Preferred Share, the Series B2 Conversion Price with respect to such Series B2 Preferred Share, the Series B3 Conversion Price with respect to such Series B3 Preferred Share, and the Series C Conversion Price with respect to such Series C Preferred Share, in each case, shall be adjusted pursuant to this Article 8.3(E)(4)(c) as of the actual date of their issuance. |
(d) |
Adjustment of the Conversion Price upon Issuance of New Securities . In the event of an issuance of New Securities for a consideration per Ordinary Share received by the Company (net of any selling concessions, discounts or commissions) (the New Price ) less than the (1) Series A Conversion Price with respect to any Series A Preferred Share, (2) the Series A1 Conversion Price with respect to any Series A1 Preferred Share, (3) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (4) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (5) Series B3 Conversion Price with respect to any Series B3 Preferred Share, or (6) Series C Conversion Price with respect to any Series C Preferred Share, as applicable, in effect immediately prior to such issue, then and in such event, the Series A Conversion Price with respect to such Series A Preferred Share, the Series A1 Conversion Price with respect to such Series A1 Preferred Share, the Series B1 Conversion Price with respect to such Series B1 Preferred Share, the Series B2 Conversion Price with respect to such Series B2 Preferred Share, the Series B3 Conversion Price with respect to such Series B3 Preferred Share, and/or the Series C Conversion Price with respect to such Series C Preferred Share, as applicable, shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula: |
CP2 = CP1*(A + B) ÷ (A + C).
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For purposes of the foregoing formula, the following definitions shall apply:
(i) |
CP2 shall mean (1) the Series A Conversion Price with respect to any Series A Preferred Share, (2) the Series A1 Conversion Price with respect to any Series A1 Preferred Share, (3) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (4) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (5) Series B3 Conversion Price with respect to any Series B3 Preferred Share, or (6) Series C Conversion Price with respect to any Series C Preferred Share, in each case in effect immediately after such issue of New Securities; |
(ii) |
CP1 shall mean (1) the Series A Conversion Price with respect to any Series A Preferred Share, (2) the Series A1 Conversion Price with respect to any Series A1 Preferred Share, (3) Series B1 Conversion Price with respect to any Series B1 Preferred Share, (4) Series B2 Conversion Price with respect to any Series B2 Preferred Share, (5) Series B3 Conversion Price with respect to any Series B3 Preferred Share, or (6) Series C Conversion Price with respect to any Series C Preferred Share, in each case in effect immediately prior to such issue of New Securities; |
33
(iii) |
A shall mean the number of Ordinary Shares (on a fully diluted basis) outstanding immediately prior to such issue of New Securities; |
(iv) |
B shall mean the number of New Securities that would have been issued if such New Securities had been issued at a price per share equal to CP1 (determined by dividing the aggregate consideration received by the Company in respect of such issue by CP1); and |
(v) |
C shall mean the number of New Securities. |
(e) |
Determination of Consideration . For purposes of this Article 8.3(E)(4) , the consideration received by the Company for the issuance of any New Securities shall be computed as follows: |
(i) |
Cash and Property. Such consideration shall: |
(1) |
insofar as it consists of cash, be computed at the aggregate amount of cash received by the Company excluding amounts paid or payable for accrued interest or accrued dividends and excluding any discounts, commissions or placement fees payable by the Company to any underwriter or placement agent in connection with the issuance of any New Securities; |
(2) |
insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined and approved in good faith by the Board of Directors (so long as such approval includes the approval of the Series A Director, the Series B1 Director and the Series C Director); provided, however, that no value shall be attributed to any services performed by any employee, officer or director of any Group Company; |
34
(3) |
in the event New Securities are issued together with other Shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received which relates to such New Securities, computed as provided in clauses (1) and (2) above, as reasonably determined in good faith by the Board of Directors, including the consent of the Series A Director, the Series B1 Director and the Series C Director. |
(ii) |
Options and Convertible Securities. The consideration per Ordinary Share received by the Company for New Securities deemed to have been issued pursuant to Article 8.3(E)(4)(c) hereof relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities (determined in the manner described in paragraph (i) above), plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (y) the maximum number of Ordinary Shares (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. |
(5) |
Other Dilutive Events. In case any event shall occur as to which the other provisions of this Article 8.3(E) are not strictly applicable, but the failure to make any adjustment to the Series A Conversion Price with respect to any Series A Preferred Share, the Series A1 Conversion Price with respect to any Series A1 Preferred Share, Series B1 Conversion Price with respect to any Series B1 Preferred Share, Series B2 Conversion Price with respect to any Series B2 Preferred Share, Series B3 Conversion Price with respect to any Series B3 Preferred Share, and/or Series C Conversion Price with respect to any Series C Preferred Share, in each case, would not fairly protect the conversion rights of such holders in accordance with the essential intent and principles hereof, then the Company, in good faith, shall determine the appropriate adjustment to be made, on a basis consistent with the essential intent and principles established in this Article 8.3(E) , necessary to preserve, without dilution, the conversion rights of such holders. |
35
(6) |
No Impairment. The Company will not, by amendment of these Articles or through any reorganization, recapitalization, transfer of assets, consolidation, merger, amalgamation, scheme of arrangement, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Article 8.3 and in the taking of all such action as may be necessary or appropriate to protect the conversion rights of the holders of Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares and Series C Preferred Shares against impairment. |
(7) |
Certificate of Adjustment. In the case of any adjustment or readjustment of the Series A Conversion Price with respect to any Series A Preferred Share, Series A1 Conversion Price with respect to any Series A1 Preferred Share, Series B1 Conversion Price with respect to any Series B1 Preferred Share, Series B2 Conversion Price with respect to any Series B2 Preferred Share, Series B3 Conversion Price with respect to any Series B3 Preferred Share, or Series C Conversion Price with respect to any Series C Preferred Share, in each case, the Company, at its sole expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall deliver such certificate by notice to each registered holder of such Series A Preferred Share, Series A1 Preferred Share, Series B1 Preferred Share, Series B2 Preferred Share, Series B3 Preferred Share or Series C Preferred Share, as applicable, at the holders address as shown in the Companys books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the consideration received or deemed to be received by the Company for any New Securities issued or sold or deemed to have been issued or sold, (ii) the number of New Securities issued or sold or deemed to be issued or sold, (iii) the Series A Conversion Price with respect to such Series A Preferred Share, the Series A1 Conversion Price with respect to such Series A1 Preferred Share, Series B1 Conversion Price with respect to such Series B1 Preferred Share, the Series B2 Conversion Price with respect to such Series B2 Preferred Share, the Series B3 Conversion Price with respect to such Series B3 Preferred Share, and the Series C Conversion Price with respect to such Series C Preferred Share, in each case, in effect before and after such adjustment or readjustment, and (iv) the type and number of Equity Securities of the Company, and the type and amount, if any, of other property which would be received upon conversion of such Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares and/or Series C Preferred Shares, after such adjustment or readjustment. |
36
(8) |
Notice of Record Date. In the event the Company shall propose to take any action of the type or types requiring an adjustment set forth in this Article 8.3(E) , the Company shall give notice to the holders of the relevant Preferred Shares, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Series A Conversion Price with respect to the relevant Series A Preferred Share, the Series A1 Conversion Price with respect to the relevant Series A1 Preferred Share, the Series B1 Conversion Price with respect to the relevant Series B1 Preferred Share, the Series B2 Conversion Price with respect to the relevant Series B2 Preferred Share, the Series B3 Conversion Price with respect to the relevant Series B3 Preferred Share and/or the Series C Conversion Price with respect to the relevant Series C Preferred Share, in each case, and the number, kind or class of shares or other securities or property which shall be deliverable upon the occurrence of such action or deliverable upon the conversion of such Preferred Shares. In the case of any action which would require the fixing of a record date, such notice shall be given at least twenty (20) days prior to the date so fixed, and in the case of all other actions, such notice shall be given at least thirty (30) days prior to the taking of such proposed action. |
(9) |
Reservation of Shares Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued Ordinary Shares, solely for the purpose of effecting the conversion of the Preferred Shares, such number of its Ordinary Shares as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Shares. If at any time the number of authorized but unissued Ordinary Shares shall not be sufficient to effect the conversion of all then outstanding Preferred Shares, in addition to such other remedies as shall be available to the holders of Preferred Shares, the Company and its Members will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Ordinary Shares to such number of shares as shall be sufficient for such purpose. |
37
(10) |
Notices. Any notice required or permitted pursuant to this Article 8.3 shall be given in writing and shall be given in accordance with Articles 107 through 111 . |
(11) |
Payment of Taxes. The Company will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of Ordinary Shares upon conversion of the Preferred Shares, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of Ordinary Shares in a name other than that in which such Preferred Shares so converted were registered. |
8.4 |
Anti-Dilution Rights for Holders of Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares and Series C Preferred Shares . If the Company proposes to adopt any New ESOP(s) after the Series B1 Closing, the Series B2 Closing, the Series B3 Closing, the Series C1 Closing and/or the Series C2 Closing, and the aggregate number of Ordinary Shares reserved under any such New ESOP(s) is less than or equal to 10% of the Companys share capital as at the Series B2 Closing on a fully diluted basis (i.e. 6,859,869 Ordinary Shares, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events after the B2 Closing) (the 10% ESOP Quota ), the Company shall issue to each holder of Series B1 Preferred Shares/Series B2 Preferred Shares/Series B3 Preferred Shares/Series C1 Preferred Shares/Series C2 Preferred Shares a number of additional Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, Series C1 Preferred Shares or Series C2 Preferred Shares (with respect to a holder of Series B1 Preferred Shares, the Series B1 Preferred Shares; with respect to a holder of Series B2 Preferred Shares, the Series B2 Preferred Shares; with respect to a holder of Series B3 Preferred Shares, the Series B3 Preferred Shares; with respect to a holder of Series C1 Preferred Shares, the Series C1 Preferred Shares; and with respect to a holder of Series C2 Preferred Shares, the Series C2 Preferred Shares) at a consideration equal to the par value of such shares at the same time as the reservation of shares for the New ESOP(s) to ensure that such holders shareholding percentage only with respect to its applicable Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, Series C1 Preferred Shares or Series C2 Preferred Shares in the Company shall not be diluted by any such New ESOP(s) ( New ESOP Anti-dilution Right ). For the avoidance of doubt, if the number of Ordinary Shares reserved under the New ESOP(s) cumulatively exceeds the 10% ESOP Quota, the holders of Series B1 Preferred Shares/Series B2 Preferred Shares/Series B3 Preferred Shares/Series C1 Preferred Shares/Series C2 Preferred Shares shall not have any New ESOP Anti-dilution Right with respect to the portion of Ordinary Shares reserved under the New ESOP(s) which exceeds the 10% ESOP Quota while each holder of Series B1 Preferred Shares/Series B2 Preferred Shares/Series B3 Preferred Shares/Series C1 Preferred Shares/Series C2 Preferred Shares shall still be entitled to the New ESOP Anti-dilution Right with respect to the portion of Ordinary Shares reserved under the New ESOP(s) up to the 10% ESOP Quota. For the avoidance of doubt, any grant or exercise of such New ESOP(s) shall follow the procedures specified in the ESOP plan. The New ESOP Anti-dilution Right shall expire upon the IPO of the Company. |
38
8.5 |
Voting Rights . |
(A) |
General Rights . Subject to the provisions of the Memorandum and these Articles, at all general meetings of the Company: (a) the holder of each Ordinary Share issued and outstanding shall have one vote in respect of each Ordinary Share held, (b) the holder of a Series A Preferred Share, the holder of a Series A1 Preferred Share, the holder of a Series B1 Preferred Share, the holder of a Series B2 Preferred Share the holder of a Series B3 Preferred Share and the holder of a Series C Preferred Share shall each be entitled to such number of votes as equals the whole number of Ordinary Shares into which such holders collective Preferred Shares are convertible immediately after the close of business on the record date of the determination of the Companys Members entitled to vote or, if no such record date is established, at the date such vote is taken or any written consent of the Companys Members is first solicited. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as converted basis (after aggregating all shares into which the Preferred Shares held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). |
(B) |
Protective Provisions . |
(1) |
Approval by the Series A Majority, the Series B Majority and the Series C Majority . The Company shall not take, permit to occur, approve, authorize, or agree or commit to do any of the following, and no Member shall permit the Company to, take, permit to occur, approve, authorize, or agree or commit to do any of the following, and the Company shall not permit any other Group Company to take, permit to occur, approve, authorize, or agree or commit to do any of the following, whether in a single transaction or a series of related transactions, whether directly or indirectly, and whether or not by amendment, merger, consolidation, scheme of arrangement, amalgamation, or otherwise, unless approved in writing by the Series A Majority, the Series B Majority, Tencent (as applicable) and the Series C Majority: |
(1) |
any amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, any series of Preferred Shares (including without limitation the change of the size or composition of the Board or the board of directors of any other Group Company); |
39
(2) |
any action that creates, authorizes the creation of or issues any Equity Security or other security convertible into or exercisable for any Equity Security, or change the authorized number of shares of any series of Preferred Shares or Ordinary Shares or any reorganization or restructuring of its share capital (other than the Restructuring); provided that in case that the Company proposes a Qualified IPO, the holders of Preferred Shares or their Directors (if applicable) shall not unreasonably disapprove the proposal relating to such Qualified IPO. |
(3) |
any purchase, repurchase, redemption or retirement of any Equity Securities, other than repurchases pursuant to share restriction agreements approved by the Board upon termination of a Director, employee or consultant; |
(4) |
any amendment or modification to or waiver under any of the Charter Documents in a manner adverse to any series of Preferred Shares; |
(5) |
any declaration, set aside or payment of a dividend or other distribution, or the adoption of, or any change to, the dividend policy; |
(6) |
(a) any amendment of the maximum number of Equity Securities that may be granted under the Current ESOP; and (b) the adoption, amendment or termination of any equity incentive, purchase or participation plan for the benefit of employees, officers, directors, contractors, advisors or consultants other than the Current ESOP (each such plan, a New ESOP ); |
(7) |
(i) any transaction(s) with any Related Party (other than the Principals and their respective Associates and Tencent and its Affiliates), either individually or together with any other transactions with such party, having an aggregate transaction value exceeding US$30,000,000 in any financial year, (ii) any transactions with any Related Party (other than the Principals and their Associates) that are on terms that are less favorable than arms length terms for the relevant Group Company; and (iii) any transactions with a Principal or its Associate; |
(8) |
the commencement of or consent to any proceeding seeking (i) to adjudicate it as bankrupt or insolvent, (ii) liquidation, winding up, dissolution, reorganization, or other arrangement under law relating to bankruptcy, insolvency or reorganization or relief of debtors, or (iii) the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; |
40
(9) |
any investment in, or divestiture or sale of an interest in a Subsidiary, partnership or joint venture; |
(10) |
any transaction or a series of transactions that constitute a Share Sale or a Deemed Liquidation Event, provided that, for so long as Tencent together with its Affiliates hold more than 50% of the Series B1 Preferred Shares it acquired at the Series B1 Closing (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events), the transferee, target, offeror or other counterparty to the transaction(s) shall not be any of the Restricted Persons II as set forth in the Shareholders Agreement without prior written consent of Tencent; |
(11) |
approval of, or any deviation from or amendment of, the annual budget or the business and financial plan; |
(12) |
incurrence of Indebtedness or guarantees of Indebtedness in excess of 10% of the net book value of the total assets of the Group as at the end of the preceding financial year; |
(13) |
any sale, transfer, or other disposal of, or the incurrence of any Lien on, any assets valued in excess of 10% of the net book value of the total assets of the Group as at the end of the preceding financial year; |
(14) |
any change in the direct or indirect equity ownership of the Domestic Company or any amendment or modification to or waiver under any of the Control Documents; |
(15) |
any material change to the business scope or nature of business, or cessation of any business line ( including entering into any business not within the scope of the Business); or |
(16) |
any action by a Group Company to authorize, approve or enter into any agreement or obligation with respect to any of the actions listed above. |
41
Notwithstanding anything to the contrary contained herein, where any act listed in clauses (1) through (16) above requires the approval of the Members of the Company in accordance with the Statute, and if the Members vote in favour of such act but the approval of the Series A Majority, the Series B Majority, Tencent (as applicable) or the Series C Majority has not yet been obtained, then the Series A Majority, the Series B Majority, Tencent (as the case may be) or the Series C Majority shall, in such vote, have the voting rights equal to the aggregate voting power of all the Members who voted in favor of such act plus one.
(2) |
Board Approvals . The Company shall not take, permit to occur, approve, authorize, or agree or commit to do any of the following, and the Members shall not permit the Company to, take, permit to occur, approve, authorize, or agree or commit to do any of the following, whether in a single transaction or a series of related transactions, and the Company shall not permit any other Group Company to take, permit to occur, approve, authorize, or agree or commit to do any of the following, whether directly or indirectly, and whether or not by amendment, merger, consolidation, scheme of arrangement, amalgamation, or otherwise, unless approved by the Board (which approval must include the approvals of the Series A Director, the Series B1 Director and the Series C Director): |
(1) |
incurrence of Indebtedness or guarantees of Indebtedness in excess of the lower of (i) US$3,000,000; (ii) 5% of the net book value of the total assets of the Group as at the end of the preceding financial year in the aggregate during any financial year; |
(2) |
purchase or lease of any business and/or assets valued in excess of the lower of (i) US$3,000,000; (ii) 5% of the net book value of the total assets of the Group as at the end of the preceding financial year in the aggregate during any financial year; |
(3) |
any capital commitment or expenditure in excess of the lower of (i) US$3,000,000; (ii) 5% of the net book value of the total assets of the Group as at the end of the preceding financial year; |
(4) |
the investment in any other entity exceeding US$5,000,000 individually or US$10,000,000 in the aggregate during any financial year, or enter into any joint venture or partnership; |
(5) |
appointment or removal of any auditor, material change in accounting policies or change of financial year; or |
42
(6) |
any action by a Group Company to authorize, approve or enter into any agreement or obligation with respect to any of the actions listed above. |
8.6 |
Redemption Rights. |
(A) |
Redemption . Subject to any legal restrictions on the Companys redemption of shares: |
(i) |
(1) if the Company has not achieved a Qualified IPO by the date that is five years after the date of the Series B1 Closing, (2) in the event of any material breach of representations and warranties, covenants or obligations made or borne by any Warrantor (as defined in the Series A Purchase Agreement) in the Transaction Documents (as defined in the Series A Purchase Agreement, including those duly amended and restated versions from time to time) which causes a Material Adverse Effect (as defined in the Series A Purchase Agreement) on the business of the Group Companies or any holder of the Series A Preferred Shares, or in the event any Warrantor gives any material misrepresentation or engages in wilful or fraudulent misconducts, which causes a Material Adverse Effect (as defined in the Series A Purchase Agreement) on the business of the Group Companies or any holder of the Series A Preferred Shares, or (3) any holder of any other class of Shares elects to exercise its redemption right, the holders of at least a majority of the then outstanding Series A Preferred Shares may; |
(ii) |
(1) if the Company has not achieved a Qualified IPO by the date that is five years after the date of the Series B1 Closing, (2) in the event of any material breach of representations and warranties, covenants or obligations made or borne by any Warrantor (as defined in the Series A1 Purchase Agreement) in the Transaction Documents (as defined in the Series A1 Purchase Agreement, including those duly amended and restated versions from time to time) which causes a Material Adverse Effect (as defined in the Series A1 Purchase Agreement) on the business of the Group Companies or any holder of the Series A1 Preferred Shares, or in the event any Warrantor gives any material misrepresentation or engages in wilful or fraudulent misconduct, which causes a Material Adverse Effect (as defined in the Series A1 Purchase Agreement) on the business of the Group Companies or any holder of the Series A1 Preferred Shares, or (3) any holder of any other class of Shares elects to exercise its redemption right, the holders of at least a majority of the then outstanding Series A1 Preferred Shares may, |
43
(iii) |
(1) if the Company has not achieved a Qualified IPO by the date that is five years after the date of the Series B1 Closing, (2) in the event of any material breach of representations and warranties, covenants or obligations made or borne by any Warrantor (as defined in the Series B1 Purchase Agreement) in the Transaction Documents (as defined in the Series B1 Purchase Agreement, including those duly amended and restated versions from time to time) which causes a Material Adverse Effect (as defined in the Series B1 Purchase Agreement) on the business of the Group Companies or any holder of the Series B1 Preferred Shares, or in the event any Warrantor gives any material misrepresentation or engages in wilful or fraudulent misconduct, which causes a Material Adverse Effect (as defined in the Series B1 Purchase Agreement) on the business of the Group Companies or any holder of the Series B1 Preferred Shares, (3) except where the Company has provided an alternative plan, to the satisfaction of the Series B Majority, to operate the business of the Group Companies without the relevant material license, permit or government approval, (x) any Group Company being unable to obtain any material license or permit that such Group Company had applied for (or was obligated to apply for) in accordance with the Series B1 Purchase Agreement or (y) any material license, permit or government approval of any Group Company has been revoked, in each case, resulting in that the Business being suspended or shut down or cannot be conducted in the way that it is currently conducted for a period longer than one hundred and eighty (180) days, or (4) any holder of any other class of Shares elects to exercise its redemption right, the Series B Majority may, |
44
(iv) |
(1) if the Company has not achieved a Qualified IPO by the date that is five years after the date of the Series B1 Closing, (2) in the event of any material breach of representations and warranties, covenants or obligations made or borne by any Warrantor (as defined in the Series C Purchase Agreements) in the Transaction Documents (as defined in the Series C Purchase Agreements, including those duly amended and restated versions from time to time) which causes a Material Adverse Effect (as defined in the Series C Purchase Agreements) on the business of the Group Companies or any holder of the Series C Preferred Shares, (3) except where the Company has provided an alternative plan, to the satisfaction of the Series C Majority, to operate the business of the Group Companies without the relevant material license, permit or government approval, (x) any Group Company being unable to obtain any material license or permit that such Group Company had applied for (or was obligated to apply for) in accordance with the Series C Purchase Agreements or (y) any material license, permit or government approval of any Group Company has been revoked, in each case, resulting in that the Business being suspended or shut down or cannot be conducted in the way that it is currently conducted for a period longer than one hundred and eighty (180) days, or (4) any holder of any other class of Shares elects to exercise its redemption right, the Series C Majority may, |
in each case, give a written notice by hand or letter mail or courier service to the Company at its principal executive offices at any time or from time to time (the Initial Redemption Notice ) requesting redemption of all or part of their relevant Preferred Shares, and the Company shall (1) promptly thereafter provide all of the other holders of Preferred Shares notice (pursuant to Articles 107 through 111 ) of the Initial Redemption Notice and of their right to participate in such redemption, which right is exercisable by each such holder in their own discretion by delivering a written notice (each, a Redemption Notice ) by hand or letter mail or courier service to the Company at its principal executive offices within fifteen (15) days of the giving of such notice by the Company, requesting and specifying redemption of all or part of their Preferred Shares, and (2) pay to each holder (each, a Redeeming Preferred Shareholder ) of a Preferred Share for which an Initial Redemption Notice or a Redemption Notice has been timely submitted (each, a Redeeming Preferred Share ), in respect of such Redeeming Preferred Share, an amount (the Redemption Price ) determined in accordance with the following formula:
45
with |
respect to the Series A Preferred Shares: |
IP x (110 %) N + D, where
IP = Series A Issue Price;
N = a fraction, the numerator of which is the number of calendar days between date the Series A Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series A Preferred Share up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers;
with |
respect to the Series A1 Preferred Shares: |
IP x (110 %) N + D, where
IP = Series A1 Issue Price;
N = a fraction, the numerator of which is the number of calendar days between the Series A1 Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series A1 Preferred Share up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers.
with |
respect to the Series B1 Preferred Shares: |
IP x (110 %) N + D, where
IP = Series B1 Issue Price;
N = a fraction, the numerator of which is the number of calendar days between date the Series B1 Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series B1 Preferred Share up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers;
46
with |
respect to the Series B2 Preferred Shares: |
IP x (110 %) N + D, where
IP = Series B2 Issue Price;
N = a fraction, the numerator of which is the number of calendar days between date the Series B2 Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series B2 Preferred Share up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; and
with |
respect to the Series B3 Preferred Shares: |
IP x (110 %) N + D, where
IP = Series B3 Issue Price;
N = a fraction, the numerator of which is the number of calendar days between date the Series B3 Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series B3 Preferred Share up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers.
with |
respect to the Series C Preferred Shares: |
IP x (110 %) N + D, where
IP = Series C Cash Price;
N = a fraction, the numerator of which is the number of calendar days between date the Series C Issue Date and the date on which the Redemption Price is paid and the denominator of which is 365;
D = all declared but unpaid dividends on each Series C Preferred Share up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers.
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Each Redemption Price shall be paid on a date to be determined at the discretion of the Company, but in any event after the expiry of fifteen (15) days of the giving of the notice by the Company set out in this Article 8.6(A) above, and within sixty (60) days of the date of the Initial Redemption Notice (the Redemption Price Payment Date ).
(B) |
Insufficient Funds . If the Company does not have sufficient cash or funds legally available to redeem all of the Redeeming Preferred Shares required to be redeemed, or if the Company is otherwise prohibited by applicable law from making such redemption, the funds that are legally available (the Redemption Funds ) shall be paid and applied on the Redemption Price Payment Date in the following order and manner: (i) the Redemption Funds which are legally available shall first be used to the extent permitted by applicable Law to pay the all amount of aggregate Redemption Price for Series C Preferred Shares, pari passu as between themselves, and (ii) after full payment of the aggregate Redemption Price for the Series C Preferred Shares, each Series B1 Preferred Share, Series B2 Preferred Share and Series B3 Preferred Share, pari passu as between themselves, and (ii) after full payment of the aggregate Redemption Price for the Series B1 Preferred Shares, the Series B2 Preferred Shares and the Series B3 Preferred Share, any remaining Redemption Funds shall be used to the extent permitted by applicable Law to pay the all amount of aggregate Redemption Price for each Series A Preferred Share and Series A1 Preferred Share, pari passu as between themselves. Any remaining Preferred Shares of any series to be redeemed but with respect to which the Redemption Price for such series of Preferred Shares due and payable has not been paid in full shall be carried forward and redeemed as soon as the Company has legally available funds or assets to redeem in accordance with the same priority described in this Article 8.6(B) . In any case, if the full Redemption Price has not been paid in respect of a Redeeming Preferred Share, the redemption shall not be deemed to have been consummated in respect of such Redeeming Preferred Share on the Redemption Price Payment Date, and the relevant Redeeming Preferred Shareholder shall remain entitled to all of its rights, including (without limitation) its voting rights, in respect of such Redeeming Preferred Share, and such of the Redeeming Preferred Shares shall remain outstanding for the purposes of these Articles. Only when the Redemption Price in respect of such Redeeming Preferred Share has been paid in full, the redemption shall be deemed to have been consummated in respect of such Redeeming Preferred Share on the day of such payment, whereupon all such rights shall automatically cease, the Register of Members shall be updated accordingly and such Redeeming Preferred Shares shall be cancelled. Any portion of the Redemption Price not paid by the Company in respect of any Redeeming Preferred Share on the Redemption Price Payment Date shall continue to be owed to the holder thereof. |
48
(C) |
Waivers . The Company may, with the written consent of any Redeeming Preferred Shareholder, without the need to amend this Article, modify, waive, or deviate from any of the requirements of, or procedures set forth in, this Article that is applicable to such Redeeming Preferred Shareholder. |
(D) |
No Impairment . Once the Company has received an Initial Redemption Notice, it shall not (and shall not permit any Subsidiary to) take any action which could have the effect of delaying, undermining or restricting the redemption, and the Company shall in good faith use all commercially reasonable efforts and as expeditiously as possible, increase its legally available redemption funds, including without limitation, by causing any other Group Company to distribute any and all available funds to the Company for purposes of paying the Redemption Price for all Redeeming Preferred Shares on the Redemption Price Payment Date, and until the date on which each Redeeming Preferred Share is redeemed, the Company shall not declare or pay any dividend nor otherwise make any distribution of or otherwise decrease its profits available for distribution. |
ORDINARY SHARES
9. |
Certain rights, preferences, privileges and limitations of the Ordinary Shares of the Company are as follows: |
9.1 |
Dividend Provision . Subject to Article 8 and to the preferential rights of holders of all series and classes of Shares in the Company at the time outstanding having preferential rights as to dividends, the holders of the Ordinary Shares shall, subject to the Statute and these Articles, be entitled to receive, when, as and if declared by the Directors, out of any assets of the Company legally available therefor, such dividends as may be declared from time to time by the Directors. |
9.2 |
Liquidation . Upon the liquidation, dissolution or winding up of the Company, the assets of the Company shall be distributed as provided in Article 8.2 . |
9.3 |
Voting Rights . The holder of each Ordinary Share shall have the right to one vote with respect to such Ordinary Share, and shall be entitled to notice of any Members meeting in accordance with these Articles, and shall be entitled to vote upon such matters and in such manner as may be provided for in these Articles. |
REGISTER OF MEMBERS
10. |
The Company shall maintain or cause to be maintained the Register of Members in accordance with the Statute. The Register of Members shall be the only evidence as to who are the Members entitled to examine the Register of Members, the list required to be sent to Members under Article 38 , or the other books and records of the Company, or to vote in person or by proxy at any meeting of Members. |
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FIXING RECORD DATE
11. |
The Directors may fix in advance a date as the record date for any determination of Members entitled to notice of or to vote at a meeting of the Members, or any adjournment thereof, and for the purpose of determining the Members entitled to receive payment of any dividend the Directors may, at or within ninety (90) days prior to the date of declaration of such dividend fix a subsequent date as the record date for such determination. |
12. |
If no record date is fixed for the determination of Members entitled to notice of, or to vote at, a meeting of Members or Members entitled to receive payment of a dividend, the date on which notice of the meeting is sent or the date on which the resolution of the Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this Article, such determination shall apply to any adjournment thereof. |
CERTIFICATES FOR SHARES
13. |
Share certificates representing Shares, if any, shall be in such form as the Directors may determine. Share certificates shall be signed by one or more Directors or other Person authorised by the Directors. The Directors may authorise certificates to be issued with the authorised signature(s) affixed by mechanical process. All certificates for Shares shall be consecutively numbered or otherwise identified and shall specify the Shares to which they relate. All certificates surrendered to the Company for transfer shall be cancelled and, subject to these Articles, no new certificate shall be issued until the former certificate representing a like number of relevant Shares shall have been surrendered and cancelled. |
14. |
The Company shall not be bound to issue more than one certificate for Shares held jointly by more than one Person and delivery of a certificate to one joint holder shall be a sufficient delivery to all of them. |
15. |
If a share certificate is defaced, worn out, lost or destroyed, it may be renewed on such terms (if any) as to evidence and indemnity and on the payment of such expenses reasonably incurred by the Company in investigating evidence, as the Directors may prescribe, and (in the case of defacement or wearing out) upon delivery of the old certificate. |
TRANSFER OF SHARES
16. |
The Shares of the Company are subject to transfer restrictions as set forth in the Shareholders Agreement, by and among the Company and certain of its Members. The Company will only register transfers of Shares that are made in accordance with such agreements and will not register transfers of Shares that are made in violation of such agreements. The instrument of transfer of any Share shall be in writing and shall be executed by or on behalf of the transferor (and, if the Directors so require, signed by the transferee). The transferor shall be deemed to remain the holder of a Share until the name of the transferee is entered in the Register of Members. |
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REDEMPTION AND REPURCHASE OF SHARES
17. |
The Company is permitted to redeem, purchase or otherwise acquire any of the Companys Shares, so long as such redemption, purchase or acquisition (i) is pursuant to any redemption provisions set forth in these Memorandum and Articles, (ii) is pursuant to the Current ESOP, or (iii) is as otherwise agreed by the holder of such Share and the Company, subject in the case of clause (ii) or (iii) to compliance with any applicable restrictions set forth in the Shareholders Agreement, the Memorandum and these Articles, including Article 8 . |
18. |
Subject to the provisions of the Statute, these Articles, including Article 8.5(B) , and the Shareholders Agreement, the Company may issue Shares that are to be redeemed or are liable to be redeemed at the option of the Member or the Company. Subject to the provisions of the Statute and these Articles, including Article 8 , the Directors may authorize the redemption or purchase by the Company of its own Shares in such manner and on such terms as they think fit and may make a payment in respect of the redemption or purchase of its own Shares in any manner permitted by the Statute, including out of capital. |
VARIATION OF RIGHTS OF SHARES
19. |
Subject to Article 8 , if at any time the share capital of the Company is divided into different classes of Shares, the rights attached to any class (unless otherwise provided by the terms of issue of the Shares of that class) may only be varied with the consent in writing of Members holding not less than a majority of the votes entitled to be cast by holders (in person or by proxy) of Shares on a poll at a general meeting of such class affected by the proposed variation of rights or with the sanction of a resolution of such Members holding not less than a majority of the votes which could be cast by holders (in person or by proxy) of Shares of such class on a poll at a general meeting but not otherwise. |
20. |
For the purpose of the preceding Article, all of the provisions of these Articles relating to general meetings shall apply, to the extent applicable, mutatis mutandis , to every meeting of holders of separate class of shares, except that the necessary quorum shall be one or more Persons holding or representing by proxy at least a majority of the issued Shares of such class and that any Member holding Shares of such class, present in person or by proxy, may demand a poll. |
21. |
Subject to Article 8 , the rights conferred upon the holders of Shares or any class of Shares shall not, unless otherwise expressly provided by the terms of issue of such Shares, be deemed to be varied by the creation, redesignation, or issue of Shares ranking senior thereto or pari passu therewith. |
COMMISSION ON SALE OF SHARES
22. |
The Company may, with the approval of the Board (so long as such approval includes the approval of the Series A Director, the Series B1 Director and Series C Director), so far as the Statute permits, pay a commission to any Person in consideration of his or her subscribing or agreeing to subscribe whether absolutely or conditionally for any Shares of the Company. Such commissions may be satisfied by the payment of cash and/or the issue of fully or partly paid-up Shares. The Company may also on any issue of Shares pay such brokerage as may be lawful. |
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NON-RECOGNITION OF INTERESTS
23. |
The Company shall not be bound by or compelled to recognise in any way (even when having notice thereof) any equitable, contingent, future or partial interest in any Share, or (except only as is otherwise provided by these Articles or the Statute) any other rights in respect of any Share other than an absolute right to the entirety thereof in the registered holder. |
TRANSMISSION OF SHARES
24. |
If a Member dies, the survivor or survivors where such Member was a joint holder, and his or her legal personal representatives where such Member was a sole holder, shall be the only Persons recognised by the Company as having any title to such Members interest. The estate of a deceased Member is not thereby released from any liability in respect of any Share that had been jointly held by such Member. |
25. |
Any Person becoming entitled to a Share in consequence of the death or bankruptcy or liquidation or dissolution of a Member (or in any other way than by transfer) may, upon such evidence being produced as may from time to time be required by the Directors, elect either to become the holder of the Share or to have some Person nominated by him or her as the transferee. |
26. |
If the Person so becoming entitled shall elect to be registered as the holder, such Person shall deliver or send to the Company a notice in writing signed by such Person stating that he or she so elects. |
AMENDMENTS OF MEMORANDUM AND ARTICLES OF ASSOCIATION AND ALTERATION OF CAPITAL
27. |
Subject to Article 8 , the Company may by Ordinary Resolution: |
27.1 |
increase the share capital by such sum as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto, as the Company in general meeting may determine; |
27.2 |
consolidate and divide all or any of its share capital into Shares of larger amount than its existing Shares; |
27.3 |
by subdivision of its existing Shares or any of them divide the whole or any part of its share capital into Shares of smaller amount than is fixed by the Memorandum or into Shares without par value; |
27.4 |
cancel any Shares that at the date of the passing of the resolution have not been taken or agreed to be taken by any Person; and |
27.5 |
perform any action not required to be performed by Special Resolution. |
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28. |
Subject to the provisions of the Statute and the provisions of these Articles as regards the matters to be dealt with by Ordinary Resolution, and subject further to Article 8 , the Company may by Special Resolution: |
28.1 |
change its name; |
28.2 |
alter or add to these Articles; |
28.3 |
alter or add to the Memorandum with respect to any objects, powers or other matters specified therein; and |
28.4 |
reduce its share capital and any capital redemption reserve fund. |
28A. |
In addition to the approval requirement described in Article 8.5(B)(1)(4) , if there is any amendment or change to any provision in these Articles that constitutes any adverse amendment or change of the rights, preferences, privileges, powers, limitations or restrictions of or concerning, or the limitations or restrictions provided for the benefit of, any series of outstanding Preferred Shares in issue (the Adverse Amendment ), then the Adverse Amendment may be made only by (1) the written consents of the Series A Majority, the Series B Majority and the Series C Majority (in connection with any reserved matter approved in accordance with Article 8.5(B) in order to reflect the terms of the transaction contemplated under such approved reserved matter), or (2) if the Adverse Amendment does not relate to any matter described in Article 8.5(b) and such Adverse Amendment adversely affects the Series A Preferred Shares, the Series A1 Preferred Shares, the Series B1 Preferred Shares, the Series B2 Preferred Shares, the Series B3 Preferred Shares and/or the Series C Preferred Shares (each an Adversely Affected Class ), the written consents of the holders of a majority of the Adversely Affected Class. No amendment may adversely affect any holder of an existing class of Preferred Shares in a manner that is disproportionate to the other holders of the same class of Preferred Shares, unless otherwise consented by all holders of the relevant class of Preferred Shares. |
REGISTERED OFFICE
29. |
Subject to the provisions of the Statute, the Company may by resolution of the Directors change the location of its Registered Office. |
GENERAL MEETINGS
30. |
All general meetings other than annual general meetings shall be called extraordinary general meetings. |
31. |
The Company shall, if required by the Statute, in each year hold a general meeting as its annual general meeting, and shall specify the meeting as such in the notices calling it. The annual general meeting shall be held at such time and place as the Directors shall appoint. At these meetings, the report of the Directors (if any) shall be presented. |
32. |
The Directors may call general meetings, and they shall on a Members requisition forthwith proceed to convene an extraordinary general meeting of the Company. |
33. |
A Members requisition is a requisition of Members of the Company holding, on the date of deposit of the requisition, not less than: (i) a majority of the voting power of all of the Ordinary Shares, (ii) a majority of the voting power of the Series A Preferred Shares and the Series A1 Preferred Shares (voting together as a single class and on an as if converted basis), (iii) Series B Majority of the Company entitled to attend and vote at general meetings of the Company, or (iv) Series C Majority of the Company entitled to attend and vote at general meetings of the Company. |
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34. |
The requisition must state the objects of the meeting and must be signed by the requisitionists and deposited at the Registered Office, and may consist of several documents in like form each signed by one or more requisitionists. |
35. |
If the Directors do not within twenty-one (21) days from the date of the deposit of the requisition duly proceed to convene a general meeting to be held within a further twenty-one (21) days, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three (3) months after the expiration of the said twenty-one (21) days. |
36. |
A general meeting convened as aforesaid by requisitionists shall be convened in the same manner as nearly as possible as that in which general meetings are to be convened by Directors. |
NOTICE OF GENERAL MEETINGS
37. |
At least ten (10) Business Days prior written notice of each meeting, agenda of the business to be transacted at the meeting and any documents and materials to be circulated at or presented to the meeting, if any, shall be sent to all Members entitled to receive notice of the meeting, unless such notice is waived either before, at or after such meeting both (i) by the Members (or their proxies) holding a majority of the aggregate voting power of all of the Ordinary Shares entitled to attend and vote thereat (including the Preferred Shares on an as converted basis), and (ii) by the holders of 90% of the voting power of Preferred Shares (or their proxies). Every notice shall be exclusive of the day on which it is given or deemed to be given and shall specify the place, the day and the hour of the meeting and the general nature of the business and shall be given in the manner hereinafter mentioned or in such other manner, if any, as may be prescribed by the Company. |
38. |
The officer of the Company who has charge of the Register of Members of the Company shall prepare and make, at least two (2) Business Days before every general meeting, a complete list of the Members entitled to vote at the general meeting, arranged in alphabetical order, and showing the address of each Member and the number of shares registered in the name of each Member. Such list shall be open to examination by any Member for any purpose germane to the meeting, during ordinary business hours, for a period of at least two (2) Business Days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Member of the Company who is present. |
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PROCEEDINGS AT GENERAL MEETINGS
39. |
The holders of a majority of the aggregate voting power of all of the Ordinary Shares entitled to notice of and to attend and vote at such general meeting (including the Preferred Shares on an as converted basis), the Series A Majority, the Series B Majority and the Series C Majority together present in person or by proxy or if a company or other non-natural Person by its duly authorised representative shall be a quorum. Subject to Article 42 , no business shall be transacted at any general meeting unless a quorum is present at the time when the meeting proceeds to business. |
40. |
A Person may participate at a general meeting by conference telephone or other communications equipment by means of which all the Persons participating in the meeting can communicate with each other. Participation by a Person in a general meeting in this manner is treated as presence in person at that meeting. |
41. |
A resolution in writing (in one or more counterparts) shall be as valid and effective as if the resolution had been passed at a duly convened and held general meeting of the Company if (i) the resolution has been sent to all Members according to the notice provisions in the Shareholders Agreement within a reasonable time prior to its approval, and (ii) it is signed by all Members being entitled to receive notice of and to attend and vote at a general meeting of the Company in one or more instruments each signed by one or more of the Members. |
42. |
A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any general meeting, the Members (or their proxies) holding a majority of the aggregate voting power of all of the Shares of the Company represented at the meeting may adjourn the meeting from time to time, until a quorum shall be present or represented; provided that, if notice of such meeting has been duly delivered to all Members ten (10) Business Days prior to the scheduled meeting in accordance with the notice procedures hereunder, and the quorum is not present within one hour from the time appointed for the meeting solely because of the absence of any Member, the meeting shall be adjourned to the seventh (7th) following Business Day at the same time and place (or to such other time or such other place as the directors may determine) with notice delivered to all Members 48 hours prior to the adjourned meeting in accordance with the notice procedures under Articles 107 through 111 and, if at the adjourned meeting, the quorum is not present within one half hour from the time appointed for the meeting solely because of the absence of any Member, then the presence of such Member shall not be required at such adjourned meeting for purposes of establishing a quorum. At such adjourned meeting, any business may be transacted that might have been transacted at the meeting as originally notified. |
43. |
The chairman, if any, of the Board of Directors shall preside as chairman at every general meeting of the Company, or if there is no such chairman, or if he or she shall not be present within ten (10) minutes after the time appointed for the holding of the meeting, or is unwilling or unable to act, the Directors present shall elect one of their number, or shall designate a Member, to be chairman of the meeting. |
44. |
With the consent of a general meeting at which a quorum is present, the chairman may (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a general meeting is adjourned, notice of the adjourned meeting shall be given as in the case of an original meeting. |
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45. |
A resolution put to the vote of the meeting shall be decided by poll and not on a show of hands. |
46. |
On a poll a Member shall have one vote for each Ordinary Share he holds on an as converted basis. |
47. |
Except on a poll on a question of adjournment, a poll shall be taken as the chairman directs, and the result of the poll shall be deemed to be the resolution of the general meeting at which the poll was demanded. |
48. |
A poll on a question of adjournment shall be taken forthwith. |
49. |
A poll on any other question shall be taken at such time as the chairman of the general meeting directs, and any business other than that upon which a poll has been demanded or is contingent thereon may proceed pending the taking of the poll. |
VOTES OF MEMBERS
50. |
Except as otherwise required by law or these Articles, the Ordinary Shares and the Preferred Shares shall vote together on an as converted basis on all matters submitted to a vote of Members. |
51. |
In the case of joint holders of record, the vote of the senior holder who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and seniority shall be determined by the order in which the names of the holders stand in the Register of Members. |
52. |
A Member of unsound mind, or in respect of whom an order has been made by any court, having jurisdiction in lunacy, may vote by his or her committee, receiver, or other Person on such Members behalf appointed by that court, and any such committee, receiver, or other Person may vote by proxy. |
53. |
No Person shall be entitled to vote at any general meeting or at any separate meeting of the holders of a class or series of Shares unless he or she is registered as a Member on the record date for such meeting nor unless all calls or other monies then payable by such Member in respect of Shares have been paid. |
54. |
No objection shall be raised to the qualification of any voter except at the general meeting or adjourned general meeting at which the vote objected to is given or tendered and every vote not disallowed at the meeting shall be valid. |
55. |
Votes may be cast either personally or by proxy. A Member may appoint more than one proxy or the same proxy under one or more instruments to attend and vote at a meeting. |
56. |
A Member holding more than one Share need not cast the votes in respect of his or her Shares in the same way on any resolution and therefore may vote a Share or some or all such Shares either for or against a resolution and/or abstain from voting a Share or some or all of the Shares and, subject to the terms of the instrument appointing him or her, a proxy appointed under one or more instruments may vote a Share or some or all of the Shares in respect of which he or she is appointed either for or against a resolution and/or abstain from voting. |
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PROXIES
57. |
The instrument appointing a proxy shall be in writing, be executed under the hand of the appointor or of his or her attorney duly authorised in writing, or, if the appointor is a corporation, under the hand of an officer or attorney duly authorised for that purpose. A proxy need not be a Member of the Company. |
58. |
The instrument appointing a proxy shall be deposited at the Registered Office or at such other place as is specified for that purpose in the notice convening the meeting, no later than the time for holding the meeting or adjourned meeting. |
59. |
The instrument appointing a proxy may be in any usual or common form and may be expressed to be for a particular meeting or any adjournment thereof or generally until revoked. An instrument appointing a proxy shall be deemed to include the power to demand or join or concur in demanding a poll. |
60. |
Votes given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the Share in respect of which the proxy is given unless notice in writing of such death, insanity, revocation or transfer was received by the Company at the Registered Office before the commencement of the general meeting or adjourned meeting at which it is sought to use the proxy. |
CORPORATE MEMBERS
61. |
Any corporation or other non-natural Person that is a Member may in accordance with its constitutional documents, or in the absence of such provision by resolution of its directors or other governing body, authorise such Person as it thinks fit to act as its representative at any meeting of the Company or any class of Members, and the Person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he or she represents as the corporation could exercise if it were an individual Member. |
SHARES THAT MAY NOT BE VOTED
62. |
Shares in the Company that are beneficially owned by the Company or held by it in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding Shares at any given time. |
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APPOINTMENT OF DIRECTORS; OBSERVERS
63. |
The authorized number of directors on the Board shall be at least nine (9) directors, with the composition of the Board determined as follows: (a) the holders of a majority of the outstanding Ordinary Shares (voting as a separate class) shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time six (6) directors on the Board (each an Ordinary Director ), (b) CW_toutiao Limited ( Chengwei ) shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time one (1) director (the Series A Director ) on the Board, (c) Image Flag Investment (HK) Limited ( Tencent ) shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time one (1) director on the Board (the Series B1 Director ), (d) the Series C2 Investor shall be exclusively entitled to designate, appoint, remove, replace and reappoint after the Series C2 Closing and from time to time one (1) director on the Board (the Series C Director ) so long as the Series C2 Investor doesnt transfer all or part of its Series C2 Preferred Shares, and (e) the Board may, by the affirmative vote of a simple majority of the directors present and voting at a Board meeting, appoint several persons as independent directors of the Company, to satisfy applicable laws, regulations or stock exchange rules. Any committee formed by the Board shall include at least the Series A Director and the Series B1 Director, except for any audit committee which will be formed upon the closing of an IPO. For the avoidance of doubt, if the holders of a majority of the outstanding Ordinary Shares (voting as a separate class) fail to appoint all of the six (6) Ordinary Directors, Mr. Tan Siliang ( 谭思亮 ) as an Ordinary Director shall have such number of votes in addition to the one (1) vote of Tan Siliang ( 谭思亮 ) as an Ordinary Director that is equal to six (6) less the number of Ordinary Directors that have been appointed. Each of (w) CMC Queen Holdings Limited, (x) Redpoint, (y) People Better Limited and Shunwei Growth III Limited jointly, and (z) Long Range L.P. shall be entitled to appoint a representative (each an Observer , and collectively the Observers ) to attend meetings of the Board in a nonvoting observer capacity and the Company shall give such Observers copies of all notices, minutes, consents and other materials that it provides to its directors at the same time and in the same manner as provided to such directors. |
POWERS OF DIRECTORS
64. |
Subject to the provisions of the Statute, the Memorandum and these Articles and to any directions given by Special Resolution, the business of the Company shall be managed by or under the direction of the Directors who may exercise all the powers of the Company; provided , however , that the Company shall not carry out any action inconsistent with Articles 8 and 9 . No alteration of the Memorandum or these Articles and no such direction shall invalidate any prior act of the Directors that would have been valid if that alteration had not been made or that direction had not been given. A duly convened meeting of Directors at which a quorum is present may exercise all powers exercisable by the Directors. |
65. |
All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for monies paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed as the case may be in such manner as the Directors shall determine. |
66. |
Subject to Article 8 , the Directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any Director who has held any other salaried office or place of profit with the Company or to his or her spouse or dependents and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance. |
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67. |
Subject to Article 8 , the Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof and to issue debentures, debenture shares, mortgages, bonds and other such securities whether outright or as security for any debt, liability or obligation of the Company or of any third party. |
VACATION OF OFFICE AND REMOVAL OF DIRECTOR
68. |
The office of a Director shall be vacated if: |
68.1 |
such Director gives notice in writing to the Company that he or she resigns the office of Director; or |
68.2 |
such Director dies, becomes bankrupt or makes any arrangement or composition with such Directors creditors generally; or |
68.3 |
such Director is found to be or becomes of unsound mind. |
69. |
Any Director who shall have been elected by a specified group of Members may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the group of Members then entitled to elect such Director in accordance with Article 63 , given at a special meeting of such Members duly called or by an action by written consent for that purpose. Any vacancy in the Board of Directors caused as a result of such removal or one or more of the events set out in Article 68 of any Director who shall have been elected by a specified group of Members, may be filled by, and only by, the affirmative vote of the group of Members then entitled to elect such Director in accordance with Article 63 , given at a special meeting of such Members duly called or by an action by written consent for that purpose, unless otherwise agreed upon among such Members. |
PROCEEDINGS OF DIRECTORS
70. |
A Director may by a written instrument appoint an alternate who need not be a Director, and an alternate is entitled to attend meetings in the absence of the Director who appointed him and to vote or consent in place of the Director. At all meetings of the Board of Directors, a majority of the number of the Directors in office elected in accordance with Article 63 that includes (i) one (1) Ordinary Director, (ii) the Series A Director, (iii) the Series B1 Director, and (iv) the Series C Director shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the Directors present (in person or in alternate) at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by the Statute or the Memorandum or these Articles, including Section 8. If only one Director is elected, such sole Director shall constitute a quorum. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting, until a quorum shall be present, provided that and subject to Article 8.5(B)(2) , if notice of the board meeting has been duly delivered to all directors of the Board prior to the scheduled meeting in accordance with the notice procedures hereunder, and the quorum is not present within one half hour from the time appointed for the meeting solely because of the absence of the Series A Director, the Series B1 Director or the Series C Director, the meeting shall be adjourned to the seventh (7) following Business Day at the same time and place (or to such other time or such other place as the directors may determine) with notice delivered to all directors in accordance with the notice procedures hereunder and, if at the adjourned meeting, the quorum is not present within one half hour from the time appointed for the meeting solely because of the absence of the same Director who was absent at the initial board meeting, then the presence of such Director shall not be required at such adjourned meeting solely for purpose of determining if a quorum has been established, provided that at such adjourned meeting any business not included in the original notice of meeting shall not be transacted. |
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71. |
Subject to the provisions of these Articles, the Directors may regulate their proceedings as they think fit, provided however that the board meetings shall be held at least once every three (3) months unless the Board otherwise approves (so long as such approval includes the approval of the Series A Director, the Series B1 Director and the Series C Director) and that a written notice of each meeting, agenda of the business to be transacted at the meeting and all documents and materials to be circulated at or presented to the meeting shall be sent to all Directors entitled to receive notice of the meeting at least five (5) Business Days before the meeting and a copy of the minutes of the meeting shall be sent to such Persons. |
72. |
A Person may participate in a meeting of the Directors or committee of the Board of Directors by conference telephone or other communications equipment by means of which all the Persons participating in the meeting can communicate with each other at the same time. Participation by a Person in a meeting in this manner is treated as presence in person at that meeting. Unless otherwise determined by the Directors, the meeting shall be deemed to be held at the place where the chairman is at the start of the meeting. In the event of a deadlock of the votes at any meeting of the Directors, the relevant matters shall be submitted to the Members for approval, subject to compliance with Article 8.5(B) hereof. |
73. |
A resolution in writing (in one or more counterparts) signed by all the Directors or all the members of a committee of the Board of Directors shall be as valid and effectual as if it had been passed at a meeting of the Directors, or committee of the Board of Directors as the case may be, duly convened and held. |
74. |
Meetings of the Board of Directors may be called by any Director on five (5) Business Days written notice to each Director in accordance with Articles 107 through 111 , and such written notice shall specify the agenda of the business to be transacted at the meeting and any documents and materials to be presented to the meeting. |
75. |
The continuing Directors may act notwithstanding any vacancy in their body, but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors, the continuing Directors or Director may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose. |
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76. |
The Directors may elect a chairman of their board and determine the period for which he or she is to hold office; but if no such chairman is elected, or if at any meeting the chairman shall not be present within ten (10) minutes after the time appointed for holding the same, the Directors present may choose one of their members to be chairman of the meeting. |
77. |
All acts done by any meeting of the Directors or of a committee of the Board of Directors shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any Director or that they or any of them were disqualified, be as valid as if every such Person had been duly appointed and qualified to be a Director. |
DIRECTORS INTERESTS
78. |
Subject to Article 81 , a Director may hold any other office or place of profit under the Company (other than the office of Auditor) in conjunction with his or her office of Director for such period and on such terms as to remuneration and otherwise as the Directors may determine. |
79. |
Subject to Article 81 , a Director may act by himself or herself or his or her firm in a professional capacity for the Company and such Director or firm shall be entitled to remuneration for professional services as if such Director were not a Director. |
80. |
Subject to Article 81 , a Director of the Company may be or become a director or other officer of or otherwise interested in any company promoted by the Company or in which the Company may be interested as Member or otherwise, and no such Director shall be accountable to the Company for any remuneration or other benefits received by such Director as a director or officer of, or from his or her interest in, such other company. |
81. |
In addition to any further restrictions set forth in these Articles, no Person shall be disqualified from the office of Director or prevented by such office from contracting with the Company, either as vendor, purchaser or otherwise, nor shall any such contract or any contract or transaction entered into by or on behalf of the Company in which any Director shall be in any way interested (each, an Interested Transaction ) be or be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such Interested Transaction by reason of such Director holding office or of the fiduciary relation thereby established, and any such director may vote at a meeting of directors on any resolution concerning a matter in which that director has an interest (and if he votes his vote shall be counted) and shall be counted towards a quorum of those present at such meeting, in each case so long as the material facts of the interest of each Director in the agreement or transaction and his interest in or relationship to any other party to the agreement or transaction are disclosed in good faith to and are known by the other Directors. A general notice or disclosure to the Directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof that a Director is a member of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure under this Article. |
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MINUTES
82. |
The Directors shall cause minutes to be made in books kept for the purpose of all appointments of officers made by the Directors, all proceedings at meetings of the Company or the holders of any series of Shares and of the Directors, and of committees of the Board of Directors, including the names of the Directors present at each meeting. |
DELEGATION OF DIRECTORS POWERS
83. |
Subject to these Articles, the Board of Directors may establish an Audit Committee and Compensation Committee, and approve the delegation of any of their powers to any committee consisting of one or more Directors, provided that each of the Series A Director, the Series B1 Director and the Series C Director shall be appointed as a member of such committee, except for any audit committee which will be formed upon the closing of an IPO. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of the absent or disqualified member if such other Directors appointment is approved or ratified by the Board of Directors. |
84. |
Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Company. Each committee shall keep regular minutes and report to the Board of Directors when required. Subject to these Articles, the proceedings of a committee of the Board of Directors shall be governed by the Articles regulating the proceedings of the Board of Directors, so far as they are capable of applying. |
85. |
The Board of Directors may also, with prior consent of the Series A Director, the Series B1 Director and the Series C Director, delegate to any managing Director or any Director holding any other executive office such of their powers as they consider desirable to be exercised by such Person provided that the appointment of a managing Director shall be revoked forthwith if he or she ceases to be a Director. Any such delegation may be made subject to any conditions the Board of Directors, with prior consent of the Series A Director, the Series B1 Director and the Series C Director, may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. |
86. |
Subject to these Articles, the Directors may by power of attorney or otherwise appoint any company, firm, Person or body of Persons, whether nominated directly or indirectly by the Directors, to be the attorney or authorised signatory of the Company for such purpose and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such powers of attorney or other appointment may contain such provisions for the protection and convenience of Persons dealing with any such attorneys or authorised signatories as the Directors may think fit and may also authorise any such attorney or authorised signatory to delegate all or any of the powers, authorities and discretions vested in him or her. |
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87. |
Subject to these Articles, the Directors may appoint such officers as they consider necessary on such terms, at such remuneration and to perform such duties, and subject to such provisions as to disqualification and removal as the Directors may think fit. Unless otherwise specified in the terms of an officers appointment, an officer may be removed by resolution of the Directors or Members. |
NO MINIMUM SHAREHOLDING
88. |
There is no minimum shareholding required to be held by a Director. |
REMUNERATION OF DIRECTORS
89. |
The remuneration to be paid to the Directors, if any, shall be such remuneration as determined by the Board (including the consent of the Series A Director, the Series B1 Director and the Series C Director). The Director who is not an employee of any Group Company shall also be entitled to be paid all reasonable travelling, hotel and other out-of-pocket expenses properly incurred by them in connection with their attendance at meetings of the Board of Directors or committees of the Board of Directors, or general meetings of the Company, or separate meetings of the holders of any series of Shares or debentures of the Company, or otherwise in connection with the business of the Company. |
90. |
The Directors may by resolution of the majority of the Board (including the consent of the Series A Director, the Series B1 Director and the Series C Director) approve additional remuneration to any Director for any services other than his or her ordinary routine work as a Director. Any fees paid to a Director who is also counsel or solicitor to the Company, or otherwise serves it in a professional capacity shall be in addition to his or her remuneration as a Director. |
SEAL
91. |
The Company may, if the Directors so determine, have a Seal. The Seal shall only be used by the authority of the Directors or of a committee of the Board of Directors authorised by the Board of Directors. Every instrument to which the Seal has been affixed shall be signed by at least one Person who shall be either a Director or some officer or other Person appointed by the Directors for the purpose. |
92. |
The Company may have for use in any place or places outside the Cayman Islands a duplicate Seal or Seals each of which shall be a facsimile of the common Seal of the Company and, if the Directors so determine, with the addition on its face of the name of every place where it is to be used. |
93. |
A Director or officer, representative or attorney of the Company may without further authority of the Directors affix the Seal over his or her signature alone to any document of the Company required to be authenticated by him or her under seal or to be filed with the Registrar of Companies in the Cayman Islands or elsewhere wheresoever. |
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DIVIDENDS, DISTRIBUTIONS AND RESERVE
94. |
Subject to the Statute and these Articles, the Directors may declare dividends and distributions on Shares in issue and authorise payment of the dividends or distributions out of the assets of the Company lawfully available therefor. No dividend or distribution shall be paid except out of the realised or unrealised profits of the Company, or out of the share premium account or as otherwise permitted by the Statute. |
95. |
All dividends and distributions shall be declared and paid according to the provisions of Articles 8 and 9 . |
96. |
The Directors may deduct from any dividend or distribution payable to any Member all sums of money (if any) then payable by such Member to the Company on account of calls or otherwise. |
97. |
Subject to the provisions of Articles 8 and 9 , the Directors may declare that any dividend or distribution be paid wholly or partly by the distribution of specific assets and in particular of shares, debentures or securities of any other company or in any one or more of such ways and where any difficulty arises in regard to such distribution, the Directors may settle the same as they think expedient and in particular may issue fractional Shares and fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to any Members upon the basis of the value so fixed in order to adjust the rights of all Members and may vest any such specific assets in trustees as may seem expedient to the Directors. |
98. |
Any dividend, distribution, interest or other monies payable in cash in respect of Shares may be paid by wire transfer to the holder or by cheque or warrant sent through the post directed to the registered address of the holder or, in the case of joint holders, to the registered address of the holder who is first named on the Register of Members or to such Person and to such address as such holder or joint holders may in writing direct. Every such cheque or warrant shall be made payable to the order of the Person to whom it is sent. Any one of two or more joint holders may give effectual receipts for any dividends, bonuses or other monies payable in respect of the Share held by them as joint holders. |
99. |
No dividend or distribution shall bear interest against the Company, except as expressly provided in these Articles. |
100. |
Any dividend that cannot be paid to a Member and/or that remains unclaimed after six (6) months from the date of declaration of such dividend may, in the discretion of the Directors, be paid into a separate account in the Companys name, provided that the Company shall not be constituted as a trustee in respect of that account and the dividend shall remain as a debt due to the Member. Any dividend that remains unclaimed after a period of six (6) years from the date of declaration of such dividend shall be forfeited and shall revert to the Company. |
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CAPITALIZATION
101. |
Subject to these Articles, including but not limited to Article 8 , the Directors may capitalise any sum standing to the credit of any of the Companys reserve accounts (including share premium account and capital redemption reserve fund) or any sum standing to the credit of profit and loss account or otherwise available for distribution and to appropriate such sum to Members in the proportions in which such sum would have been divisible amongst them had the same been a distribution of profits by way of dividend as set forth in Articles 8 and 9 hereof and to apply such sum on their behalf in paying up in full unissued Shares for allotment and distribution credited as fully paid-up to and amongst them in the proportion aforesaid. In such event, the Directors shall do all acts and things required to give effect to such capitalization, with full power to the Directors to make such provisions as they think fit for the case of Shares becoming distributable in fractions (including provisions whereby the benefit of fractional entitlements accrue to the Company rather than to the Members concerned). The Directors may authorise any Person to enter on behalf of all of the Members interested into an agreement with the Company providing for such capitalization and matters incidental thereto and any agreement made under such authority shall be effective and binding on all concerned. |
BOOKS OF ACCOUNT
102. |
The Directors shall cause proper books of account to be kept at such place as they may from time to time designate with respect to all sums of money received and expended by the Company and the matters in respect of which the receipt or expenditure takes place, all sales and purchases of goods by the Company and the assets and liabilities of the Company. Proper books shall not be deemed to be kept if there are not kept such books of account as are necessary to give a true and fair view of the state of the Companys affairs and to explain its transactions. The Directors shall from time to time determine whether and to what extent and at what times and places, and under what conditions or regulations, the accounts and books of the Company or any of them shall be open to inspection of Members not being Directors and no such Member shall have any right of inspecting any account or book or document of the Company except as conferred by the Statute or authorized by the Directors or the Company in general meeting or in a written agreement binding on the Company. The Company shall cause all books of account to be maintained for a minimum period of five years from the date on which they were prepared. |
103. |
The Directors may from time to time cause to be prepared and to be laid before the Company in general meeting profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by law. |
AUDIT
104. |
Subject to Article 8.5(B), the Directors may appoint an Auditor of the Company who shall hold office until removed from office by a resolution of the Directors, and may fix the Auditors remuneration. |
105. |
Every Auditor of the Company shall have a right of access at all times to the books and accounts and vouchers of the Company and shall be entitled to require from the Directors and officers of the Company such information and explanation as may be necessary for the performance of the duties of the Auditor. |
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106. |
Auditors shall, if so required by the Directors, make a report on the accounts of the Company during their tenure of office at the next annual general meeting following their appointment in the case of a company that is registered with the Registrar of Companies as an ordinary company, and at the next extraordinary general meeting following their appointment in the case of a company that is registered with the Registrar of Companies as an exempted company and at any other time during their term of office, upon request of the Directors or any general meeting of the Members. |
NOTICES
107. |
Except as otherwise provided in these Articles, notices shall be in writing. Notice may be given by the Company to any Member or Director either personally or by sending it by next-day or second-day courier service, fax, electronic mail or similar means to such Member or Director (as the case may be) or to the address of such Member or Director as shown in the Register of Members or the Register of Directors (as the case may be) (or where the notice is given by electronic mail by sending it to the electronic mail address provided by such Member or Director). |
108. |
Where a notice is sent by next-day or second-day courier service, service of the notice shall be deemed to be effected by properly addressing, pre-paying and sending by next-day or second-day service through an internationally-recognized courier a letter containing the notice, with a confirmation of delivery, and to have been effected at the earlier of (i) delivery (or when delivery is refused) and (ii) expiration of two (2) Business Days after the letter containing the same is sent as aforesaid. Where a notice is sent by fax or electronic mail, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organization, with a written confirmation of delivery, and to have been effected on the day the same is sent as aforesaid, if such day is a Business Day and if sent during normal business hours of the recipient, otherwise the next Business Day. |
109. |
A notice may be given by the Company to the Person or Persons that the Company has been advised are entitled to a Share or Shares in consequence of the death or bankruptcy of a Member in the same manner as other notices that are required to be given under these Articles and shall be addressed to them by name, or by the title of representatives of the deceased, or trustee of the bankrupt, or by any like description at the address supplied for that purpose by the Persons claiming to be so entitled, or at the option of the Company, by giving the notice in any manner in which the same might have been given if the death or bankruptcy had not occurred. |
110. |
Notice of every general meeting shall be given in any manner hereinbefore authorised to every Person shown as a Member in the Register of Members on the record date for such meeting except that in the case of joint holders the notice shall be sufficient if given to the joint holder first named in the Register of Members and every Person upon whom the ownership of a Share devolves by reason of his or her being a legal personal representative or a trustee in bankruptcy of a Member of record where the Member of record but for his or her death or bankruptcy would be entitled to receive notice of the meeting, and no other Person shall be entitled to receive notices of general meetings. |
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111. |
Whenever any notice is required by law or these Articles to be given to any Director, member of a committee or Member, a waiver thereof in writing, signed by the Person or Persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. |
WINDING UP
112. |
If the Company shall be wound up, assets available for distribution amongst the Members shall be distributed, in accordance with Articles 8 and 9 . |
113. |
If the Company shall be wound up, the liquidator may, with the sanction of a Special Resolution of the Company and any other sanction required by the Statute, divide amongst the Members in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for that purpose value any assets and, subject to Articles 8 and 9 , determine how the division shall be carried out as between the Members or different classes of Members. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the Members as the liquidator, with the like sanction, shall think fit, but so that no Member shall be compelled to accept any asset upon which there is a liability. |
INDEMNITY
114. |
To the maximum extent permitted by applicable law, the Directors and officers for the time being of the Company and any trustee for the time being acting in relation to any of the affairs of the Company and their heirs, executors, administrators and personal representatives respectively shall be indemnified out of the assets of the Company from and against all actions, proceedings, costs, charges, losses, damages and expenses that they or any of them shall or may incur or sustain by reason of any act done or omitted in or about the execution of their duty in their respective offices or trusts, except such (if any) as they shall incur or sustain by or through their own fraud or dishonesty, and no such Director or officer or trustee shall be answerable for the acts, receipts, neglects or defaults of any other Director or officer or trustee or for joining in any receipt for the sake of conformity or for the solvency or honesty of any banker or other Persons with whom any monies or effects belonging to the Company may be lodged or deposited for safe custody or for any insufficiency of any security upon which any monies of the Company may be invested or for any other loss or damage due to any such cause as aforesaid or which may happen in or about the execution of his or her office or trust unless the same shall happen through the fraud or dishonesty of such Director or officer or trustee. Except with respect to proceedings to enforce rights to indemnification pursuant to this Article, the Company shall indemnify any such indemnitee pursuant to this Article in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors (including the Series A Director, the Series B1 Director and the Series C Director). The right to indemnification conferred in this Article shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent provided by, and subject to the requirements of, applicable law, so long as the indemnitee agrees with the Company to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Article. |
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115. |
To the maximum extent permitted by applicable law, the Directors and officers for the time being of the Company and any trustee for the time being acting in relation to any of the affairs of the Company and their heirs, executors, administrators and personal representatives respectively shall not be personally liable to the Company or its Members for monetary damages for breach of their duty in their respective offices, except such (if any) as they shall incur or sustain by or through their own fraud or dishonesty respectively. |
FINANCIAL YEAR
116. |
Subject to Article 8.5(B), unless the Directors otherwise prescribe, the financial year of the Company shall end on the 31st of December in each year and, following the year of incorporation, shall begin on the 1st of January in each year. |
TRANSFER BY WAY OF CONTINUATION
117. |
If the Company is exempted as defined in the Statute, it shall, subject to the provisions of the Statute and with the approval of a Special Resolution and the written consents of the Series A Majority, the Series B Majority and the Series C Majority, have the power to register by way of continuation as a body corporate under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands. |
DRAG ALONG RIGHTS
118. |
At any time from the Series B1 Closing and prior to a Qualified IPO, if (i) the Series A Majority, (ii) the Series B Majority, (iii) the Series C Majority and (iv) holders representing a majority of the Ordinary Shares (together as the Drag Holders ) propose to enter into a transaction or a series of transactions that constitute a Share Sale or a Deemed Liquidation Event (the Drag-Along Sale ) with any Person (the Offeror ) provided that such proposed Drag-Along Sale implies a sale price per Share no less than two (2) times the Series B1 Issue Price (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events), the Drag Holders may, at their option, by delivery of a written notice (the Drag-Along Notice ), require all of the other Members, including Principals and Principal Holding Companies, (the Dragged Holders ) to, and whereupon each Dragged Holder shall: |
(i) |
sell, at the same time as the Drag Holders sell to the Offeror, in the Drag-Along Sale, all of its Equity Securities of the Company or the same percentage of its Equity Securities of the Company as the Drag Holders sell, upon substantially the same terms and conditions as were agreed to by the Drag Holders; provided, however, that such terms and conditions, including with respect to price paid or received per Equity Security of the Company, may differ as between different classes of Equity Securities of the Company in accordance with their relative liquidation preferences as set forth in Article 8.2 and provided further that some Members may be given the right or opportunity to exchange or roll a portion of their Equity Securities of the Company for Equity Securities of the acquirer or an Affiliate thereof in the Drag-Along Sale but in such event there shall be no obligation to afford such right or opportunity to all of the Members (provided further that, if such right is given to any Member, it shall also be offered to all the holders of Preferred Shares); |
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(ii) |
vote all of its Equity Securities of the Company (a) in favor of such Drag-Along Sale, (b) against any other consolidation, recapitalization, amalgamation, merger, sale of securities, sale of assets, business combination, or transaction that would interfere with, delay, restrict, or otherwise adversely affect such Drag-Along Sale, and (c) against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the definitive agreement(s) related to such Drag-Along Sale or that could result in any of the conditions to the closing obligations under such agreement(s) not being fulfilled, and, in connection therewith, to be present (in person or by proxy) at all relevant meetings of the Members (or adjournments thereof) or to approve and execute all relevant written consents in lieu of a meeting; |
(iii) |
not exercise any dissenters or appraisal rights under applicable law with respect to such Drag-Along Sale; |
(iv) |
take all necessary actions in connection with the consummation of such Drag-Along Sale as reasonably requested by the Drag Holders, including but not limited to the execution and delivery of any share transfer or other agreements prepared in connection with such Drag-Along Sale, and the delivery, at the closing of such Drag-Along Sale involving a sale of Shares, of all certificates representing Shares held or controlled by such Member, duly endorsed for transfer or accompanied by a duly executed share transfer form, or affidavits and indemnity undertakings with respect to lost certificates; and |
(v) |
approve any restructuring of the Company in connection with such Drag-Along Sale, as and if reasonably requested by the Drag Holders. |
In any such Drag-Along Sale, (i) each such Dragged Holder shall make representations and warranties regarding such holders title to and ownership of the Shares, due authorization, enforceability, no violation or breach of or default by such Dragged Holder under (with or without the giving of notice or lapse of time or both) any law or regulation applicable to such Dragged Holders or any material contract to which such Dragged Holder is a party or by which it is bound as a result of such Dragged Holder participating in the Drag-Along Sale, obtaining all requisite Consents (as defined in the Shareholders Agreement) in connection with the Drag-Along Sale, to the extent that such Consents (as defined in the Shareholders Agreement) can be obtained without incurring significant expenses, (ii) each such Dragged Holder shall bear a proportionate share (based on the relative proceeds received in such transaction) of the Drag Holders reasonable and documented fees and expenses incurred in the Drag Along Sale transaction, including legal, accounting and investment banking fees and expenses, and if approved by such Dragged Holder, deducting such fees and expenses from the proceeds payable to such Dragged Holder, and (iii) each such Dragged Holder shall severally, not jointly, join on a pro rata basis (based upon the relative proceeds received in such transaction) in any indemnification or other obligations that are part of the terms and conditions of such Drag-Along Sale (other than those that relate specifically to a particular Member, such as indemnification with respect to representations and warranties given by such Member regarding such Members title to and ownership of Shares, due authorization, enforceability, and no conflicts, which shall instead be given solely by such Member). In no event shall a holder of Preferred Shares be required to (x) assume any obligations in connection with the Drag-Along Sale other than any customary obligations (which, for the avoidance of doubt, shall not include any non-compete provisions, non-solicitation provisions, exclusivity provisions or other restriction on the business of such holder of Preferred Shares or its Affiliates); or (y) be liable for the inaccuracy of any representation, warranty or covenant made by, or any obligation of, any other party to the Drag-Along Sale, other than the Company.
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119. |
In the event that any such Dragged Holder fails for any reason to take any of the foregoing actions under Article 118 following the Drag-Along Notice, such Member hereby grants an irrevocable power of attorney and proxy to any Director to take all necessary actions and execute and deliver all documents deemed by such Director to be reasonably necessary to effectuate the terms hereof. |
120. |
The proceeds from any Drag-Along Sale shall be distributed in accordance with the terms of Article 8.2(A) . Each of the Members hereby agrees and shall procure that the Offeror shall distribute the proceeds of such Drag-Along Sale to the Members in accordance with this Article 120 . |
121. |
Sections 8 through 13 of the Shareholders Agreement shall not apply in connection with a Drag-Along Sale, notwithstanding anything contained to the contrary in the Shareholders Agreement. |
CONTENT CENSORSHIP SYSTEM
122. |
If Jifen or any of its subsidiaries proposes to amend its content censorship system, it shall obtain the prior consent of the relevant management representative appointed by the Series C2 Investor to Jifen, regardless of whether the Series C2 Closing has been consummated. |
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Exhibit 3.2
THE COMPANIES LAW (2018 REVISION)
OF THE CAYMAN ISLANDS
COMPANY LIMITED BY SHARES
SIXTH AMENDED AND RESTATED
MEMORANDUM OF ASSOCIATION
OF
QUTOUTIAO INC.
(adopted by a Special Resolution passed on August 30, 2018 and effective immediately prior to the completion of the initial public offering of the Companys American Depositary Shares representing its Class A Ordinary Shares)
1. |
The name of the Company is Qutoutiao Inc.. |
2. |
The Registered Office of the Company will be situated at the offices of Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1 1205 Cayman Islands, or at such other location within the Cayman Islands as the Directors may from time to time determine. |
3. |
The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Law or any other law of the Cayman Islands. |
4. |
The Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit as provided by the Companies Law. |
5. |
The Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands; provided that nothing in this section shall be construed as to prevent the Company effecting and concluding contracts in the Cayman Islands, and exercising in the Cayman Islands all of its powers necessary for the carrying on of its business outside the Cayman Islands. |
6. |
The liability of each Shareholder is limited to the amount, if any, unpaid on the Shares held by such Shareholder. |
7. |
The authorised share capital of the Company is US$50,000 divided into 500,000,000 shares comprising of (i) 50,000,000 Class A Ordinary Shares of a par value of US$0.0001 each, (ii) 34,248,442 Class B Ordinary Shares of a par value of US$0.0001 each and (iii) 415,751,558 shares of a par value of US$0.0001 each of such class or classes (however designated) as the board of directors may determine in accordance with Article 10 of the Articles. Subject to the Companies Law and the Articles, the Company shall have power to redeem or purchase any of its Shares and to increase or reduce its authorised share capital and to sub-divide or consolidate the said Shares or any of them and to issue all or any part of its capital whether original, redeemed, increased or reduced with or without any preference, priority, special privilege or other rights or subject to any postponement of rights or to any conditions or restrictions whatsoever and so that unless the conditions of issue shall otherwise expressly provide every issue of shares whether stated to be ordinary, preference or otherwise shall be subject to the powers on the part of the Company hereinbefore provided. |
8. |
The Company has the power contained in the Companies Law to deregister in the Cayman Islands and be registered by way of continuation in some other jurisdiction. |
9. |
Capitalised terms that are not defined in this Memorandum of Association bear the same meanings as those given in the Articles of Association of the Company. |
2
THE COMPANIES LAW (2018 REVISION)
OF THE CAYMAN ISLANDS
COMPANY LIMITED BY SHARES
SIXTH AMENDED AND RESTATED
ARTICLES OF ASSOCIATION
OF
QUTOUTIAO INC.
(adopted by a Special Resolution passed on August 30, 2018 and effective immediately prior to the completion of the initial public offering of the Companys American Depositary Shares representing its Class A Ordinary Shares)
TABLE A
The regulations contained or incorporated in Table A in the First Schedule of the Companies Law shall not apply to the Company and the following Articles shall comprise the Articles of Association of the Company.
INTERPRETATION
1. |
In these Articles the following defined terms will have the meanings ascribed to them, if not inconsistent with the subject or context: |
ADS | means an American Depositary Share representing Class A Ordinary Shares; | |
Affiliate | means in respect of a Person, any other Person that, directly or indirectly, through (1) one or more intermediaries, controls, is controlled by, or is under common control with, such Person, and (i) in the case of a natural person, shall include, without limitation, such persons spouse, parents, children, siblings, mother-in-law, father-in-law, brothers-in-law and sisters-in-law, a trust for the benefit of any of the foregoing, and a corporation, partnership or any other entity wholly or jointly owned by any of the foregoing, and (ii) in the case of an entity, shall include a partnership, a corporation or any other entity or any natural person which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such entity. The term control shall mean the ownership, directly or indirectly, of shares possessing more than fifty per cent (50%) of the voting power of the corporation, partnership or other entity (other than, in the case of a corporation, securities having such power only by reason of the happening of a contingency), or having the power to control the management or elect a majority of members to the board of directors or equivalent decision-making body of such corporation, partnership or other entity; |
3
Articles | means these articles of association of the Company, as amended or substituted from time to time; | |
Board and Board of Directors and Directors | means the directors of the Company for the time being, or as the case may be, the directors assembled as a board or as a committee thereof; | |
Chairman | means the chairman of the Board of Directors; | |
Class or Classes | means any class or classes of Shares as may from time to time be issued by the Company; | |
Class A Ordinary Share | means an Ordinary Share of a par value of US$0.0001 in the capital of the Company, designated as a Class A Ordinary Share and having the rights provided for in these Articles; | |
Class B Ordinary Share | means an Ordinary Share of a par value of US$0.0001 in the capital of the Company, designated as a Class B Ordinary Share and having the rights provided for in these Articles; | |
Commission | means the Securities and Exchange Commission of the United States of America or any other federal agency for the time being administering the Securities Act; | |
Company | Means Qutoutiao Inc., a Cayman Islands exempted company; | |
Companies Law | means the Companies Law (2018 Revision) of the Cayman Islands and any statutory amendment or re-enactment thereof; | |
Companys Website | means the main corporate/investor relations website of the Company, the address or domain name of which has been notified to Shareholders; | |
Designated Stock Exchange | means the stock exchange in the United States on which any Shares and ADSs are listed for trading; | |
Designated Stock Exchange Rules | means the relevant code, rules and regulations, as amended, from time to time, applicable as a result of the original and continued listing of any Shares or ADSs on the Designated Stock Exchange; | |
electronic | has the meaning given to it in the Electronic Transactions Law and any amendment thereto or re-enactments thereof for the time being in force and includes every other law incorporated therewith or substituted therefor; | |
electronic communication | means electronic posting to the Companys Website, transmission to any number, address or internet website or other electronic delivery methods as otherwise decided and approved by not less than a majority of the vote of the Board; |
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Electronic Transactions Law | means the Electronic Transactions Law (2003 Revision) of the Cayman Islands and any statutory amendment or re-enactment thereof; | |
electronic record | has the meaning given to it in the Electronic Transactions Law and any amendment thereto or re-enactments thereof for the time being in force and includes every other law incorporated therewith or substituted therefor; | |
Founder
Founder Affiliate |
refers to Mr. Eric Siliang Tan or Mr. Lei Li;
means any entity that is ultimately controlled by the Founder; |
|
Law | means the Companies Law and every other law and regulation of the Cayman Islands for the time being in force concerning companies and affecting the Company; | |
Memorandum of Association | means the memorandum of association of the Company, as amended or substituted from time to time; | |
Ordinary Resolution |
means a resolution:
(a) passed by a simple majority of the votes cast by such Shareholders as, being entitled to do so, vote in person or, where proxies are allowed, by proxy or, in the case of corporations, by their duly authorised representatives, at a general meeting of the Company held in accordance with these Articles and where a poll is taken regard shall be had in computing a majority to the number of votes to which each Shareholder is entitled; or |
|
(b) approved in writing by all of the Shareholders entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Shareholders and the effective date of the resolution so adopted shall be the date on which the instrument, or the last of such instruments, if more than one, is executed; |
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Ordinary Share | means a Class A Ordinary Share or a Class B Ordinary Share; | |
paid up | means paid up as to the par value in respect of the issue of any Shares and includes credited as paid up; | |
Person | means any natural person, firm, company, joint venture, partnership, corporation, association or other entity (whether or not having a separate legal personality) or any of them as the context so requires; | |
Register | means the register of Members of the Company maintained in accordance with the Companies Law; |
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Registered Office | means the registered office of the Company as required by the Companies Law; | |
Seal | means the common seal of the Company (if adopted) including any facsimile thereof; | |
Secretary | means any Person appointed by the Directors to perform any of the duties of the secretary of the Company; | |
Securities Act | means the Securities Act of 1933 of the United States of America, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time; | |
Share | means a share in the capital of the Company. All references to Shares herein shall be deemed to be Shares of any or all Classes as the context may require. For the avoidance of doubt in these Articles the expression Share shall include a fraction of a Share; | |
Shareholder or Member | means a Person who is registered as the holder of one or more Shares in the Register; | |
Share Premium Account | means the share premium account established in accordance with these Articles and the Companies Law; | |
signed | means bearing a signature or representation of a signature affixed by mechanical means or an electronic symbol or process attached to or logically associated with an electronic communication and executed or adopted by a person with the intent to sign the electronic communication; | |
Special Resolution |
means a special resolution of the Company passed in accordance with the Law, being a resolution:
(a) passed by not less than two-thirds of the votes cast by such Shareholders as, being entitled to do so, vote in person or, where proxies are allowed, by proxy or, in the case of corporations, by their duly authorised representatives, at a general meeting of the Company of which notice specifying the intention to propose the resolution as a special resolution has been duly given and where a poll is taken regard shall be had in computing a majority to the number of votes to which each Shareholder is entitled; or
(b) approved in writing by all of the Shareholders entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Shareholders and the effective date of the special resolution so adopted shall be the date on which the instrument or the last of such instruments, if more than one, is executed; |
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Treasury Share | means a Share held in the name of the Company as a treasury share in accordance with the Companies Law; and | |
United States | means the United States of America, its territories, its possessions and all areas subject to its jurisdiction. |
2. |
In these Articles, save where the context requires otherwise: |
(a) |
words importing the singular number shall include the plural number and vice versa; |
(b) |
words importing the masculine gender only shall include the feminine gender and any Person as the context may require; |
(c) |
the word may shall be construed as permissive and the word shall shall be construed as imperative; |
(d) |
reference to a dollar or dollars (or US$) and to a cent or cents is reference to dollars and cents of the United States of America; |
(e) |
reference to a statutory enactment shall include reference to any amendment or re-enactment thereof for the time being in force; |
(f) |
reference to any determination by the Directors shall be construed as a determination by the Directors in their sole and absolute discretion and shall be applicable either generally or in any particular case; |
(g) |
reference to in writing shall be construed as written or represented by any means reproducible in writing, including any form of print, lithograph, email, facsimile, photograph or telex or represented by any other substitute or format for storage or transmission for writing including in the form of an electronic record or partly one and partly another; |
(h) |
any requirements as to delivery under the Articles include delivery in the form of an electronic record or an electronic communication; |
(i) |
any requirements as to execution or signature under the Articles, including the execution of the Articles themselves, can be satisfied in the form of an electronic signature as defined in the Electronic Transaction Law; and |
(j) |
Sections 8 and 19(3) of the Electronic Transactions Law shall not apply. |
3. |
Subject to the last two preceding Articles, any words defined in the Companies Law shall, if not inconsistent with the subject or context, bear the same meaning in these Articles. |
PRELIMINARY
4. |
The business of the Company may be conducted as the Directors see fit. |
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5. |
The Registered Office shall be at such address in the Cayman Islands as the Directors may from time to time determine. The Company may in addition establish and maintain such other offices and places of business and agencies in such places as the Directors may from time to time determine. |
6. |
The expenses incurred in the formation of the Company and in connection with the offer for subscription and issue of Shares shall be paid by the Company. Such expenses may be amortised over such period as the Directors may determine and the amount so paid shall be charged against income and/or capital in the accounts of the Company as the Directors shall determine. |
7. |
The Directors shall keep, or cause to be kept, the Register at such place as the Directors may from time to time determine and, in the absence of any such determination, the Register shall be kept at the Registered Office. |
SHARE CAPITAL
8. |
The authorised share capital of the Company is US$50,000 divided into 500,000,000 shares comprising of (i) 50,000,000 Class A Ordinary Shares of a par value of US$0.0001 each, (ii) 34,248,442 Class B Ordinary Shares of a par value of US$0.0001 each and (iii) 415,751,558 shares of a par value of US$0.0001 each of such class or classes (however designated) as the board of directors may determine in accordance with Article 10 of the Articles. |
SHARES
9. |
Subject to these Articles, all Shares for the time being unissued shall be under the control of the Directors who may, in their absolute discretion and without the approval of the Members, cause the Company to: |
(a) |
issue, allot and dispose of Shares (including, without limitation, preferred shares) (whether in certificated form or non-certificated form) to such Persons, in such manner, on such terms and having such rights and being subject to such restrictions as they may from time to time determine; |
(b) |
grant rights over Shares or other securities to be issued in one or more classes or series as they deem necessary or appropriate and determine the designations, powers, preferences, privileges and other rights attaching to such Shares or securities, including dividend rights, voting rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers, preferences, privileges and rights associated with the then issued and outstanding Shares, at such times and on such other terms as they think proper; and |
(c) |
grant options with respect to Shares and issue warrants or similar instruments with respect thereto. |
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10. |
The Directors may authorise the division of Shares into any number of Classes and the different Classes shall be authorised, established and designated (or re-designated as the case may be) and the variations in the relative rights (including, without limitation, voting, dividend and redemption rights), restrictions, preferences, privileges and payment obligations as between the different Classes (if any) may be fixed and determined by the Directors or by the Shareholders by Ordinary Resolution. The Directors may issue Shares with such preferred or other rights, all or any of which may be greater than the rights of Ordinary Shares, at such time and on such terms as they may think appropriate. Notwithstanding Article 18, the Directors may issue from time to time, out of the authorised share capital of the Company (other than the authorised but unissued Ordinary Shares), series of preferred shares in their absolute discretion and without approval of the Members; provided, however, before any preferred shares of any such series are issued, the Directors shall by resolution of Directors determine, with respect to any series of preferred shares, the terms and rights of that series, including: |
(a) |
the designation of such series, the number of preferred shares to constitute such series and the subscription price thereof if different from the par value thereof; |
(b) |
whether the preferred shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may be general or limited; |
(c) |
the dividends, if any, payable on such series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any shares of any other class or any other series of shares; |
(d) |
whether the preferred shares of such series shall be subject to redemption by the Company, and, if so, the times, prices and other conditions of such redemption; |
(e) |
whether the preferred shares of such series shall have any rights to receive any part of the assets available for distribution amongst the Members upon the liquidation of the Company, and, if so, the terms of such liquidation preference, and the relation which such liquidation preference shall bear to the entitlements of the holders of shares of any other class or any other series of shares; |
(f) |
whether the preferred shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the preferred shares of such series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; |
(g) |
whether the preferred shares of such series shall be convertible into, or exchangeable for, shares of any other class or any other series of preferred shares or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; |
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(h) |
the limitations and restrictions, if any, to be effective while any preferred shares of such series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Company of, the existing shares or shares of any other class of shares or any other series of preferred shares; |
(i) |
the conditions or restrictions, if any, upon the creation of indebtedness of the Company or upon the issue of any additional shares, including additional shares of such series or of any other class of shares or any other series of preferred shares; and |
(j) |
any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof; |
and, for such purposes, the Directors may reserve an appropriate number of Shares for the time being unissued. The Company shall not issue Shares to bearer.
11. |
The Company may insofar as may be permitted by law, pay a commission to any Person in consideration of his subscribing or agreeing to subscribe whether absolutely or conditionally for any Shares. Such commissions may be satisfied by the payment of cash or the lodgement of fully or partly paid-up Shares or partly in one way and partly in the other. The Company may also pay such brokerage as may be lawful on any issue of Shares. |
12. |
The Directors may refuse to accept any application for Shares, and may accept any application in whole or in part, for any reason or for no reason. |
CLASS A ORDINARY SHARES AND CLASS B ORDINARY SHARES
13. |
Holders of Class A Ordinary Shares and Class B Ordinary Shares shall at all times vote together as one class on all resolutions submitted to a vote by the Members. Each Class A Ordinary Share shall entitle the holder thereof to one vote on all matters subject to vote at general meetings of the Company, and each Class B ordinary share shall entitle the holder thereof to ten votes on all matters subject to vote at general meetings of the Company. |
14. |
Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time at the option of the holder thereof. The right to convert shall be exercisable by the holder of the Class B Ordinary Share delivering a written notice to the Company that such holder elects to convert a specified number of Class B Ordinary Shares into Class A Ordinary Shares. In no event shall Class A Ordinary Shares be convertible into Class B Ordinary Shares. |
15. |
Any conversion of Class B Ordinary Shares into Class A Ordinary Shares pursuant to these Articles shall be effected by the Directors by repurchasing the relevant Class B Ordinary Shares and in consideration therefor issuing fully-paid Class A Ordinary Shares in equal number (the Conversion ). Such Conversion shall become effective forthwith upon entries being made in the Register of Members to record the Conversion. The automatic Conversion pursuant to Article 16 shall take place without any action being required by the holder of such Class B Ordinary Shares and whether or not the certificates representing such share are surrendered to the Company. Any reference to a re-designation and re-classification of the Class B Ordinary Shares as Class A Ordinary Shares shall mean a Conversion. |
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16. |
Upon any sale, transfer, assignment or disposition of any Class B Ordinary Share by a Shareholder to any person who is not a Founder or Founder Affiliate, or upon a change of ultimate beneficial ownership of any Class B Ordinary Share to any Person who is not a Founder or Founder Affiliate, such Class B Ordinary Share shall be automatically and immediately converted into one Class A Ordinary Share. For the avoidance of doubt, (i) a sale, transfer, assignment or disposition shall be effective upon the Companys registration of such sale, transfer, assignment or disposition in its Register of Members; and (ii) the creation of any pledge, charge, encumbrance or other third party right of whatever description on any Class B Ordinary Shares to secure a holders contractual or legal obligations shall not be deemed as a sale, transfer, assignment or disposition unless and until any such pledge, charge, encumbrance or other third party right is enforced and results in the third party holding legal title to the relevant Class B Ordinary Shares, in which case all the related Class B Ordinary Shares shall be automatically converted into the same number of Class A Ordinary Shares. For purpose of this Article 15, beneficial ownership shall have the meaning set forth in Rule 13d-3 under the United States Securities Exchange Act of 1934, as amended. |
17. |
Save and except for voting rights and conversion rights as set out in Articles 13 to 16 (inclusive), the Class A Ordinary Shares and the Class B Ordinary Shares shall rank pari passu with one another and shall have the same rights, preferences, privileges and restrictions. |
MODIFICATION OF RIGHTS
18. |
Whenever the capital of the Company is divided into different Classes the rights attached to any such Class may, subject to any rights or restrictions for the time being attached to any Class, only be materially adversely varied or abrogated with the consent in writing of the holders of two-thirds of the issued Shares of that Class or with the sanction of a resolution passed at a separate meeting of the holders of the Shares of that Class by a majority of two-thirds of the votes cast at such meeting. To every such separate meeting all the provisions of these Articles relating to general meetings of the Company or to the proceedings thereat shall, mutatis mutandis, apply, except that the necessary quorum shall be one or more Persons holding or representing by proxy at least one-third in nominal or par value amount of the issued Shares of the relevant Class (but so that if at any adjourned meeting of such holders a quorum as above defined is not present, those Shareholders who are present shall form a quorum) and that, subject to any rights or restrictions for the time being attached to the Shares of that Class, every Shareholder of the Class shall on a poll have one vote for each Share of the Class held by him. For the purposes of this Article the Directors may treat all the Classes or any two or more Classes as forming one Class if they consider that all such Classes would be affected in the same way by the proposals under consideration, but in any other case shall treat them as separate Classes. |
19. |
The rights conferred upon the holders of the Shares of any Class issued with preferred or other rights shall not, subject to any rights or restrictions for the time being attached to the Shares of that Class, be deemed to be materially adversely varied or abrogated by, inter alia, the creation, allotment or issue of further Shares ranking pari passu with or subsequent to them or the redemption or purchase of any Shares of any Class by the Company. The rights of the holders of Shares shall not be deemed to be materially adversely varied by the creation or issue of Shares with preferred or other rights including, without limitation, the creation of Shares with enhanced or weighted voting rights. |
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CERTIFICATES
20. |
Every Person whose name is entered as a Member in the Register may, without payment and upon its written request, request a certificate within two calendar months after allotment or lodgement of transfer (or within such other period as the conditions of issue shall provide) in the form determined by the Directors. All certificates shall specify the Share or Shares held by that Person, provided that in respect of a Share or Shares held jointly by several persons the Company shall not be bound to issue more than one certificate, and delivery of a certificate for a Share to one of several joint holders shall be sufficient delivery to all. All certificates for Shares shall be delivered personally or sent through the post addressed to the Member entitled thereto at the Members registered address as appearing in the Register. |
21. |
Every share certificate of the Company shall bear legends required under the applicable laws, including the Securities Act. |
22. |
Any two or more certificates representing Shares of any one Class held by any Member may at the Members request be cancelled and a single new certificate for such Shares issued in lieu on payment (if the Directors shall so require) of one dollar (US$1.00) or such smaller sum as the Directors shall determine. |
23. |
If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed, a new certificate representing the same Shares may be issued to the relevant Member upon request, subject to delivery up of the old certificate or (if alleged to have been lost, stolen or destroyed) compliance with such conditions as to evidence and indemnity and the payment of out-of-pocket expenses of the Company in connection with the request as the Directors may think fit. |
24. |
In the event that Shares are held jointly by several persons, any request may be made by any one of the joint holders and if so made shall be binding on all of the joint holders. |
FRACTIONAL SHARES
25. |
The Directors may issue fractions of a Share and, if so issued, a fraction of a Share shall be subject to and carry the corresponding fraction of liabilities (whether with respect to nominal or par value, premium, contributions, calls or otherwise), limitations, preferences, privileges, qualifications, restrictions, rights (including, without prejudice to the generality of the foregoing, voting and participation rights) and other attributes of a whole Share. If more than one fraction of a Share of the same Class is issued to or acquired by the same Shareholder such fractions shall be accumulated. |
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LIEN
26. |
The Company has a first and paramount lien on every Share (whether or not fully paid) for all amounts (whether presently payable or not) payable at a fixed time or called in respect of that Share. The Company also has a first and paramount lien on every Share registered in the name of a Person indebted or under liability to the Company (whether he is the sole registered holder of a Share or one of two or more joint holders) for all amounts owing by him or his estate to the Company (whether or not presently payable). The Directors may at any time declare a Share to be wholly or in part exempt from the provisions of this Article. The Companys lien on a Share extends to any amount payable in respect of it, including but not limited to dividends. |
27. |
The Company may sell, in such manner as the Directors in their absolute discretion think fit, any Share on which the Company has a lien, but no sale shall be made unless an amount in respect of which the lien exists is presently payable nor until the expiration of fourteen calendar days after a notice in writing, demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder for the time being of the Share, or the Persons entitled thereto by reason of his death or bankruptcy. |
28. |
For giving effect to any such sale the Directors may authorise a Person to transfer the Shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the Shares comprised in any such transfer and he shall not be bound to see to the application of the purchase money, nor shall his title to the Shares be affected by any irregularity or invalidity in the proceedings in reference to the sale. |
29. |
The proceeds of the sale after deduction of expenses, fees and commission incurred by the Company shall be received by the Company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable, and the residue shall (subject to a like lien for sums not presently payable as existed upon the Shares prior to the sale) be paid to the Person entitled to the Shares immediately prior to the sale. |
CALLS ON SHARES
30. |
Subject to the terms of the allotment, the Directors may from time to time make calls upon the Shareholders in respect of any moneys unpaid on their Shares, and each Shareholder shall (subject to receiving at least fourteen calendar days notice specifying the time or times of payment) pay to the Company at the time or times so specified the amount called on such Shares. A call shall be deemed to have been made at the time when the resolution of the Directors authorising such call was passed. |
31. |
The joint holders of a Share shall be jointly and severally liable to pay calls in respect thereof. |
32. |
If a sum called in respect of a Share is not paid before or on the day appointed for payment thereof, the Person from whom the sum is due shall pay interest upon the sum at the rate of eight percent per annum from the day appointed for the payment thereof to the time of the actual payment, but the Directors shall be at liberty to waive payment of that interest wholly or in part. |
33. |
The provisions of these Articles as to the liability of joint holders and as to payment of interest shall apply in the case of non-payment of any sum which, by the terms of issue of a Share, becomes payable at a fixed time, whether on account of the amount of the Share, or by way of premium, as if the same had become payable by virtue of a call duly made and notified. |
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34. |
The Directors may make arrangements with respect to the issue of partly paid Shares for a difference between the Shareholders, or the particular Shares, in the amount of calls to be paid and in the times of payment. |
35. |
The Directors may, if they think fit, receive from any Shareholder willing to advance the same all or any part of the moneys uncalled and unpaid upon any partly paid Shares held by him, and upon all or any of the moneys so advanced may (until the same would, but for such advance, become presently payable) pay interest at such rate (not exceeding without the sanction of an Ordinary Resolution, eight percent per annum) as may be agreed upon between the Shareholder paying the sum in advance and the Directors. No such sum paid in advance of calls shall entitle the Member paying such sum to any portion of a dividend declared in respect of any period prior to the date upon which such sum would, but for such payment, become presently payable. |
FORFEITURE OF SHARES
36. |
If a Shareholder fails to pay any call or instalment of a call in respect of partly paid Shares on the day appointed for payment, the Directors may, at any time thereafter during such time as any part of such call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued. |
37. |
The notice shall name a further day (not earlier than the expiration of fourteen calendar days from the date of the notice) on or before which the payment required by the notice is to be made, and shall state that in the event of non-payment at or before the time appointed, the Shares in respect of which the call was made will be liable to be forfeited. |
38. |
If the requirements of any such notice as aforesaid are not complied with, any Share in respect of which the notice has been given may at any time thereafter, before the payment required by notice has been made, be forfeited by a resolution of the Directors to that effect. |
39. |
A forfeited Share may be sold or otherwise disposed of on such terms and in such manner as the Directors think fit, and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the Directors think fit. |
40. |
A Person whose Shares have been forfeited shall cease to be a Shareholder in respect of the forfeited Shares, but shall, notwithstanding, remain liable to pay to the Company all moneys which at the date of forfeiture were payable by him to the Company in respect of the Shares forfeited, but his liability shall cease if and when the Company receives payment in full of the amount unpaid on the Shares forfeited. |
41. |
A statutory declaration in writing that the declarant is a Director of the Company and that a Share has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts in the declaration as against all Persons claiming to be entitled to the Share. |
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42. |
The Company may receive the consideration, if any, given for a Share on any sale or disposition thereof pursuant to the provisions of these Articles as to forfeiture and may execute a transfer of the Share in favour of the Person to whom the Share is sold or disposed of and that Person shall be registered as the holder of the Share and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the Shares be affected by any irregularity or invalidity in the proceedings in reference to the disposition or sale. |
43. |
The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which by the terms of issue of a Share becomes due and payable, whether on account of the amount of the Share, or by way of premium, as if the same had been payable by virtue of a call duly made and notified. |
TRANSFER OF SHARES
44. |
The instrument of transfer of any Share shall be in writing and in any usual or common form or such other form as the Directors may, in their absolute discretion, approve and be executed by or on behalf of the transferor and if in respect of a nil or partly paid up Share, or if so required by the Directors, shall also be executed on behalf of the transferee and shall be accompanied by the certificate (if any) of the Shares to which it relates and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer. The transferor shall be deemed to remain a Shareholder until the name of the transferee is entered in the Register in respect of the relevant Shares. |
45. (a) |
The Directors may in their absolute discretion decline to register any transfer of Shares which is not fully paid up or on which the Company has a lien. |
(b) |
The Directors may also decline to register any transfer of any Share unless: |
(i) |
the instrument of transfer is lodged with the Company, accompanied by the certificate for the Shares to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer; |
(ii) |
the instrument of transfer is in respect of only one Class of Shares; |
(iii) |
the instrument of transfer is properly stamped, if required; |
(iv) |
in the case of a transfer to joint holders, the number of joint holders to whom the Share is to be transferred does not exceed four; and |
(v) |
a fee of such maximum sum as the Designated Stock Exchange may determine to be payable, or such lesser sum as the Board of Directors may from time to time require, is paid to the Company in respect thereof. |
46. |
The registration of transfers may, on ten calendar days notice being given by advertisement in such one or more newspapers, by electronic means or by any other means in accordance with the Designated Stock Exchange Rules, be suspended and the Register closed at such times and for such periods as the Directors may, in their absolute discretion, from time to time determine, provided always that such registration of transfer shall not be suspended nor the Register of Members closed for more than thirty calendar days in any calendar year. |
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47. |
All instruments of transfer that are registered shall be retained by the Company. If the Directors refuse to register a transfer of any Shares, they shall within three calendar months after the date on which the transfer was lodged with the Company send notice of the refusal to each of the transferor and the transferee. |
TRANSMISSION OF SHARES
48. |
The legal personal representative of a deceased sole holder of a Share shall be the only Person recognised by the Company as having any title to the Share. In the case of a Share registered in the name of two or more holders, the survivors or survivor, or the legal personal representatives of the deceased holder of the Share, shall be the only Person recognised by the Company as having any title to the Share. |
49. |
Any Person becoming entitled to a Share in consequence of the death or bankruptcy of a Shareholder shall, upon such evidence being produced as may from time to time be required by the Directors, have the right either to be registered as a Shareholder in respect of the Share or, instead of being registered himself, to make such transfer of the Share as the deceased or bankrupt Person could have made; but the Directors shall, in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the Share by the deceased or bankrupt Person before the death or bankruptcy. |
50. |
A Person becoming entitled to a Share by reason of the death or bankruptcy of a Shareholder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered Shareholder, except that he shall not, before being registered as a Shareholder in respect of the Share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the Company, provided however, that the Directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the Share, and if the notice is not complied with within ninety calendar days, the Directors may thereafter withhold payment of all dividends, bonuses or other monies payable in respect of the Share until the requirements of the notice have been complied with. |
REGISTRATION OF EMPOWERING INSTRUMENTS
51. |
The Company shall be entitled to charge a fee not exceeding one dollar (US$1.00) on the registration of every probate, letters of administration, certificate of death or marriage, power of attorney, notice in lieu of distringas, or other instrument. |
ALTERATION OF SHARE CAPITAL
52. |
The Company may from time to time by Ordinary Resolution increase the share capital by such sum, to be divided into Shares of such Classes and amount, as the resolution shall prescribe. |
53. |
The Company may by Ordinary Resolution: |
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(a) |
increase its share capital by new Shares of such amount as it thinks expedient; |
(b) |
consolidate and divide all or any of its share capital into Shares of a larger amount than its existing Shares; |
(c) |
subdivide its Shares, or any of them, into Shares of an amount smaller than that fixed by the Memorandum, provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced Share shall be the same as it was in case of the Share from which the reduced Share is derived; and |
(d) |
cancel any Shares that, at the date of the passing of the resolution, have not been taken or agreed to be taken by any Person and diminish the amount of its share capital by the amount of the Shares so cancelled. |
54. |
The Company may by Special Resolution reduce its share capital and any capital redemption reserve in any manner authorised by law. |
REDEMPTION, PURCHASE AND SURRENDER OF SHARES
55. |
Subject to the provisions of the Companies Law and these Articles, the Company may: |
(a) |
issue Shares that are to be redeemed or are liable to be redeemed at the option of the Shareholder or the Company. The redemption of Shares shall be effected in such manner and upon such terms as may be determined, before the issue of such Shares, by either the Board or by the Shareholders by Ordinary Resolution; |
(b) |
purchase its own Shares (including any redeemable Shares) on such terms and in such manner and terms as have been approved by the Board or by the Members by Ordinary Resolution, or are otherwise authorised by these Articles; and |
(c) |
make a payment in respect of the redemption or purchase of its own Shares in any manner permitted by the Companies Law, including out of capital. |
56. |
Any Share in respect of which notice of redemption has been given shall not be entitled to participate in the profits of the Company in respect of the period after the date specified as the date of redemption in the notice of redemption. |
57. |
The redemption, purchase or surrender of any Share shall not be deemed to give rise to the redemption, purchase or surrender of any other Share. |
58. |
The holder of the Shares being purchased shall be bound to deliver up to the Company the certificate(s) (if any) thereof for cancellation and thereupon the Company shall pay to him the purchase or redemption monies or consideration in respect thereof. |
59. |
The Directors may accept the surrender for no consideration of any fully paid Share. |
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TREASURY SHARES
60. |
The Directors may, prior to the purchase, redemption or surrender of any Share, determine that such Share shall be held as a Treasury Share. In the event that the Directors do not specify that the relevant Shares are to be held as Treasury Shares, such Shares shall be cancelled. |
61. |
The Directors may determine to cancel a Treasury Share or transfer a Treasury Share on such terms as they think proper (including, without limitation, for nil consideration). |
62. |
No dividend may be declared or paid, and no other distribution (whether in cash or otherwise) of the Companys assets (including any distribution of assets to members on a winding up) may be declared or paid in respect of a Treasury Share. |
63. |
The Company shall be entered in the Register as the holder of the Treasury Shares provided that: |
(a) |
the Company shall not be treated as a member for any purpose and shall not exercise any right in respect of the Treasury Shares, and any purported exercise of such a right shall be void; |
(b) |
a Treasury Share shall not be voted, directly or indirectly, at any meeting of the Company and shall not be counted in determining the total number of issued shares at any given time, whether for the purposes of these Articles or the Companies Law, save that an allotment of Shares as fully paid bonus shares in respect of a Treasury Share is permitted and Shares allotted as fully paid bonus shares in respect of a treasury share shall be treated as Treasury Shares. |
GENERAL MEETINGS
64. |
All general meetings other than annual general meetings shall be called extraordinary general meetings. |
65. (a) |
The Company may (but shall not be obliged to) in each calendar year hold a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it. The annual general meeting shall be held at such time and place as may be determined by the Directors. |
(b) |
At these meetings the report of the Directors (if any) shall be presented. |
66. (a) |
The Chairman or a majority of the Directors may call general meetings, and they shall on a Shareholders requisition forthwith proceed to convene an extraordinary general meeting of the Company. |
(b) |
A Shareholders requisition is a requisition of Members holding at the date of deposit of the requisition Shares which carry in aggregate not less than one-third (1/3) of all votes attaching to all issued and outstanding Shares of the Company that as at the date of the deposit carry the right to vote at general meetings of the Company. |
18
(c) |
The requisition must state the objects of the meeting and must be signed by the requisitionists and deposited at the Registered Office, and may consist of several documents in like form each signed by one or more requisitionists. |
(d) |
If the Directors do not within twenty-one calendar days from the date of the deposit of the requisition duly proceed to convene a general meeting to be held within a further twenty-one calendar days, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three calendar months after the expiration of the said twenty-one calendar days. |
(e) |
A general meeting convened as aforesaid by requisitionists shall be convened in the same manner as nearly as possible as that in which general meetings are to be convened by Directors. |
NOTICE OF GENERAL MEETINGS
67. |
At least seven (7) calendar days notice shall be given for any general meeting. Every notice shall be exclusive of the day on which it is given or deemed to be given and of the day for which it is given and shall specify the place, the day and the hour of the meeting and the general nature of the business and shall be given in the manner hereinafter mentioned or in such other manner if any as may be prescribed by the Company, provided that a general meeting of the Company shall, whether or not the notice specified in this Article has been given and whether or not the provisions of these Articles regarding general meetings have been complied with, be deemed to have been duly convened if it is so agreed: |
(a) |
in the case of an annual general meeting, by all the Shareholders (or their proxies) entitled to attend and vote thereat; and |
(b) |
in the case of an extraordinary general meeting, by two-thirds (2/3 rd ) of the Shareholders having a right to attend and vote at the meeting, present in person or by proxy or, in the case of a corporation or other non-natural person, by its duly authorised representative or proxy. |
68. |
The accidental omission to give notice of a meeting to or the non-receipt of a notice of a meeting by any Shareholder shall not invalidate the proceedings at any meeting. |
PROCEEDINGS AT GENERAL MEETINGS
69. |
No business except for the appointment of a chairman for the meeting shall be transacted at any general meeting unless a quorum of Shareholders is present at the time when the meeting proceeds to business. One or more holders holding Shares which carry in aggregate (or representing by proxy) not less than one-third (1/3) of all votes attaching to all Shares in issue and entitled to vote at such general meeting, present in person or by proxy or, if a corporation or other non-natural person, by its duly authorised representative, shall be a quorum for all purposes. |
70. |
If within half an hour from the time appointed for the meeting a quorum is not present, the meeting shall be dissolved. |
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71. |
If the Directors wish to make this facility available for a specific general meeting or all general meetings of the Company, participation in any general meeting of the Company may be by means of a telephone or similar communication equipment by way of which all Persons participating in such meeting can communicate with each other and such participation shall be deemed to constitute presence in person at the meeting. |
72. |
The chairman, if any, of the Directors shall preside as chairman at every general meeting of the Company. |
73. |
If there is no such chairman, or if at any general meeting he is not present within fifteen minutes after the time appointed for holding the meeting or is unwilling to act as chairman, any Director or Person nominated by the Directors shall preside as chairman of that meeting, failing which the Shareholders present in person or by proxy shall choose any Person present to be chairman of that meeting. |
74. |
The chairman may with the consent of any general meeting at which a quorum is present (and shall if so directed by the meeting) adjourn a meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a meeting, or adjourned meeting, is adjourned for fourteen calendar days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting. |
75. |
The Directors may cancel or postpone any duly convened general meeting at any time prior to such meeting, except for general meetings requisitioned by the Shareholders in accordance with these Articles, for any reason or for no reason, upon notice in writing to Shareholders. A postponement may be for a stated period of any length or indefinitely as the Directors may determine. |
76. |
At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless a poll is (before or on the declaration of the result of the show of hands) demanded by the chairman or any Shareholder present in person or by proxy, and unless a poll is so demanded, a declaration by the chairman that a resolution has, on a show of hands, been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the book of the proceedings of the Company, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of, or against, that resolution. |
77. |
If a poll is duly demanded it shall be taken in such manner as the chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. |
78. |
All questions submitted to a meeting shall be decided by an Ordinary Resolution except where a greater majority is required by these Articles or by the Law. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded, shall be entitled to a second or casting vote. |
20
79. |
A poll demanded on the election of a chairman of the meeting or on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs. |
VOTES OF SHAREHOLDERS
80. |
Subject to any rights and restrictions for the time being attached to any Share, on a show of hands every Shareholder present in person or by proxy (or, if a corporation or other non-natural person, by its duly authorised representative or proxy) shall, at a general meeting of the Company, have one vote for each Class A Ordinary Share and ten votes for each Class B Ordinary Share, in each case of which he or the Person represented by proxy is the holder; and on a poll every Shareholder present in person or by proxy (or, if a corporation or other non-natural person, by its duly authorised representative or proxy) shall have one vote for each Class A Ordinary Share and ten votes for each Class B Ordinary Share, in each case of which he or the Person represented by proxy is the holder. |
81. |
In the case of joint holders the vote of the senior who tenders a vote whether in person or by proxy (or, if a corporation or other non-natural person, by its duly authorised representative or proxy) shall be accepted to the exclusion of the votes of the other joint holders and for this purpose seniority shall be determined by the order in which the names stand in the Register. |
82. |
Shares carrying the right to vote that are held by a Shareholder of unsound mind, or in respect of whom an order has been made by any court having jurisdiction in lunacy, may be voted, whether on a show of hands or on a poll, by his committee, or other Person in the nature of a committee appointed by that court, and any such committee or other Person may vote in respect of such Shares by proxy. |
83. |
No Shareholder shall be entitled to vote at any general meeting of the Company unless he is registered as a Shareholder on the record date for such meeting nor unless all calls, if any, or other sums presently payable by him in respect of Shares carrying the right to vote held by him have been paid. |
84. |
On a poll votes may be given either personally or by proxy. |
85. |
Each Shareholder, other than a recognised clearing house (or its nominee(s)) or depositary (or its nominee(s)), may only appoint one proxy on a show of hand. The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation, either under Seal or under the hand of an officer or attorney duly authorised. A proxy need not be a Shareholder. |
86. |
An instrument appointing a proxy may be in any usual or common form or such other form as the Directors may approve. |
87. |
The instrument appointing a proxy shall be deposited at the Registered Office or at such other place as is specified for that purpose in the notice convening the meeting, or in any instrument of proxy sent out by the Company: |
21
(a) |
not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote; or |
(b) |
in the case of a poll taken more than 48 hours after it is demanded, be deposited as aforesaid after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll; or |
(c) |
where the poll is not taken forthwith but is taken not more than 48 hours after it was demanded be delivered at the meeting at which the poll was demanded to the chairman or to the secretary or to any director; |
provided that the Directors may in the notice convening the meeting, or in an instrument of proxy sent out by the Company, direct that the instrument appointing a proxy may be deposited at such other time (no later than the time for holding the meeting or adjourned meeting) at the Registered Office or at such other place as is specified for that purpose in the notice convening the meeting, or in any instrument of proxy sent out by the Company. The Chairman may in any event at his discretion direct that an instrument of proxy shall be deemed to have been duly deposited. An instrument of proxy that is not deposited in the manner permitted shall be invalid.
88. |
The instrument appointing a proxy shall be deemed to confer authority to demand or join in demanding a poll. |
89. |
A resolution in writing signed by all the Shareholders for the time being entitled to receive notice of and to attend and vote at general meetings of the Company (or being corporations by their duly authorised representatives) shall be as valid and effective as if the same had been passed at a general meeting of the Company duly convened and held. |
CORPORATIONS ACTING BY REPRESENTATIVES AT MEETINGS
90. |
Any corporation which is a Shareholder or a Director may by resolution of its directors or other governing body authorise such Person as it thinks fit to act as its representative at any meeting of the Company or of any meeting of holders of a Class or of the Directors or of a committee of Directors, and the Person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual Shareholder or Director. |
DEPOSITARY AND CLEARING HOUSES
91. |
If a recognised clearing house (or its nominee(s)) or depositary (or its nominee(s)) is a Member of the Company it may, by resolution of its directors or other governing body or by power of attorney, authorise such Person(s) as it thinks fit to act as its representative(s) at any general meeting of the Company or of any Class of Shareholders provided that, if more than one Person is so authorised, the authorisation shall specify the number and Class of Shares in respect of which each such Person is so authorised. A Person so authorised pursuant to this Article shall be entitled to exercise the same powers on behalf of the recognised clearing house (or its nominee(s)) or depositary (or its nominee(s)) which he represents as that recognised clearing house (or its nominee(s)) or depositary (or its nominee(s)) could exercise if it were an individual Member holding the number and Class of Shares specified in such authorisation. |
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DIRECTORS
92. (a) |
Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than three (3) Directors, the exact number of Directors to be determined from time to time by the Board of Directors. |
(b) |
The Board of Directors shall have a Chairman elected and appointed by a majority of the Directors then in office. The period for which the Chairman will hold office will also be determined by a majority of all of the Directors then in office. The Chairman shall preside as chairman at every meeting of the Board of Directors. To the extent the Chairman is not present at a meeting of the Board of Directors within fifteen minutes after the time appointed for holding the same, the attending Directors may choose one of their number to be the chairman of the meeting. |
(c) |
The Company may by Ordinary Resolution appoint any Person to be a Director. |
(d) |
For so long as Innotech Group Holdings Ltd. and its Affiliates collectively hold no less than 50% of the voting power of the Company, Siliang Tan shall be entitled to nominate or propose the removal and replacement of a majority of the Directors by delivering a written notice to the Company, and the Directors shall procure to pass the relevant resolution in accordance with these Articles to give effect to such appointment, removal or replacement. |
(e) |
The Board may, by the affirmative vote of a simple majority of the Directors present and voting at a Board meeting, appoint any person as a Director, to fill a casual vacancy on the Board as a result of the resignation or removal of a Director who is not nominated by Siliang Tan or as an addition to the existing Board of Directors. |
(f) |
An appointment of a Director may be on terms that the Director shall automatically retire from office (unless he has sooner vacated office) at the next or a subsequent annual general meeting or upon any specified event or after any specified period in a written agreement between the Company and the Director, if any; but no such term shall be implied in the absence of express provision. Each Director whose term of office expires shall be eligible for re-election at a meeting of the Shareholders or re-appointment by the Board. |
93. |
A Director may be removed from office by Ordinary Resolution of the Company, or in case where a written notice is received from Siliang Tan under Article 92(d) or for a Director not nominated by Siliang Tan, be removed from office by the affirmative vote of a simple majority of the Directors present and voting at a Board meeting, notwithstanding anything in these Articles or in any agreement between the Company and such Director (but without prejudice to any claim for damages under such agreement). A vacancy on the Board created by the removal of a Director under the previous sentence may be filled by Ordinary Resolution or by the affirmative vote of a simple majority of the remaining Directors present and voting at a Board meeting. The notice of any meeting at which a resolution to remove a Director shall be proposed or voted upon must contain a statement of the intention to remove that Director and such notice must be served on that Director not less than ten (10) calendar days before the meeting. Such Director is entitled to attend the meeting and be heard on the motion for his removal. |
23
94. |
The Board may, from time to time, and except as required by applicable law or Designated Stock Exchange Rules, adopt, institute, amend, modify or revoke the corporate governance policies or initiatives of the Company and determine on various corporate governance related matters of the Company as the Board shall determine by resolution of Directors from time to time. |
95. |
A Director shall not be required to hold any Shares in the Company by way of qualification. A Director who is not a Member of the Company shall nevertheless be entitled to attend and speak at general meetings. |
96. |
The remuneration of the Directors may be determined by the Directors or by Ordinary Resolution. |
97. |
The Directors shall be entitled to be paid their travelling, hotel and other expenses properly incurred by them in going to, attending and returning from meetings of the Directors, or any committee of the Directors, or general meetings of the Company, or otherwise in connection with the business of the Company, or to receive such fixed allowance in respect thereof as may be determined by the Directors from time to time, or a combination partly of one such method and partly the other. |
ALTERNATE DIRECTOR OR PROXY
98. |
Any Director may in writing appoint another Person to be his alternate and, save to the extent provided otherwise in the form of appointment, such alternate shall have authority to sign written resolutions on behalf of the appointing Director, but shall not be required to sign such written resolutions where they have been signed by the appointing director, and to act in such Directors place at any meeting of the Directors at which the appointing Director is unable to be present. Every such alternate shall be entitled to attend and vote at meetings of the Directors as a Director when the Director appointing him is not personally present and where he is a Director to have a separate vote on behalf of the Director he is representing in addition to his own vote. A Director may at any time in writing revoke the appointment of an alternate appointed by him. Such alternate shall be deemed for all purposes to be a Director of the Company and shall not be deemed to be the agent of the Director appointing him. The remuneration of such alternate shall be payable out of the remuneration of the Director appointing him and the proportion thereof shall be agreed between them. |
99. |
Any Director may appoint any Person, whether or not a Director, to be the proxy of that Director to attend and vote on his behalf, in accordance with instructions given by that Director, or in the absence of such instructions at the discretion of the proxy, at a meeting or meetings of the Directors which that Director is unable to attend personally. The instrument appointing the proxy shall be in writing under the hand of the appointing Director and shall be in any usual or common form or such other form as the Directors may approve, and must be lodged with the chairman of the meeting of the Directors at which such proxy is to be used, or first used, prior to the commencement of the meeting. |
24
POWERS AND DUTIES OF DIRECTORS
100. |
Subject to the Companies Law, these Articles and to any resolutions passed in a general meeting, the business of the Company shall be managed by the Directors, who may pay all expenses incurred in setting up and registering the Company and may exercise all powers of the Company. No resolution passed by the Company in general meeting shall invalidate any prior act of the Directors that would have been valid if that resolution had not been passed. |
101. |
Subject to these Articles, the Directors may from time to time appoint any natural person or corporation, whether or not a Director to hold such office in the Company as the Directors may think necessary for the administration of the Company, including but not limited to, chief executive officer, one or more other executive officers, president, one or more vice-presidents, treasurer, assistant treasurer, manager or controller, and for such term and at such remuneration (whether by way of salary or commission or participation in profits or partly in one way and partly in another), and with such powers and duties as the Directors may think fit. Any natural person or corporation so appointed by the Directors may be removed by the Directors. The Directors may also appoint one or more of their number to the office of managing director upon like terms, but any such appointment shall ipso facto terminate if any managing director ceases for any cause to be a Director, or if the Company by Ordinary Resolution resolves that his tenure of office be terminated. |
102. |
The Directors may appoint any natural person or corporation to be a Secretary (and if need be an assistant Secretary or assistant Secretaries) who shall hold office for such term, at such remuneration and upon such conditions and with such powers as they think fit. Any Secretary or assistant Secretary so appointed by the Directors may be removed by the Directors or by the Company by Ordinary Resolution. |
103. |
The Directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Directors. |
104. |
The Directors may from time to time and at any time by power of attorney (whether under Seal or under hand) or otherwise appoint any company, firm or Person or body of Persons, whether nominated directly or indirectly by the Directors, to be the attorney or attorneys or authorised signatory (any such person being an Attorney or Authorised Signatory, respectively) of the Company for such purposes and with such powers, authorities and discretion (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience of Persons dealing with any such Attorney or Authorised Signatory as the Directors may think fit, and may also authorise any such Attorney or Authorised Signatory to delegate all or any of the powers, authorities and discretion vested in him. |
25
105. |
The Directors may from time to time provide for the management of the affairs of the Company in such manner as they shall think fit and the provisions contained in the three next following Articles shall not limit the general powers conferred by this Article. |
106. |
The Directors from time to time and at any time may establish any committees, local boards or agencies for managing any of the affairs of the Company and may appoint any natural person or corporation to be a member of such committees or local boards and may appoint any managers or agents of the Company and may fix the remuneration of any such natural person or corporation. |
107. |
The Directors from time to time and at any time may delegate to any such committee, local board, manager or agent any of the powers, authorities and discretions for the time being vested in the Directors and may authorise the members for the time being of any such local board, or any of them to fill any vacancies therein and to act notwithstanding vacancies and any such appointment or delegation may be made on such terms and subject to such conditions as the Directors may think fit and the Directors may at any time remove any natural person or corporation so appointed and may annul or vary any such delegation, but no Person dealing in good faith and without notice of any such annulment or variation shall be affected thereby. |
108. |
Any such delegates as aforesaid may be authorised by the Directors to sub-delegate all or any of the powers, authorities, and discretion for the time being vested in them. |
BORROWING POWERS OF DIRECTORS
109. |
The Directors may from time to time at their discretion exercise all the powers of the Company to raise or borrow money and to mortgage or charge its undertaking, property and assets (present and future) and uncalled capital or any part thereof, to issue debentures, debenture stock, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party. |
THE SEAL
110. |
The Seal shall not be affixed to any instrument except by the authority of a resolution of the Directors provided always that such authority may be given prior to or after the affixing of the Seal and if given after may be in general form confirming a number of affixings of the Seal. The Seal shall be affixed in the presence of a Director or a Secretary (or an assistant Secretary) or in the presence of any one or more Persons as the Directors may appoint for the purpose and every Person as aforesaid shall sign every instrument to which the Seal is so affixed in their presence. |
111. |
The Company may maintain a facsimile of the Seal in such countries or places as the Directors may appoint and such facsimile Seal shall not be affixed to any instrument except by the authority of a resolution of the Directors provided always that such authority may be given prior to or after the affixing of such facsimile Seal and if given after may be in general form confirming a number of affixings of such facsimile Seal. The facsimile Seal shall be affixed in the presence of such Person or Persons as the Directors shall for this purpose appoint and such Person or Persons as aforesaid shall sign every instrument to which the facsimile Seal is so affixed in their presence and such affixing of the facsimile Seal and signing as aforesaid shall have the same meaning and effect as if the Seal had been affixed in the presence of and the instrument signed by a Director or a Secretary (or an assistant Secretary) or in the presence of any one or more Persons as the Directors may appoint for the purpose. |
26
112. |
Notwithstanding the foregoing, a Secretary or any assistant Secretary shall have the authority to affix the Seal, or the facsimile Seal, to any instrument for the purposes of attesting authenticity of the matter contained therein but which does not create any obligation binding on the Company. |
DISQUALIFICATION OF DIRECTORS
113. |
The office of Director shall be vacated, if the Director: |
(a) |
becomes bankrupt or makes any arrangement or composition with his creditors; |
(b) |
dies or is found to be or becomes of unsound mind; |
(c) |
resigns his office by notice in writing to the Company; |
(d) |
is prohibited by any applicable Law or Designated Stock Exchange Rules from being a Director; |
(e) |
without special leave of absence from the Board, is absent from meetings of the Board for three consecutive meetings and the Board resolves that his office be vacated; or |
(f) |
is removed from office pursuant to any other provision of these Articles. |
PROCEEDINGS OF DIRECTORS
114. |
The Directors may meet together (either within or outside of the Cayman Islands) for the despatch of business, adjourn, and otherwise regulate their meetings and proceedings as they think fit. Questions arising at any meeting shall be decided by a majority of votes. At any meeting of the Directors, each Director present in person or represented by his proxy or alternate shall be entitled to one vote. In case of an equality of votes the Chairman shall have a second or casting vote. A Director may, and a Secretary or assistant Secretary on the requisition of a Director shall, at any time summon a meeting of the Directors. |
115. |
A Director may participate in any meeting of the Directors, or of any committee appointed by the Directors of which such Director is a member, by means of telephone or similar communication equipment by way of which all Persons participating in such meeting can communicate with each other and such participation shall be deemed to constitute presence in person at the meeting. |
116. |
The quorum necessary for the transaction of the business of the Board may be fixed by the Directors, and unless so fixed, the quorum shall be a majority of Directors then in office and a majority of the Directors appointed by Siliang Tan. A Director represented by proxy or by an alternate Director at any meeting shall be deemed to be present for the purposes of determining whether or not a quorum is present. |
27
117. |
A Director who is in any way, whether directly or indirectly, interested in a contract or transaction or proposed contract or transaction with the Company shall declare the nature of his interest at a meeting of the Directors. A general notice given to the Directors by any Director to the effect that he is a member of any specified company or firm and is to be regarded as interested in any contract or transaction which may thereafter be made with that company or firm shall be deemed a sufficient declaration of interest in regard to any contract so made or transaction so consummated. Subject to the Designated Stock Exchange Rules and disqualification by the chairman of the relevant Board meeting, a Director may vote in respect of any contract or transaction or proposed contract or transaction notwithstanding that he may be interested therein and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of the Directors at which any such contract or transaction or proposed contract or transaction shall come before the meeting for consideration. |
118. |
A Director may hold any other office or place of profit under the Company (other than the office of auditor) in conjunction with his office of Director for such period and on such terms (as to remuneration and otherwise) as the Directors may determine and no Director or intending Director shall be disqualified by his office from contracting with the Company either with regard to his tenure of any such other office or place of profit or as vendor, purchaser or otherwise, nor shall any such contract or arrangement entered into by or on behalf of the Company in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement by reason of such Director holding that office or of the fiduciary relation thereby established. A Director, notwithstanding his interest, may be counted in the quorum present at any meeting of the Directors whereat he or any other Director is appointed to hold any such office or place of profit under the Company or whereat the terms of any such appointment are arranged and he may vote on any such appointment or arrangement. |
119. |
Any Director may act by himself or through his firm in a professional capacity for the Company, and he or his firm shall be entitled to remuneration for professional services as if he were not a Director; provided that nothing herein contained shall authorise a Director or his firm to act as auditor to the Company. |
120. |
The Directors shall cause minutes to be made for the purpose of recording: |
(a) |
all appointments of officers made by the Directors; |
(b) |
the names of the Directors present at each meeting of the Directors and of any committee of the Directors; and |
(c) |
all resolutions and proceedings at all meetings of the Company, and of the Directors and of committees of Directors. |
121. |
When the chairman of a meeting of the Directors signs the minutes of such meeting, the same shall be deemed to have been duly held notwithstanding that all the Directors have not actually come together or that there may have been a technical defect in the proceedings. |
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122. |
A resolution in writing signed by all the Directors or all the members of a committee of Directors entitled to receive notice of a meeting of Directors or committee of Directors, as the case may be (an alternate Director, subject as provided otherwise in the terms of appointment of the alternate Director, being entitled to sign such a resolution on behalf of his appointer), shall be as valid and effectual as if it had been passed at a duly called and constituted meeting of Directors or committee of Directors, as the case may be. When signed a resolution may consist of several documents each signed by one or more of the Directors or his duly appointed alternate. |
123. |
The continuing Directors may act notwithstanding any vacancy in their body but if and for so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors, the continuing Directors may act for the purpose of increasing the number, or of summoning a general meeting of the Company, but for no other purpose. |
124. |
Subject to any regulations imposed on it by the Directors, a committee appointed by the Directors may elect a chairman of its meetings. If no such chairman is elected, or if at any meeting the chairman is not present within fifteen minutes after the time appointed for holding the meeting, the committee members present may choose one of their members to be chairman of the meeting. |
125. |
A committee appointed by the Directors may meet and adjourn as it thinks proper. Subject to any regulations imposed on it by the Directors, questions arising at any meeting shall be determined by a majority of votes of the committee members present and in case of an equality of votes the chairman shall have a second or casting vote. |
126. |
All acts done by any meeting of the Directors or of a committee of Directors, or by any Person acting as a Director, shall notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such Director or Person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such Person had been duly appointed and was qualified to be a Director. |
DIVIDENDS
127. |
Subject to any rights and restrictions for the time being attached to any Shares, or as otherwise provided for in the Companies Law and these Articles, the Directors may from time to time declare dividends (including interim dividends) and other distributions on Shares in issue and authorise payment of the same out of the funds of the Company lawfully available therefor. |
128. |
Subject to any rights and restrictions for the time being attached to any Shares, the Company by Ordinary Resolution may declare dividends, but no dividend shall exceed the amount recommended by the Directors. |
129. |
The Directors may, before recommending or declaring any dividend, set aside out of the funds legally available for distribution such sums as they think proper as a reserve or reserves which shall, in the absolute discretion of the Directors, be applicable for meeting contingencies or for equalising dividends or for any other purpose to which those funds may be properly applied, and pending such application may in the absolute discretion of the Directors, either be employed in the business of the Company or be invested in such investments (other than Shares of the Company) as the Directors may from time to time think fit. |
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130. |
Any dividend payable in cash to the holder of Shares may be paid in any manner determined by the Directors. If paid by cheque it will be sent by mail addressed to the holder at his address in the Register, or addressed to such person and at such addresses as the holder may direct. Every such cheque or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the Register in respect of such Shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company. |
131. |
The Directors may determine that a dividend shall be paid wholly or partly by the distribution of specific assets (which may consist of the shares or securities of any other company) and may settle all questions concerning such distribution. Without limiting the generality of the foregoing, the Directors may fix the value of such specific assets, may determine that cash payment shall be made to some Shareholders in lieu of specific assets and may vest any such specific assets in trustees on such terms as the Directors think fit. |
132. |
Subject to any rights and restrictions for the time being attached to any Shares, all dividends shall be declared and paid according to the amounts paid up on the Shares, but if and for so long as nothing is paid up on any of the Shares dividends may be declared and paid according to the par value of the Shares. No amount paid on a Share in advance of calls shall, while carrying interest, be treated for the purposes of this Article as paid on the Share. |
133. |
If several Persons are registered as joint holders of any Share, any of them may give effective receipts for any dividend or other moneys payable on or in respect of the Share. |
134. |
No dividend shall bear interest against the Company. |
135. |
Any dividend unclaimed after a period of six calendar years from the date of declaration of such dividend may be forfeited by the Board of Directors and, if so forfeited, shall revert to the Company. |
ACCOUNTS, AUDIT AND ANNUAL RETURN AND DECLARATION
136. |
The books of account relating to the Companys affairs shall be kept in such manner as may be determined from time to time by the Directors. |
137. |
The books of account shall be kept at the Registered Office, or at such other place or places as the Directors think fit, and shall always be open to the inspection of the Directors. |
138. |
The Directors may from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of Shareholders not being Directors, and no Shareholder (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by law or authorised by the Directors or by Ordinary Resolution. |
30
139. |
The accounts relating to the Companys affairs shall be audited in such manner and with such financial year end as may be determined from time to time by the Directors or failing any determination as aforesaid shall not be audited. |
140. |
The Directors may appoint an auditor of the Company who shall hold office until removed from office by a resolution of the Directors and may fix his or their remuneration. |
141. |
Every auditor of the Company shall have a right of access at all times to the books and accounts and vouchers of the Company and shall be entitled to require from the Directors and officers of the Company such information and explanation as may be necessary for the performance of the duties of the auditors. |
142. |
The auditors shall, if so required by the Directors, make a report on the accounts of the Company during their tenure of office at the next annual general meeting following their appointment, and at any time during their term of office, upon request of the Directors or any general meeting of the Members. |
143. |
The Directors in each calendar year shall prepare, or cause to be prepared, an annual return and declaration setting forth the particulars required by the Companies Law and deliver a copy thereof to the Registrar of Companies in the Cayman Islands. |
CAPITALISATION OF RESERVES
144. |
Subject to the Companies Law, the Directors may: |
(a) |
resolve to capitalise an amount standing to the credit of reserves (including a Share Premium Account, capital redemption reserve and profit and loss account), which is available for distribution; |
(b) |
appropriate the sum resolved to be capitalised to the Shareholders in proportion to the nominal amount of Shares (whether or not fully paid) held by them respectively and apply that sum on their behalf in or towards: |
(i) |
paying up the amounts (if any) for the time being unpaid on Shares held by them respectively, or |
(ii) |
paying up in full unissued Shares or debentures of a nominal amount equal to that sum, |
and allot the Shares or debentures, credited as fully paid, to the Shareholders (or as they may direct) in those proportions, or partly in one way and partly in the other, but the Share Premium Account, the capital redemption reserve and profits which are not available for distribution may, for the purposes of this Article, only be applied in paying up unissued Shares to be allotted to Shareholders credited as fully paid;
(c) |
make any arrangements they think fit to resolve a difficulty arising in the distribution of a capitalised reserve and in particular, without limitation, where Shares or debentures become distributable in fractions the Directors may deal with the fractions as they think fit; |
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(d) |
authorise a Person to enter (on behalf of all the Shareholders concerned) into an agreement with the Company providing for either: |
(i) |
the allotment to the Shareholders respectively, credited as fully paid, of Shares or debentures to which they may be entitled on the capitalisation, or |
(ii) |
the payment by the Company on behalf of the Shareholders (by the application of their respective proportions of the reserves resolved to be capitalised) of the amounts or part of the amounts remaining unpaid on their existing Shares, |
and any such agreement made under this authority being effective and binding on all those Shareholders; and
(e) |
generally do all acts and things required to give effect to any of the actions contemplated by this Article 144. |
145. |
Notwithstanding any provisions in these Articles, the Directors may resolve to capitalise an amount standing to the credit of reserves (including the share premium account, capital redemption reserve and profit and loss account) or otherwise available for distribution by applying such sum in paying up in full unissued Shares to be allotted and issued to: |
(a) |
employees (including Directors) or service providers of the Company or its Affiliates upon exercise or vesting of any options or awards granted under any share incentive scheme or employee benefit scheme or other arrangement which relates to such persons that has been adopted or approved by the Directors or the Members; |
(b) |
any trustee of any trust or administrator of any share incentive scheme or employee benefit scheme to whom shares are to be allotted and issued by the Company in connection with the operation of any share incentive scheme or employee benefit scheme or other arrangement which relates to such persons that has been adopted or approved by the Directors or Members; or |
(c) |
any depositary of the Company for the purposes of the issue, allotment and delivery by the depositary of ADSs to employees (including Directors) or service providers of the Company or its Affiliates upon exercise or vesting of any options or awards granted under any share incentive scheme or employee benefit scheme or other arrangement which relates to such persons that has been adopted or approved by the Directors or the Members. |
SHARE PREMIUM ACCOUNT
146. |
The Directors shall in accordance with the Companies Law establish a Share Premium Account and shall carry to the credit of such account from time to time a sum equal to the amount or value of the premium paid on the issue of any Share. |
32
147. |
There shall be debited to any Share Premium Account on the redemption or purchase of a Share the difference between the nominal value of such Share and the redemption or purchase price provided always that at the discretion of the Directors such sum may be paid out of the profits of the Company or, if permitted by the Companies Law, out of capital. |
NOTICES
148. |
Except as otherwise provided in these Articles, any notice or document may be served by the Company or by the Person entitled to give notice to any Shareholder or Director either personally, or by posting it by airmail or air courier service in a prepaid letter addressed to such Shareholder or Director at his address as appearing in the Register or the Register of Directors of the Company, as the case may be, or by electronic mail to any electronic mail address such Shareholder or Director may have specified in writing for the purpose of such service of notices, or by facsimile or by placing it on the Companys Website should the Directors deem it appropriate provided that the Company shall notify the Shareholders of the placement of such notice by any of the means set out above. In the case of joint holders of a Share, all notices shall be given to that one of the joint holders whose name stands first in the Register in respect of the joint holding, and notice so given shall be sufficient notice to all the joint holders. |
149. |
Notices posted to addresses outside the Cayman Islands shall be forwarded by prepaid airmail. |
150. |
Any Shareholder present, either personally or by proxy, at any meeting of the Company shall for all purposes be deemed to have received due notice of such meeting and, where required, of the purposes for which such meeting was convened. |
151. |
Any notice or other document, if served by: |
(a) |
post, shall be deemed to have been served five calendar days after the time when the letter containing the same is posted; |
(b) |
facsimile, shall be deemed to have been served upon production by the transmitting facsimile machine of a report confirming transmission of the facsimile in full to the facsimile number of the recipient; |
(c) |
recognised courier service, shall be deemed to have been served 48 hours after the time when the letter containing the same is delivered to the courier service; or |
(d) |
electronic mail, shall be deemed to have been served immediately upon the time of the transmission by electronic mail. |
In proving service by post or courier service it shall be sufficient to prove that the letter containing the notice or documents was properly addressed and duly posted or delivered to the courier service.
33
152. |
Any notice or document delivered or sent by post to or left at the registered address of any Shareholder in accordance with the terms of these Articles shall notwithstanding that such Shareholder be then dead or bankrupt, and whether or not the Company has notice of his death or bankruptcy, be deemed to have been duly served in respect of any Share registered in the name of such Shareholder as sole or joint holder, unless his name shall at the time of the service of the notice or document have been removed from the Register as the holder of the Share, and such service shall for all purposes be deemed a sufficient service of such notice or document on all Persons interested (whether jointly with or as claiming through or under him) in the Share. |
153. |
Notice of every general meeting of the Company shall be given to: |
(a) |
all Shareholders holding Shares with the right to receive notice and who have supplied to the Company an address for the giving of notices to them; and |
(b) |
every Person entitled to a Share in consequence of the death or bankruptcy of a Shareholder, who but for his death or bankruptcy would be entitled to receive notice of the meeting. |
No other Person shall be entitled to receive notices of general meetings.
INFORMATION
154. |
No Member shall be entitled to require discovery of any information in respect of any detail of the Companys trading or any information which is or may be in the nature of a trade secret or secret process which may relate to the conduct of the business of the Company and which in the opinion of the Board would not be in the interests of the Members of the Company to communicate to the public. |
155. |
The Board shall be entitled to release or disclose any information in its possession, custody or control regarding the Company or its affairs to any of its Members including, without limitation, information contained in the Register and transfer books of the Company. |
INDEMNITY
156. |
Every Director (including for the purposes of this Article any alternate Director appointed pursuant to the provisions of these Articles), Secretary, assistant Secretary, or other officer for the time being and from time to time of the Company (but not including the Companys auditors) and the personal representatives of the same (each an Indemnified Person) shall be indemnified and secured harmless against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such Indemnified Person, other than by reason of such Indemnified Persons own dishonesty, wilful default or fraud as determined by a court of competent jurisdiction, in or about the conduct of the Companys business or affairs (including as a result of any mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by such Indemnified Person in defending (whether successfully or otherwise) any civil proceedings concerning the Company or its affairs in any court whether in the Cayman Islands or elsewhere. |
157. |
No Indemnified Person shall be liable: |
34
(a) |
for the acts, receipts, neglects, defaults or omissions of any other Director or officer or agent of the Company; or |
(b) |
for any loss on account of defect of title to any property of the Company; or |
(c) |
on account of the insufficiency of any security in or upon which any money of the Company shall be invested; or |
(d) |
for any loss incurred through any bank, broker or other similar Person; or |
(e) |
for any loss occasioned by any negligence, default, breach of duty, breach of trust, error of judgement or oversight on such Indemnified Persons part; or |
(f) |
for any loss, damage or misfortune whatsoever which may happen in or arise from the execution or discharge of the duties, powers, authorities, or discretions of such Indemnified Persons office or in relation thereto; |
unless the same shall happen through such Indemnified Persons own dishonesty, willful default or fraud as determined by a court of competent jurisdiction.
FINANCIAL YEAR
158. |
Unless the Directors otherwise prescribe, the financial year of the Company shall end on December 31 st in each calendar year and shall begin on January 1st in each calendar year. |
NON-RECOGNITION OF TRUSTS
159. |
No Person shall be recognised by the Company as holding any Share upon any trust and the Company shall not, unless required by law, be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any Share or (except only as otherwise provided by these Articles or as the Companies Law requires) any other right in respect of any Share except an absolute right to the entirety thereof in each Shareholder registered in the Register. |
WINDING UP
160. |
If the Company shall be wound up the liquidator may, with the sanction of a Special Resolution of the Company and any other sanction required by the Companies Law, divide amongst the Members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for that purpose value any assets and determine how the division shall be carried out as between the Members or different classes of Members. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the Members as the liquidator, with the like sanction, shall think fit, but so that no Member shall be compelled to accept any asset upon which there is a liability. |
35
161. |
If the Company shall be wound up, and the assets available for distribution amongst the Members shall be insufficient to repay the whole of the share capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the Members in proportion to the par value of the Shares held by them. If in a winding up the assets available for distribution amongst the Members shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst the Members in proportion to the par value of the Shares held by them at the commencement of the winding up subject to a deduction from those Shares in respect of which there are monies due, of all monies payable to the Company for unpaid calls or otherwise. This Article is without prejudice to the rights of the holders of Shares issued upon special terms and conditions. |
AMENDMENT OF ARTICLES OF ASSOCIATION
162. |
Subject to the Companies Law and the rights attaching to the various Classes, the Company may at any time and from time to time by Special Resolution alter or amend these Articles in whole or in part. |
CLOSING OF REGISTER OR FIXING RECORD DATE
163. |
For the purpose of determining those Shareholders that are entitled to receive notice of, attend or vote at any meeting of Shareholders or any adjournment thereof, or those Shareholders that are entitled to receive payment of any dividend, or in order to make a determination as to who is a Shareholder for any other purpose, the Directors may provide that the Register shall be closed for transfers for a stated period which shall not exceed in any case thirty calendar days in any calendar year. If the Register shall be so closed for the purpose of determining those Shareholders that are entitled to receive notice of, attend or vote at a meeting of Shareholders the Register shall be so closed for at least ten days immediately preceding such meeting and the record date for such determination shall be the date of the closure of the Register. |
164. |
In lieu of or apart from closing the Register, the Directors may fix in advance a date as the record date for any such determination of those Shareholders that are entitled to receive notice of, attend or vote at a meeting of the Shareholders and for the purpose of determining those Shareholders that are entitled to receive payment of any dividend the Directors may, at or within ninety calendar days prior to the date of declaration of such dividend, fix a subsequent date as the record date for such determination. |
165. |
If the Register is not so closed and no record date is fixed for the determination of those Shareholders entitled to receive notice of, attend or vote at a meeting of Shareholders or those Shareholders that are entitled to receive payment of a dividend, the date on which notice of the meeting is posted or the date on which the resolution of the Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of Shareholders. When a determination of those Shareholders that are entitled to receive notice of, attend or vote at a meeting of Shareholders has been made as provided in this Article, such determination shall apply to any adjournment thereof. |
REGISTRATION BY WAY OF CONTINUATION
166. |
The Company may by Special Resolution resolve to be registered by way of continuation in a jurisdiction outside the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing. In furtherance of a resolution adopted pursuant to this Article, the Directors may cause an application to be made to the Registrar of Companies to deregister the Company in the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing and may cause all such further steps as they consider appropriate to be taken to effect the transfer by way of continuation of the Company. |
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MERGERS AND CONSOLIDATION
167. |
The Company may merge or consolidate in accordance with the Companies Law. |
168. |
To the extent required by the Companies Law, the Company may by Special Resolution resolve to merge or consolidate the Company. |
DISCLOSURE
169. |
The Directors, or any service providers (including the officers, the Secretary and the registered office agent of the Company) specifically authorised by the Directors, shall be entitled to disclose to any regulatory or judicial authority or to any stock exchange on which securities of the Company may from time to time be listed any information regarding the affairs of the Company including without limitation information contained in the Register and books of the Company. |
37
Exhibit 4.1
Qutoutiao Inc.
NAME AND ADDRESS OF SHAREHOLDER | CERTIFICATE NUMBER | DISTINCTIVE NUMBERS |
PAR VALUE PER SHARE |
|||||
FROM | TO | US$0.0001 | ||||||
DATE OF ISSUE | NO. OF SHARE | CLASS OF SHARE | PURCHASE PRICE | |||||
SHARE CERTIFICATE
OF
Qutoutiao Inc.
INCORPORATED IN THE CAYMAN ISLANDS
The authorized share capital of the Company is US$50,000 divided into 500,000,000 shares comprising of (i) 50,000,000 Class A Ordinary Shares of a par value of US$0.0001 each, (ii) 34,248,442 Class B Ordinary Shares of a par value of US$0.0001 each, and (iii) 415,751,558 shares of a par value of US$0.0001 each of such class or classes (however designated) as the board of directors may determine in accordance with the Amended Charter.
THIS IS TO CERTIFY THAT THE UNDERMENTIONED PERSON IS THE REGISTERED HOLDER OF THE SHARES SPECIFIED HEREUNDER SUBJECT TO THE RULES AND LAWS GOVERNING THE ADMINISTRATION OF THE COMPANY
SHAREHOLDER | NO. OF SHARE | CLASS OF SHARE | DISTINCTIVE NUMBERS |
CERTIFICATE NUMBER |
DATE OF ISSUE | |||||||
FROM | TO | |||||||||||
GIVEN UNDER THE COMMON SEAL OF THE COMPANY ON THE DATE ABOVE AND IN THE PRESENCE OF
|
|
|
DIRECTOR |
NO TRANSFER OF ANY OF THE ABOVE SHARES CAN BE REGISTERED UNLESS ACCOMPANIED BY THIS CERTIFICATE
Exhibit 4.4
FOURTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
THIS FOURTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT (this Agreement ) is entered into on September 4, 2018 (the Effective Date ), by and among:
1. |
Qutoutiao Inc., an exempted company organized under the Laws of the Cayman Islands (the Company ), |
2. |
InfoUniversal Limited, a company organized under the Laws of Hong Kong (the HK Company ), |
3. |
Shanghai Quyun Internet Technology Co., Ltd. (上海趣蕴网络科技有限公司), a wholly foreign-owned enterprise incorporated under the Laws of the PRC and a wholly owned subsidiary of the HK Company (the WFOE ), |
4. |
Shanghai Jifen Culture Communications Co., Ltd. (上海基分文化传播有限公司), a limited liability company incorporated under the Laws of the PRC ( Jifen ), |
5. |
Shanghai Xike Information Technology Service Co., Ltd. (上海溪客信息技术服务有限公司), a limited liability company incorporated under the Laws of the PRC ( Xike ), |
6. |
Shanghai Tuile Information Technology Service Co., Ltd. (上海推乐信息技术服务有限公司), a limited liability company incorporated under the Laws of the PRC ( Tuile ), |
7. |
Anhui Zhangduan Internet Technology Co., Ltd. (安徽掌端网络科技有限公司), a limited liability company incorporated under the Laws of the PRC ( Zhangduan ), |
8. |
Beijing Qukandian Internet Technology Co., Ltd. (北京趣看点网络科技有限公司), a limited liability company incorporated under the Laws of the PRC ( Qukandian , together with Jifen, Xike, Tuile and Zhangduan, the Domestic Companies ), |
9. |
Shanghai Dian Guan Network Technology Co., Ltd. (上海点冠网络科技有限公司), a limited liability company incorporated under the Laws of the PRC ( Dian Guan ), |
10. |
the individuals listed on Schedule A attached hereto (each, a Principal and collectively, the Principals ), |
11. |
the holding companies listed on Schedule A attached hereto owned by such individuals (each, a Principal Holding Company and collectively, the Principal Holding Companies ), |
12. |
each Person listed on Part A of Schedule B hereto (each, a Series A Investor and collectively, the Series A Investors ), |
13. |
each Person listed on Part B of Schedule B hereto (the Series A1 Investor ), |
14. |
the Person listed on Part C of Schedule B hereto (the Series B1 Investor ); |
15. |
each Person listed on Part D of Schedule B hereto (each, a Series B2 Investor and collectively, the Series B2 Investors ); |
16. |
each Person listed on Part E of Schedule B hereto (each, a Series B3 Investor and collectively, the Series B3 Investors ); |
17. |
each Person listed on Part F of Schedule B hereto (each, a Series C1 Investor and collectively, the Series C1 Investors ); |
18. |
each Person listed on Part G of Schedule B hereto (the Series C2 Investor ) to join this Agreement at a later time by executing and delivering a Joinder Deed in substantially the form attached hereto as Exhibit A (if applicable); and |
19. |
each Person listed on Part H of Schedule B hereto (each, an Ordinary Shareholder and collectively, the Ordinary Shareholders ). |
Each of the parties to this Agreement is referred to herein individually as a Party and collectively as the Parties . Capitalized terms used herein without definition shall have the meanings set forth in the Series C Share Purchase Agreements (as defined below).
RECITALS
A. |
The Company owns 100% interest in the HK Company. The HK Company owns 100% interest in the WFOE, which in turn Controls the Domestic Company by a Captive Structure. The WFOE also owns 100% interest in Dian Guan. |
B. |
The Domestic Companies and Dian Guan are engaged in operation of mobile content aggregation platforms under the name of 趣头条 and 趣多拍 or otherwise and related advertising solutions platforms (the Business ). The Company seeks expansion capital to grow the Business and, correspondingly, seeks to secure an investment from the Investors, on the terms and conditions set forth herein. |
C. |
The Series A Investors (except xInternet Limited) have agreed to purchase from the Company, and the Company has agreed to sell to the Series A Investors (except xInternet Limited), certain Series A Preferred Shares (as defined below) of the Company on the terms and conditions set forth in the Series A Preferred Share Purchase Agreement dated September 8, 2017 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the Domestic Companies and the Series A Investors (except xInternet Limited) (the Series A Share Purchase Agreement ). |
D. |
The Shareholders Agreement dated October 13, 2017 has been entered into by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies, the Series A Investors (the Series A Shareholders Agreement ). |
E. |
xInternet Limited has agreed to purchase from CW_toutiao Limited, and CW_toutiao Limited has agreed to sell to xInternet Limited, 225,275 Series A Preferred Shares of the Company on the terms and conditions set forth in the Share Purchase Agreement dated November 12, 2017 by and between xInternet Limited and CW_toutiao Limited. |
F. |
The Series A1 Investor has agreed to purchase from the Company, and the Company has agreed to sell to the Series A1 Investor, certain Series A1 Preferred Shares (as defined below) of the Company on the terms and conditions set forth in the Series A1 Preferred Share Purchase Agreement dated October 14, 2017 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies and the Series A1 Investor (the Series A1 Share Purchase Agreement ). |
2
G. |
The Amended and Restated Shareholders Agreement dated November 14, 2017 has been entered into by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies, the Series A Investors and the Series A1 Investor (the Series A1 Shareholders Agreement ). |
H. |
The Series B1 Investor has agreed to purchase from the Company, and the Company has agreed to sell to the Series B1 Investor, certain Series B1 Preferred Shares (as defined below) of the Company on the terms and conditions set forth in the Series B1 Preferred Share Purchase Agreement dated March 4, 2018 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the Domestic Companies, Dian Guan and the Series B1 Investor (the Series B1 Share Purchase Agreement ). |
I. |
The Second Amended and Restated Shareholders Agreement dated March 8, 2018 has been entered into by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies, the Series A Investors, the Series A1 Investor and the Series B1 Investor (the Series B1 Shareholders Agreement ). |
J. |
The Series B2 Investors has agreed to purchase from the Company, and the Company has agreed to sell to the Series B2 Investors, certain Series B2 Preferred Shares (as defined below) of the Company on the terms and conditions set forth in the Series B2 Preferred Share Purchase Agreement dated March 8, 2018 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the Domestic Companies, Dian Guan and the Series B2 Investors (the Series B2 Share Purchase Agreement ) and the Series B2 Investors (except Shanghai Shanghai ChuangVest Venture Investment Partnership(Limited Partnership)(上海创伴创业投资合伙企业(有限合伙)) ( Shanghai CC )) have joined the Series B2 Shareholders Agreement through the respective Joinder Deeds dated March 12, 2018. |
K. |
The Series B3 Investors have agreed to purchase from the Company, and the Company has agreed to sell to the Series B3 Investors, certain Series B3 Preferred Shares (as defined below) of the Company on the terms and conditions set forth in the Series B3 Preferred Share Purchase Agreement dated April 19, 2018 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the Domestic Companies, Dian Guan and the Series B3 Investors (the Series B3 Share Purchase Agreement ). |
L. |
Shanghai CC has agreed to exercise the warrant issued by the Company dated March 8, 2018 to purchase certain Series B2 Preferred Shares of the Company and to enter into and be bound by this Agreement as a Series B2 Investor. |
M. |
The Third Amended and Restated Shareholders Agreement dated April 27, 2018 has been entered into by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies, the Series A Investors, the Series A1 Investor, the Series B1 Investor, the Series B2 Investors and the Series B3 Investors (the Series B3 Shareholders Agreement ). |
3
N. |
The Series C1 Investors have agreed to purchase from the Company, and the Company has agreed to sell to the Series C1 Investors, certain Series C1 Preferred Shares (as defined below) of the Company on the terms and conditions set forth in the Series C1 Preferred Share Purchase Agreements both dated August 17, 2018 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the Domestic Companies, Dian Guan and such Series C1 Investors (collectively, the Series C1 Share Purchase Agreements ). |
O. |
The Series C2 Investor has agreed to purchase from the Company, and the Company has agreed to sell to the Series C2 Investor, certain Series C2 Preferred Shares (as defined below) of the Company on the terms and conditions set forth in the Series C2 Preferred Share Purchase Agreement dated August 27, 2018 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the Domestic Companies, Dian Guan and the Series C2 Investor (the Series C2 Share Purchase Agreement , together with the Series C1 Share Purchase Agreements, the Series C Share Purchase Agreements ). |
P. |
The Investors desire to enter into this Agreement and to accept the rights, covenants and obligations hereof. |
Q. |
The Parties desire to enter into this Agreement and make the respective representations, warranties, covenants and agreements set forth herein on the terms and conditions set forth herein. |
WITNESSETH
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties intending to be legally bound hereto hereby agree as follows:
1. |
Definitions. |
1.1 The following terms shall have the meanings ascribed to them below:
Accounting Standards means generally accepted accounting principles in the United States or PRC, as applicable, applied on a consistent basis.
Affiliate means, (a) with respect to a Person other than a natural person, any other Person that, directly or indirectly, Controls, is Controlled by or is under common Control with such Person, and (b) in the case of a natural person, any other Person that is directly or indirectly Controlled by such a Person or is a Relative of such Person; provided that the Company and its Subsidiaries shall be deemed not to be Affiliates of the Investors. In the case of an Investor, where applicable, the term Affiliate also includes (v) any Controlling shareholder of such Investor, (w) any of such Controlling shareholders or Investors general partners, (x) the fund manager managing such Controlling shareholder or Investor (and general partners and key officers who Controls, or acts as a position of fund partner of, such Investor or its Affiliates thereof) and other funds managed by such fund manager, and (y) trusts controlled by or for the benefit of any such Person referred to in (v), (w) or (x).
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Applicable Securities Laws means (i) with respect to any offering of securities in the United States, or any other act or omission within that jurisdiction, the securities laws of the United States, including the Exchange Act and the Securities Act, and any applicable Law of any state of the United States, and (ii) with respect to any offering of securities in any jurisdiction other than the United States, or any related act or omission in that jurisdiction, the applicable Laws of that jurisdiction.
Associate means, with respect to any Person, (1) a corporation or organization (other than the Group Companies) of which such Person is an officer or partner or is, directly or indirectly, the record or beneficial owner of five percent (5%) or more of any class of Equity Securities of such corporation or organization, (2) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar capacity, or (3) any Relative of such Person and of such Persons spouse.
Auditor means the Person for the time being performing the duties of auditor of the Company or Jifen (as the case may be).
Board or Board of Directors means the board of directors of the Company.
Business Day means any day that is not a Saturday, Sunday, legal holiday or other day on which commercial banks are required or authorized by law to be closed in the Cayman Islands, the United States, Hong Kong or the PRC.
Captive Structure means the structure under which the WFOE Controls Jifen through the Control Documents.
Charter Documents means, with respect to a particular legal entity, the articles of incorporation, certificate of incorporation, formation or registration (including, if applicable, certificates of change of name), memorandum of association, articles of association, bylaws, articles of organization, limited liability company agreement, trust deed, trust instrument, operating agreement, joint venture agreement, business license, or similar or other constitutive, governing, or charter documents, or equivalent documents, of such entity.
Chengwei means CW_toutiao Limited, a company incorporated under the laws of Hong Kong, and its successors, permitted assignees and transferees.
CMC means CMC Queen Holdings Limited, a company incorporated under the laws of the Cayman Islands, and its successors, permitted assignees and transferees.
Circular 37 means the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Overseas Investment and Financing and Round Trip Investment via Special Purpose Companies issued by SAFE on July 4, 2014.
Code means the United States Internal Revenue Code of 1986, as amended.
Commission means (i) with respect to any offering of securities in the United States, the Securities and Exchange Commission of the United States or any other federal agency at the time administering the Securities Act, and (ii) with respect to any offering of securities in a jurisdiction other than the United States, the regulatory body of the jurisdiction with authority to supervise and regulate the offering or sale of securities in that jurisdiction.
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Convertible Securities means any indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Ordinary Shares.
Consent means any consent, approval, authorization, release, waiver, permit, grant, franchise, concession, agreement, license, exemption or order of, registration, certificate, declaration or filing with, or report or notice to, any Person, including any Governmental Authority.
Control of a given Person means the power or authority, whether exercised or not, to direct the business, management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by Contract or otherwise; provided, that such power or authority shall conclusively be presumed to exist upon possession of beneficial ownership or power to direct the vote of more than fifty percent (50%) of the votes entitled to be cast at a meeting of the members or shareholders of such Person or power to control the composition of a majority of the board of directors of such Person. The terms Controlled and Controlling have meanings correlative to the foregoing.
Control Documents has the meaning set forth in the Series C Share Purchase Agreements.
Current ESOP means (i) the 2017 Equity Incentive Plan of the Company duly adopted by the Company on February 15, 2018, with a total number of 10,000,000 Ordinary Shares of the Company (the 2017 ESOP ), thereinto 9,500,000 to be granted or awarded in accordance with such 2017 ESOP and are currently held by Qu World Limited, a wholly owned subsidiary and nominee of the trustee for a trust established for the benefit of the grantees or participants under the 2017 ESOP (the Trust ), and 500,000 Ordinary Shares had been vested and issued to certain participants under the 2017 Plan. And (ii) the 2018 Equity Incentive Plan duly adopted by the Company on February 25, 2018, with a maximum number of 2,964,141 Ordinary Shares of the Company (the 2018 ESOP ) to be granted or awarded under such 2018 ESOP, all of which have been reserved and allocated in the share capital of the Company.
Deemed Liquidation Event means any of the following events:
(1) any consolidation, amalgamation, scheme of arrangement or merger of any Group Company with or into any other Person or other reorganization in which the members or shareholders of such Group Company immediately prior to such consolidation, amalgamation, merger, scheme of arrangement or reorganization own less than fifty percent (50%) of such Group Companys voting power in the aggregate immediately after such consolidation, merger, amalgamation, scheme of arrangement or reorganization, or any transaction or series of related transactions to which such Group Company is a party or a target in which in excess of fifty percent (50%) of such Group Companys voting power is transferred (a Change of Control ); provided that the foregoing shall not include a bona fide equity financing of any Group Company through issuance of Equity Securities of any Group Company; provided further, that no shareholder of the Company or the Company shall circumvent or otherwise avoid the liquidation preference provisions set forth in the Charter Documents of the Company or the intent thereof by structuring a Change of Control as an equity financing but which in substance is a Change of Control; for the avoidance of doubt, Xike, Tuile, Zhangduan and Qukandian shall not be deemed as a Group Company for the purpose of this definition, provided that Jifen has not transferred and will not transfer any Equity Securities, material business or assets of any of them;
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(2) a sale, transfer, lease or other disposition of all or substantially all of the assets of any Group Company (or any series of related transactions resulting in such sale, transfer, lease or other disposition of all or substantially all of the assets of such Group Company); or
(3) the exclusive, irrevocable licensing of all or substantially all of any Group Companys intellectual property to a third party.
Director means a director serving on the Board.
Equity Securities means, with respect to any Person that is a legal entity, any and all shares of capital stock, membership interests, partnership interest, units, profits interests, ownership interests, equity interests, registered capital, and other equity securities of such Person, senior or pari passu , and any right, warrant, option, call, commitment, conversion privilege, preemptive right or other right to acquire any of the foregoing, or security convertible into, exchangeable or exercisable for any of the foregoing (whether or not such derivative securities have actually been issued by such Person), or any Contract providing for the acquisition of any of the foregoing.
Exchange Act means the United States Securities Exchange Act of 1934, as amended.
Form F-3 means Form F-3 promulgated by the Commission under the Securities Act or any successor form or substantially similar form then in effect.
Form S-3 means Form S-3 promulgated by the Commission under the Securities Act or any successor form or substantially similar form then in effect.
Governmental Authority means any government of any nation or any federation, province or state or any other political subdivision thereof, any entity, authority or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any government authority, agency, department, board, commission or instrumentality of the PRC or any other country, or any political subdivision thereof (including any entity or enterprise owned or controlled by a government), any court, tribunal or arbitrator, any public international organization and any self-regulatory organization.
Governmental Order means any applicable order, ruling, decision, verdict, decree, writ, subpoena, mandate, precept, command, directive, consent, approval, award, judgment, injunction or other similar determination or finding by, before or under the supervision of any Governmental Authority.
Group Company means each of the Company, the HK Company, the WFOE, Dian Guan and the Domestic Companies, together with each Subsidiary of any of the foregoing, and Group refers to all of the Group Companies collectively.
Holders means the holders of Registrable Securities who are parties to this Agreement from time to time, and their permitted transferees that become parties to this Agreement from time to time.
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Hong Kong means the Hong Kong Special Administrative Region of the Peoples Republic of China.
Indebtedness of any Person means, without duplication, actual or contingent obligations in respect of each of the following of such Person: (i) all indebtedness for borrowed money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced that are incurred in connection with the acquisition of properties, assets or businesses, (v) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (vi) all obligations that are capitalized in accordance with Accounting Standards, (vii) all obligations under bankers acceptance, letter of credit or similar facilities, (viii) all obligations to purchase, redeem, retire, defease or otherwise acquire for value any Equity Securities of such Person, (ix) all obligations in respect of any interest rate swap, hedge or cap agreement, and (x) all guarantees issued in respect of the Indebtedness referred to in clauses (i) through (ix) above of any other Person, but only to the extent of the Indebtedness guaranteed.
Information Rights Holder means a holder of any Preferred Shares.
Initiating Holders means, with respect to a request duly made under Section 2.1 or Section 2.2 to Register any Registrable Securities, the Holders initiating such request.
Intellectual Property means any and all (i) patents, patent rights and applications therefor and reissues, reexaminations, continuations, continuations-in-part, divisions, and patent term extensions thereof, (ii) inventions (whether patentable or not), discoveries, improvements, concepts, innovations, utility models and industrial models, (iii) registered and unregistered copyrights, copyright registrations and applications, mask works and registrations and applications therefor, authors rights and works of authorship (including artwork, software, computer programs, source code, object code and executable code, firmware, development tools, files, records and data, and related documentation), (iv) URLs, web sites, web pages and any part thereof, (v) technical information, know-how, trade secrets, drawings, designs, design protocols, specifications, proprietary data, customer lists, databases, proprietary processes, technology, formulae, and algorithms and other intellectual property, (vi) trade names, trade dress, trademarks, domain names, service marks, logos, business names, and registrations and applications therefor, and (vii) the goodwill symbolized or represented by the foregoing and any similar rights situated in any country and the benefit (subject to the burden) of any of the foregoing (in each case whether registered or unregistered and including applications for the grant of any of the foregoing and the right to apply for any of the foregoing in any part of the world).
Investors means collectively, the Series A Investors, the Series A1 Investor, the Series B1 Investor, the Series B2 Investor, the Series B3 Investors and the Series C Investors.
IPO means the first firm underwritten registered public offering by the Company of its Ordinary Shares pursuant to a Registration Statement that is filed with and declared effective by either the Commission under the Securities Act or another Governmental Authority for a public offering in a jurisdiction other than the United States.
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Law or Laws means any and all provisions of any applicable constitution, treaty, statute, law, regulation, ordinance, code, rule, or rule of common law, any governmental approval, concession, grant, franchise, license, agreement, directive, requirement, or other governmental restriction or any similar form of decision of, or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Authority, in each case as amended, and any and all applicable Governmental Orders.
Liabilities means, with respect to any Person, all liabilities, obligations, Indebtedness and commitments of such Person of any nature, accrued, absolute, contingent or otherwise, due or to become due, liquidated or unliquidated, and whether or not of a nature required to be disclosed in the accounts of any Person.
Lien means any claim, charge, easement, encumbrance, lease, covenant, security interest, lien, option, pledge, rights of others, or restriction (whether on voting, sale, transfer, disposition or otherwise), whether imposed by Contract, understanding, law, equity or otherwise.
Memorandum and Articles means the Fifth Amended and Restated Memorandum of Association of the Company and the Fifth Amended and Restated Articles of Association of the Company, as each may be amended and/or restated from time to time.
Ordinary Share Equivalents means any Equity Security which is by its terms convertible into or exchangeable or exercisable for Ordinary Shares or other share capital of the Company, including without limitation, the Preferred Shares.
Ordinary Shares means the Companys ordinary shares, par value US$0.0001 per share.
Person means any individual, sole proprietorship, partnership, limited partnership, limited liability company, firm, joint venture, estate, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or governmental or regulatory authority or other enterprise or entity of any kind or nature.
PRC means the Peoples Republic of China, but solely for the purposes of this Agreement, excluding Hong Kong, the Macau Special Administrative Region and the islands of Taiwan.
Preferred Shares means the Series A Preferred Shares, the Series A1 Preferred Shares, the Series B1 Preferred Shares, the Series B2 Preferred Shares, the Series B3 Preferred Shares, the Series C1 Preferred Shares and the Series C2 Preferred Shares.
Public Official means any executive, official, or employee of a Governmental Authority, political party or member of a political party, political candidate; executive, employee or officer of a public international organization; or director, officer or employee or agent of a wholly owned or partially state-owned or controlled enterprise, including a PRC state-owned or controlled enterprise.
Qualified IPO has the meaning given to such term in the Memorandum and Articles.
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Redpoint means ACE Redpoint Ventures China I, L.P., ACE Redpoint Associates China I, L.P. and ACE Redpoint China Strategic I, L.P. collectively.
Registrable Securities means (i) the Ordinary Shares issued or issuable upon conversion of the Preferred Shares, (ii) any Ordinary Shares of the Company issued or issuable as a dividend or other distribution with respect to, in exchange for, or in replacement of, the shares referenced in (i) herein, and (iii) any Ordinary Shares owned or hereafter acquired by the Investors; excluding in all cases, however, any of the foregoing sold by a Person in a transaction other than an assignment pursuant to Section 20.4 . For purposes of this Agreement, Registrable Securities shall cease to be Registrable Securities when such Registrable Securities have been disposed of pursuant to an effective Registration Statement.
Registration means a registration effected by preparing and filing a Registration Statement and the declaration or ordering of the effectiveness of that Registration Statement; and the terms Register and Registered have meanings concomitant with the foregoing.
Registration Statement means a registration statement prepared on Form F-1, F-3, S-1, or S-3 under the Securities Act, or on any comparable form in connection with registration in a jurisdiction other than the United States.
Related Party means any Affiliate, officer, director, supervisory board member, employee, or holder of any Equity Security of any Group Company, and any Affiliate or Associate of any of the foregoing, in each case, other than the Group Companies.
Relative of a natural person means the spouse of such person and any parent, step-parent, grandparent, child, step-child, grandchild, sibling, step-sibling, cousin, in-law, uncle, aunt, nephew, niece or great-grandparent of such person or spouse.
Restricted Persons I means persons listed in Part I of Exhibit B , which may be updated once every financial year of the Company with the consents of Mr. Tan Siliang (谭思亮), Chengwei, the Series A1 Investor and Tencent.
Restricted Persons II means persons as listed in Part II of Exhibit B , which may be updated once every financial year of the Company with the consents of Mr. Tan Siliang (谭思亮), Chengwei, the Series A1 Investor and Tencent.
SAFE means the State Administration of Foreign Exchange of the PRC.
Securities Act means the United States Securities Act of 1933, as amended.
Series A Issue Price means US$6.5520, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series A Preferred Shares.
Series A Majority means the holders of at least a majority of the voting power of the outstanding Series A Preferred Shares and the Series A1 Preferred Shares (voting together as a single class and on an as converted basis).
Series A Preferred Shares means the Series A Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles of the Company.
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Series A1 Issue Price means US$7.28, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series A1 Preferred Shares.
Series A1 Preferred Shares means the Series A1 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles of the Company.
Series B Investors means the Series B1 Investor, the Series B2 Investors and the Series B3 Investors.
Series B Majority means (i) the holders of at least a majority of the voting power of the outstanding Series B1 Preferred Shares, the Series B2 Preferred Shares and the Series B3 Preferred Shares (voting together as a single class and on an as converted basis) and Tencent (provided that Tencent holds a majority of the voting power of the outstanding Series B1 Preferred Shares and the Series B2 Preferred Shares (voting together as a single class and on an as converted basis)); or (ii) the holders of at least a majority of the voting power of the outstanding Series B1 Preferred Shares, the Series B2 Preferred Shares and the Series B3 Preferred Shares (voting together as a single class and on an as converted basis) provided that Tencent fails to hold a majority of the voting power of the outstanding Series B1 Preferred Shares and the Series B2 Preferred Shares (voting together as a single class and on an as converted basis).
Series B1 Closing shall refer to the Closing as provided in the Series B1 Share Purchase Agreement.
Series B1 Issue Price means US$19.3722 as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series B1 Preferred Shares.
Series B1 Preferred Shares means the Series B1 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles of the Company.
Series B2 Closing shall refer to the Closing as provided in the Series B2 Share Purchase Agreement.
Series B2 Issue Price means US$23.6156 as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series B2 Preferred Shares.
Series B2 Preferred Shares means the Series B2 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles of the Company.
Series B3 Closing shall refer to the Closing as provided in the Series B3 Share Purchase Agreement.
Series B3 Issue Price means US$25.9772 as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series B3 Preferred Shares.
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Series B3 Preferred Shares means the Series B3 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles of the Company.
Series C1 Preferred Shares means the Series C1 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles of the Company.
Series C1 Issue Price means US$37.2280, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series C1 Preferred Shares.
Series C1 Closing shall refer to the Closing as provided in the Series C1 Share Purchase Agreements.
Series C1 Investors means the holders of the Series C1 Preferred Shares of the Company.
Series C2 Preferred Shares means the Series C2 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles of the Company.
Series C2 Issue Price means US$37.2280, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series C2 Preferred Shares.
Series C2 Closing shall refer to the Closing as provided in the Series C2 Share Purchase Agreement.
Series C2 Investor means the holder of the Series C2 Preferred Shares of the Company, which shall be an Affiliate of Shanghai Dongfang Newspaper Co., Ltd. (上海东方报业有限公司, The Paper ).
Series C Investors means collectively the Series C1 Investors and the Series C2 Investor, and each a Series C Investor.
Series C Majority means (i) the holders of at least a majority of the voting power of the outstanding Series C1 Preferred Shares (voting together as a single class and on an as converted basis) before the Series C2 Closing, or (ii) the holder of at least a majority of the voting power of the outstanding Series C Preferred Shares (voting together as a single class and on an as converted basis) if the Series C2 Closing has been fully consummated.
Series C Preferred Shares means the Series C1 Preferred Shares and/or the Series C2 Preferred Shares.
Shareholder means a holder of any Shares.
Shares means the Ordinary Shares and the Preferred Shares.
Share Sale means a transaction or series of related transactions in which a Person, or a group of related Persons, acquires any Equity Securities of the Company such that, immediately after such transaction or series of related transactions, such Person or group of related Persons holds Equity Securities of the Company representing more than fifty percent (50%) of the outstanding voting power of the Company.
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Subsidiary means, with respect to any given Person, any other Person that is Controlled directly or indirectly by such given Person, at any time and from time to time.
Tencent means Image Flag Investment (HK) Limited, a company incorporated with limited liability under the laws of Hong Kong.
Transaction Documents means, and includes, the Transaction Documents as defined in the Series C Share Purchase Agreements.
US means the United States of America.
United States Person means United States person as defined in Section 7701(a)(30) of the Code.
1.2 Other Defined Terms. The following terms shall have the meanings defined for such terms in the Sections set forth below:
Term |
Section | |
10% ESOP Quota |
19.14 | |
Additional Number |
7.4(b) | |
Agreement |
Preamble | |
Alternative Plan |
19.11(b) | |
Arbitration Notice |
20.6(a) | |
Business |
Recitals | |
Company |
Preamble | |
Confidential Information |
19.10(a) | |
Co-Sale Notice |
10.1 | |
Dian Guan |
Preamble | |
Dispute |
20.6(a) | |
Domestic Companies |
Preamble | |
Drag Holders |
15.1 | |
Drag-Along Notice |
15.1 | |
Drag-Along Sale |
15.1 | |
Dragged Holders |
15.1 | |
Effective Date |
Preamble | |
Exempt Registrations |
3.4 | |
Exercising Shareholder |
9.2(c) | |
First Participation Notice |
7.4(a) | |
First Participation Period |
7.4(a) | |
HK Company |
Preamble | |
HKIAC |
20.6(b) | |
HKIAC Rules |
20.6(b) | |
Investors Partners |
19.13 | |
Jifen |
Preamble | |
New ESOP |
18.1(f) | |
New ESOP Anti-dilution Right |
19.14 | |
New Securities |
7.3 | |
Observer |
17.1 |
13
Term |
Section | |
Offered Shares |
9.1 | |
Offeror |
15.1 | |
Option Period |
9.2(a) | |
Ordinary Director |
17.1 | |
Ordinary Shareholder |
Preamble | |
Oversubscription Participants |
7.4(b) | |
Participation Notice |
7.4(b) | |
Participation Period |
7.4(b) | |
Parties |
Preamble | |
Party |
Preamble | |
Permitted Transferee |
12.1 | |
Permitted Transferees |
12.1 | |
Preemptive Pro Rata Share |
7.2 | |
Preemptive Right |
7.1 | |
Principal |
Preamble | |
Principal Holding Companies |
Preamble | |
Principal Holding Company |
Preamble | |
Principals |
Preamble | |
Prohibited Transfer |
13.1 | |
Put Consideration |
19.15(a) | |
Put Notice |
19.15(b) | |
Put Right |
19.15(a) | |
Qukandian |
Preamble | |
Re-allotment Period |
9.2(c) | |
Restricted Business |
19.8 | |
ROFR Pro Rata Share |
9.2(b) | |
Second Notice |
9.2(c) | |
Second Participation Notice |
7.4(b) | |
Second Participation Period |
7.4(b) | |
Selling Shareholder |
10.1 | |
Series A Director |
17.1 | |
Series A Investor |
Preamble | |
Series A Investors |
Preamble | |
Series A Share Purchase Agreement |
Recitals | |
Series A Shareholders Agreement |
Recitals | |
Series A1 Investor |
Preamble | |
Series A1 Share Purchase Agreement |
Recitals | |
Series A1 Shareholders Agreement |
Recitals | |
Series B1 Director |
17.1 | |
Series B1 Investor |
Preamble | |
Series B1 Share Purchase Agreement |
Recitals | |
Series B2 Investors |
Preamble | |
Series B2 Share Purchase Agreement |
Recitals | |
Series B3 Investors |
Preamble | |
Series B3 Share Purchase Agreement |
Recitals |
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Term |
Section | |
Series B3 Shareholders Agreement |
Recitals | |
Series C Director |
17.1 | |
Shelf Period |
2.2(a) | |
Shelf Registration Statement |
2.2 | |
Shelf Takedown Request |
2.2(b) | |
Subpart F Income |
19.13 | |
Tokens |
19.16 | |
Transfer |
8.1 | |
Transfer Notice |
9.1 | |
Transferor |
9.1 | |
Tuile |
Preamble | |
VIE Event |
19.11(b) | |
Violation |
5.1(a) | |
WFOE |
Preamble | |
Xike |
Preamble | |
Zhangduan |
Preamble |
1.3 Interpretation. For all purposes of this Agreement, except as otherwise expressly herein provided, (i) the terms defined in this Section 1 shall have the meanings assigned to them in this Section 1 and include the plural as well as the singular, (ii) all accounting terms not otherwise defined herein have the meanings assigned under the Accounting Standards, (iii) all references in this Agreement to designated Sections and other subdivisions are to the designated Sections and other subdivisions of the body of this Agreement, (iv) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, (v) the words herein, hereof and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision, (vi) all references in this Agreement to designated Schedules, Exhibits and Appendices are to the Schedules, Exhibits and Appendices attached to this Agreement, (vii) references to this Agreement, any other Transaction Documents and any other document shall be construed as references to such document as the same may be amended, supplemented or novated from time to time, (viii) the term or is not exclusive, (ix) the term including will be deemed to be followed by , but not limited to, (x) the terms shall, will, and agrees are mandatory, and the term may is permissive, (xi) the phrase directly or indirectly means directly, or indirectly through one or more intermediate Persons or through contractual or other arrangements, and direct or indirect has the correlative meaning, (xii) the term voting power refers to the number of votes attributable to the Shares (on an as-converted basis) in accordance with the terms of the Memorandum and Articles, (xiii) the headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement, (xiv) references to laws include any such law modifying, re-enacting, extending or made pursuant to the same or which is modified, re-enacted, or extended by the same or pursuant to which the same is made, and (xv) all references to dollars or to US$ are to currency of the United States of America and all references to RMB are to currency of the PRC (and each shall be deemed to include reference to the equivalent amount in other currencies).
2. |
Demand Registration. |
2.1 Registration Other Than on Form F-3 or Form S-3.
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(a) Subject to the terms of this Agreement, at any time or from time to time after the earlier of (i) the date that is six (6) months after the closing of the IPO, or the date that the lock-up by underwriters is partially or wholly released, Holders holding twenty percent (20%) or more of the voting power of the then outstanding Registrable Securities held by all Holders may request in writing that the Company effect a Registration of Registrable Securities having an anticipated aggregate offering price, net of underwriting discounts and commissions, in excess of US$100,000,000. Upon receipt of such a request, the Company shall (x) promptly (but in no event more than three (3) business days thereafter) give written notice of the proposed Registration to all other Holders and (y) as soon as practicable, use its reasonable best efforts to cause the Registrable Securities specified in the request, together with any Registrable Securities of any Holder who requests in writing to join such Registration within fifteen (15) days after the Companys delivery of written notice, to be Registered as the Initiating Holders may request. The Company shall be obligated to effect no more than three (3) Registrations pursuant to this Section 2.1 that have been declared and ordered effective; provided that if the sale of all of the Registrable Securities sought to be included pursuant to this Section 2.1 is not consummated, such Registration shall not be deemed to constitute one of the Registration rights granted pursuant to this Section 2.1 .
(b) Notwithstanding any other provision herein, at any time or from time to time after the earlier of (i) the date that is six (6) months after the closing of the IPO, or the date that the lock-up by underwriters is partially or wholly released, the holder of the Series C2 Preferred Shares is entitled to request in writing that the Company effects a Registration of Registrable Securities held by the holder of the Series C2 Preferred Shares. Upon receipt of such request, the Company shall use its best efforts to cause the Registrable Securities held by the holder of the Series C2 Preferred Shares to be registered. The Company shall be obligated to effect only one (1) Registration at the request of the holder of the Series C2 Preferred Shares pursuant to this Section 2.1(b) , other than the three (3) Registrations pursuant to Section 2.1(a) that has been declared and ordered effective. All expenses incurred in connection with Registration in this Section 2.1(b) , including all Registration, filing and qualification fees (including to the Commission and FINRA), printers and accounting fees, fees and disbursements of legal counsel for the Company and any reasonable fees and expenses of underwriters (if any) customarily paid by an issuer shall be borne by the Company. In addition, if the Company proposes to Register for its own account any of its Equity Securities, or for the account of any holder (other than the holder of the Series C2 Preferred Shares) of Equity Securities any of such holders Equity Securities, in connection with the public offering of such securities (except for Exempt Registrations), the Company shall promptly (but in no event fewer than twenty (20) days prior to the proposed date of filing such Registration Statement, or in the case of a Shelf Registration Statement, the anticipated pricing or trade date) give the holder of the Series C2 Preferred Shares written notice of such Registration and, upon the written request of the holder of the Series C2 Preferred Shares given within fifteen (15) days after delivery of such notice, the Company shall use its reasonable best efforts to include in such Registration any Registrable Securities thereby requested to be Registered by the holder of the Series C2 Preferred Shares. If the holder of the Series C2 Preferred Shares decides not to include all or any of its Registrable Securities in such Registration by the Company, the holder of the Series C2 Preferred Shares shall nevertheless continue to have the right to include any Registrable Securities in any subsequent Registration Statement or Registration Statements as may be filed by the Company, all upon the terms and conditions set forth in the Shareholders Agreement. In order to avoid any doubt, the holder of the Series C2 Preferred Shares is entitled to participate in all registrations rights herein.
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2.2 Registration on Form F-3 or Form S-3. The Company shall use its best efforts to qualify for registration on Form F-3 or Form S-3. Subject to the terms of this Agreement, if the Company qualifies for registration on Form F-3 or Form S-3 (or any comparable form for Registration in a jurisdiction other than the United States), any Holder(s) may request the Company to file, in any jurisdiction in which the Company has had a registered underwritten public offering, a Registration Statement on Form F-3 or Form S-3 (or any comparable form for Registration in a jurisdiction other than the United States), including without limitation any shelf registration statement filed under the Securities Act providing for the registration of, and the sale on a continuous or a delayed basis by the Holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act and/or any similar rule that may be adopted by the Commission (a Shelf Registration Statement ). Upon receipt of such a request, the Company shall (i) promptly (but in no event more than three (3) business days thereafter) give written notice of the proposed Registration to all other Holders and (ii) as soon as practicable, use its reasonable best efforts to cause the Registrable Securities specified in the request, together with any Registrable Securities of any Holder who requests in writing to join such Registration within fifteen (15) days after the Companys delivery of written notice, to be Registered and qualified for sale and distribution in such jurisdiction. The Company shall be obligated to effect no more than two (2) Registrations that have been declared and ordered effective within any twelve (12)-month period pursuant to this Section 2.2 ; provided that if the sale of all of the Registrable Securities sought to be included pursuant to this Section 2.2 is not consummated pursuant to Section 2.4 or for any reason other than solely due to the action or inaction of the Holders including Registrable Securities in such Registration, such Registration shall not be deemed to constitute one of the Registration rights granted pursuant to this Section 2.2 .
(a) Continued Effectiveness. The Company shall use its reasonable best efforts to keep any Shelf Registration Statement continuously effective under the Securities Act in order to permit the prospectus forming part of the Shelf Registration Statement to be usable by Holders until the earlier of: (i) the date as of which all Registrable Securities have been sold pursuant to the Shelf Registration Statement or another Registration Statement filed under the Securities Act (but in no event prior to the applicable period referred to in Section 4(a)(3) of the Securities Act and Rule 174 thereunder); and (ii) the date as of which no Holder holds Registrable Securities (such period of effectiveness, the Shelf Period ). Subject to Section 2.3 , the Company shall be deemed not to have used its reasonable best efforts to keep the Shelf Registration Statement effective during the Shelf Period if the Company voluntarily takes any action or omits to take any action that would result in Holders of the Registrable Securities covered thereby not being able to offer and sell any Registrable Securities pursuant to such Shelf Registration Statement during the Shelf Period, unless such action or omission is required by applicable Law.
(b) Shelf Takedown. At any time the Company has an effective Shelf Registration Statement with respect to a Holders Registrable Securities, by notice to the Company specifying the intended method or methods of disposition thereof, any Holder with Registrable Securities covered by the applicable Shelf Registration Statement (or to any Holders if such Shelf Registration Statement is undesignated) may make a written request (a Shelf Takedown Request ) to the Company to effect a public offering, including an underwritten shelf takedown, of all or a portion of such Holders Registrable Securities that have been Registered under such Shelf Registration Statement, and as soon as practicable the Company shall amend or supplement the Shelf Registration Statement as necessary for such purpose. Upon receipt of such a request, the Company shall (i) promptly (but in no event more than three (3) business days thereafter) give written notice of the proposed shelf takedown to all other Holders with Registrable Securities covered by the applicable Shelf Registration Statement (or to all other Holders if such Shelf Registration Statement is undesignated) and (ii) as soon as practicable, use its reasonable best efforts to cause the Registrable Securities specified in the request, together with any Registrable Securities of any Holder who requests in writing to join such Registration within fifteen (15) days (or such shorter period as may be reasonably requested in connection with an underwritten block trade) after the Companys delivery of written notice, to be Registered and qualified for sale and distribution in such jurisdiction.
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2.3 Right of Deferral.
(a) The Company shall not be obligated to Register or qualify Registrable Securities pursuant to this Section 2 :
(1) if, within three (3) Business Days of the receipt of any request of the Holders to Register any Registrable Securities under Section 2.1 or Section 2.2 , the Company gives notice to the Initiating Holders of its bona fide intention to effect the filing for its own account of a Registration Statement of Ordinary Shares within sixty (60) days of receipt of that request; provided , that the Company is actively employing in good faith its reasonable best efforts to cause that Registration Statement to become effective within sixty (60) days of receipt of that request; provided , further , that the Holders are entitled to join such Registration in accordance with Section 4 (other than an Exempt Registration (as defined below));
(2) during the period starting with the date of filing by the Company of, and ending ninety (90) days following the effective date of any Registration Statement filed pursuant to Section 2.1 or 2.2 (or subject to Section 3.1 ) hereof other than an Exempt Registration;
(3) in any jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such Registration or qualification, unless the Company is already subject to service of process in such jurisdiction; or
(4) with respect to the registration on Form F-3 or Form S-3 (or any comparable form for Registration in a jurisdiction other than the United States), if Form F-3 is not available for such offering by the Holders.
(b) If, after receiving a request from Holders pursuant to Section 2.1 or Section 2.2 hereof, the Company furnishes to the Holders a certificate signed by the chief executive officer of the Company stating that, in the good faith judgment of the Board, it would be materially detrimental to the Company or its members for a Registration Statement to be filed in the near future, then the Company shall have the right to defer such filing for a period during which such filing would be materially detrimental, provided, that the Company may not utilize this right for more than sixty (60) days on any one occasion or more than once during any twelve (12) month period; provided, further, that the Company may not Register any other its Securities during such period (except for Exempt Registrations).
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2.4 Underwritten Offerings. If, in connection with a request to Register Registrable Securities under Section 2.1 or Section 2.2 , the Initiating Holders seek to distribute such Registrable Securities in an underwritten offering, they shall so advise the Company as a part of the request, and the Company shall include such information in the written notice to the other Holders described in Section 2.1 and Section 2.2 . In such event, the right of any Holder to include its Registrable Securities in such Registration shall be conditioned upon such Holders participation in such underwritten offering and the inclusion of such Holders Registrable Securities in the underwritten offering (unless otherwise mutually agreed by the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwritten offering shall enter into an underwriting agreement in customary form with the underwriter or underwriters of internationally recognized standing selected for such underwritten offering by the holders of at least a majority of the voting power of all Registrable Securities proposed to be included in such Registration. Any Holder(s) of the Registrable Securities proposed to be distributed by such underwriter(s) shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Holder, such Holders title to the Registrable Securities, such Holders intended method of distribution and any other representations to be made by such Holder as are generally prevailing in agreements of that type, and the aggregate amount of the liability for such Holder under such agreement shall not exceed such Holders proceeds from the sale of its Registrable Securities in the offering, net of underwriting discounts and commissions but before expenses. Notwithstanding any other provision of this Agreement, if the managing underwriter advises the Company in writing that marketing factors (including without limitation the aggregate number of securities requested to be Registered, the general condition of the market, and the status of the Persons proposing to sell securities pursuant to the Registration) require a limitation of the number of Registrable Securities to be underwritten in a Registration pursuant to Section 2.1 or Section 2.2 , the underwriters may exclude up to seventy percent (70%) of the Registrable Securities requested to be Registered but only after first excluding all other Equity Securities from the Registration and underwritten offering and so long as the number of shares to be included in the Registration on behalf of the non-excluded Holders is allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities requested by such Holders to be included, provided that any Initiating Holder shall have the right to withdraw its request for Registration from the underwriting by written notice to the Company and the underwriters delivered at least three (3) days prior to the effective date of the Registration Statement, and such withdrawn request for Registration shall not be deemed to constitute one of the Registration rights granted pursuant to Section 2.1 or Section 2.2 , as the case may be. If any Holder disapproves the terms of any underwriting, the Holder may also elect to withdraw therefrom by written notice to the Company and the underwriters delivered at least three (3) days prior to the effective date of the Registration Statement. Any Registrable Securities excluded or withdrawn from such underwritten offering shall be withdrawn from the Registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to a Holder to the nearest one hundred (100) shares.
3. |
Piggyback Registrations. |
3.1 Registration of the Companys Securities. Subject to the terms of this Agreement, if the Company proposes to Register for its own account any of its Equity Securities, or for the account of any holder (other than a Holder) of Equity Securities any of such holders Equity Securities, in connection with the public offering of such securities (except for Exempt Registrations), the Company shall promptly (but in no event fewer than twenty (20) days prior to the proposed date of filing such Registration Statement, or in the case of a Shelf Registration Statement, the anticipated pricing or trade date) give each Holder written notice of such Registration and, upon the written request of any Holder given within fifteen (15) days after delivery of such notice, the Company shall use its reasonable best efforts to include in such Registration any Registrable Securities thereby requested to be Registered by such Holder. If a Holder decides not to include all or any of its Registrable Securities in such Registration by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent Registration Statement or Registration Statements as may be filed by the Company, all upon the terms and conditions set forth herein.
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3.2 Right to Terminate Registration. The Company shall have the right to terminate or withdraw any Registration initiated by it under Section 3.1 prior to the effectiveness of such Registration, whether or not any Holder has elected to participate therein, without prejudice, however, to the rights of any Holders entitled to request that such Registration be effected under Section 2.1 or Section 2.2 , as the case may be. The expenses of such withdrawn Registration shall be borne by the Company in accordance with Section 4.3 .
3.3 Underwriting Requirements.
In connection with any offering involving an underwriting of the Companys Equity Securities, the Company shall not be required to Register the Registrable Securities of a Holder under this Section 3 unless such Holders Registrable Securities are included in the underwritten offering and such Holder enters into an underwriting agreement in customary form with the underwriter or underwriters of internationally recognized standing selected by the Company and setting forth such terms for the underwritten offering as have been agreed upon between the Company and the underwriters. Any Holder(s) of the Registrable Securities proposed to be distributed by such underwriter(s) shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Holder, such Holders title to the Registrable Securities, such Holders intended method of distribution and any other representations to be made by such Holder as are generally prevailing in agreements of that type, and the aggregate amount of the liability for such Holder under such agreement shall not exceed such Holders proceeds from the sale of its Registrable Securities in the offering, net of underwriting discounts and commissions but before expenses. In the event the underwriters advise Holders seeking Registration of Registrable Securities pursuant to this Section 3 in writing that market factors (including the aggregate number of Registrable Securities requested to be Registered, the general condition of the market, and the status of the Persons proposing to sell securities pursuant to the Registration) require a limitation of the number of Registrable Securities to be underwritten, the underwriters may exclude up to seventy percent (70%) of the Registrable Securities, but in any case only after first excluding all other Equity Securities (except for securities sold for the account of the Company) from the Registration and underwriting and so long as the Registrable Securities to be included in such Registration on behalf of any non-excluded Holders are allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities requested by such Holders to be included. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to a Holder to the nearest one hundred (100) shares.
If any Holder disapproves the terms of any underwriting, the Holder may elect to withdraw therefrom by written notice to the Company and the underwriters delivered at least three (3) days prior to the effective date of the Registration Statement. Any Registrable Securities excluded or withdrawn from the underwritten offering shall be withdrawn from the Registration.
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3.4 Exempt Registrations. The Company shall have no obligation to Register any Registrable Securities under this Section 3 in connection with a Registration by the Company (i) relating solely to the sale of securities to participants in a Company share plan, or (ii) relating to a corporate reorganization or other transaction under Rule 145 of the Securities Act (or comparable provision under the Laws of another jurisdiction, as applicable) (collectively, Exempt Registrations ).
4. |
Registration Procedures. |
4.1 Registration Procedures and Obligations. Whenever required under this Agreement to effect the Registration of any Registrable Securities held by the Holders, the Company shall, as expeditiously as reasonably possible:
(a) Prepare the required Registration Statement, which shall be furnished to the Holders of the Registrable Securities covered by such Registration Statement, and make such changes concerning the Holders in such documents as such Holders, or their counsel, may reasonably request prior to the filing thereof;
(b) File with the Commission a Registration Statement with respect to those Registrable Securities and use its reasonable best efforts to cause that Registration Statement to become effective, and, (i) in the case of a Registration Statement other than a Shelf Registration Statement, keep the Registration Statement effective until the shorter of (x) one hundred eighty (180) days or (y) such date on which the distribution thereunder has been completed, and (ii) in the case of a Shelf Registration Statement, in compliance with Section 2.2(a) ;
(c) Prepare and file with the Commission amendments and supplements to that Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of Applicable Securities Laws with respect to the disposition of all securities covered by the Registration Statement;
(d) Furnish to the Holders the number of copies of a prospectus, including a preliminary prospectus, required by Applicable Securities Laws, and any other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them;
(e) To the extent the Company is eligible under the relevant provisions of Rule 430B under the Securities Act, if the Company files any Shelf Registration Statement, the Company shall include in such Shelf Registration Statement such disclosures as may be required by Rule 430B under the Securities Act (referring to the unnamed selling security holders in a generic manner by identifying the initial offering of the securities to the Holders) in order to ensure that the Holders may be added to such Shelf Registration Statement at a later time through the filing of a prospectus supplement rather than a post-effective amendment;
(f) Use its reasonable best efforts to Register and qualify the securities covered by the Registration Statement under the securities Laws of any jurisdiction, as reasonably requested by the Holders, provided, that the Company shall not be required to qualify to do business or file a general consent to service of process in any such jurisdictions;
(g) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in customary form, with the managing underwriter(s) of the offering;
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(h) Promptly notify each Holder of Registrable Securities covered by the Registration Statement at any time when a prospectus relating thereto is required to be delivered under Applicable Securities Laws of (a) any written comments by the Commission, or any request by the Commission or any applicable Governmental Authority for amendments or supplements to such Registration Statement, or for additional information (whether before or after the effective date of the Registration Statement) or any other correspondence with the Commission relating to, or which may affect, the Registration, (b) the issuance of any stop order by the Commission, or (c) the happening of any event or the existence of any condition as a result of which any prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, or if in the opinion of counsel for the Company it is necessary to supplement or amend such prospectus to comply with applicable Laws, and at the request of any such Holder promptly prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made or such prospectus, as supplemented or amended, shall comply with applicable Laws;
(i) Furnish, at the request of any Holder requesting Registration of Registrable Securities pursuant to this Agreement, on the date that such Registrable Securities are delivered for sale in connection with a Registration pursuant to this Agreement, (A) an opinion, dated the date of the sale, of the counsel representing the Company for the purposes of the Registration, in form and substance as is customarily given to underwriters in an underwritten public offering; and (B) comfort letters dated as of (x) the effective date of the registration statement covering such Registrable Securities, and (y) the date of the sale as contemplated in Rule 159 under the Securities Act, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters;
(j) Otherwise comply with all rules and regulations of the Commission to the extent applicable to the applicable registration statement, prospectus or free writing prospectus and use its reasonable best efforts to make generally available to its security holders (or otherwise provide in accordance with Section 11(a) of the Securities Act) an earnings statement satisfying the provisions of Section 11(a) of the Act, no later than forty-five (45) days after the end of a twelve (12) month period (or ninety (90) days, if such period is a financial year) beginning with the first month of the Companys first fiscal quarter commencing after the effective date of such registration statement, which statement shall cover such twelve (12) month period, subject to any proper and necessary extensions;
(k) Not, without the written consent of the holders of at least a majority of voting power of the then outstanding Registrable Securities, make any offer relating to the Securities that would constitute a free writing prospectus, as defined in Rule 405 promulgated under the Act;
(l) Provide a transfer agent and registrar for all Registrable Securities Registered pursuant to the Registration Statement and, where applicable, a number assigned by the Committee on Uniform Securities Identification Procedures for all those Registrable Securities, in each case not later than the effective date of the Registration;
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(m) Use its reasonable best efforts to cause all Registrable Securities covered by the applicable Registration Statement to be listed on each securities exchange on which any of the Companys equity securities are then listed or quoted and on each inter-dealer quotation system on which any of the Companys equity securities are then quoted; and
(n) Take all reasonable action necessary to list the Registrable Securities on the primary exchange on which the Companys securities are then traded or, in connection with a Qualified IPO, the primary exchange on which the Companys securities will be traded.
4.2 Information from Holder. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the Registration of such Holders Registrable Securities.
4.3 Expenses of Registration. All expenses, including the underwriting discounts and selling commissions applicable to the sale of Registrable Securities pursuant to this Agreement, incurred in connection with Registrations, filings or qualifications pursuant to this Agreement, including (without limitation) all Registration, filing and qualification fees (including to the Commission and FINRA), printers and accounting fees, fees and expenses in connection with compliance with any securities or Blue Sky laws (including reasonable fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities), fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange or quotation of the Registrable Securities on any inter-dealer quotation system, roadshow expenses to the extent the underwriters recommend a roadshow by the Companys management to facilitate the sale of Registrable Securities, fees and disbursements of counsel for the Company, reasonable fees and disbursement of counsel for all selling Holders and any reasonable fees and expenses of underwriters customarily paid by issuers or seller of securities shall be borne by the Company. The Company shall not, however, be required to pay for any expenses of any Registration proceeding begun pursuant to Section 2.1 or Section 2.2 of this Agreement if the Registration request is subsequently withdrawn at the request of the Holders holding at least a majority of the voting power of the Registrable Securities requested to be Registered by all Holders in such Registration (in which case all participating Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be thereby Registered in the withdrawn Registration) unless the Holders of at least a majority of the voting power of the Registrable Securities then outstanding agree that such registration constitutes the use by the Holders of one (1) demand registration pursuant to Section 2.1 (in which case such registration shall also constitute the use by all Holders of Registrable Securities of one (1) such demand registration); provided, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and the Company shall pay any and all such expenses.
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5. |
Registration-Related Indemnification. |
5.1 Company Indemnity.
(a) To the maximum extent permitted by Law, the Company will indemnify and hold harmless each Holder, such Holders partners, shareholders, members, each partner, shareholder and member of each such partner, shareholder or member, each of their respective affiliates, officers directors, shareholders, employees, advisors (including legal counsel) and agents, any underwriter (as defined in the Securities Act) and each Person, if any, who controls (as defined in the Securities Act or the Exchange Act) such Holder or underwriter, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under Laws which are applicable to the Company and relate to action or inaction required of the Company in connection with any Registration, qualification, or compliance, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (each a Violation ): (a) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement under which such Registrable Securities are registered or sold under the Securities Act (including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto or any documents incorporated by reference therein) or any other disclosure document produced by or on behalf of the company or any of its subsidiaries including any report or other document filed under the Exchange Act, (b) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a preliminary or final prospectus, in light of the circumstances under which they were made) not misleading, or (c) any violation or alleged violation by the Company of Applicable Securities Laws, or any rule or regulation promulgated under Applicable Securities Laws. The Company will reimburse, as incurred, each such Holder, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action.
(b) The indemnity agreement contained in this Section 5.1 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed), nor shall such indemnity apply in any such case for any such loss, claim, damage, liability or action to the extent that it arises solely out of or is solely based upon a Violation that occurs in reliance upon and in conformity with written information furnished specifically for use in such Registration by any such Holder, such Holders partners, officers, directors, and legal counsel, any underwriter (as defined in the Securities Act) and each Person, if any, who controls (as defined in the Securities Act) such Holder or underwriter.
5.2 Holder Indemnity.
(a) To the maximum extent permitted by Law, each selling Holder that has included Registrable Securities in a Registration will, severally and not jointly, indemnify and hold harmless the Company, its directors and officers, any other Holder selling securities in connection with such Registration and each Person, if any, who controls (within the meaning of the Securities Act or the Exchange Act) the Company, such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under Applicable Securities Laws, or any rule or regulation promulgated under Applicable Securities Laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs solely in reliance upon and in conformity with written information furnished by such Holder specifically for use in such Registration; and each such Holder will reimburse, as incurred, any Person intended to be indemnified pursuant to this Section 5.2 , for any legal or other expenses reasonably incurred by such Person in connection with investigating or defending any such loss, claim, damage, liability or action. No Holders liability under this Section 5.2 (when combined with any amounts paid by such Holder pursuant to Section 5.4 ) shall exceed the net proceeds received by such Holder from the offering of securities made in connection with that Registration.
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(b) The indemnity contained in this Section 5.2 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld or delayed).
5.3 Notice of Indemnification Claim. Promptly after receipt by an indemnified party under Section 5.1 or Section 5.2 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under Section 5.1 or Section 5.2 , deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the indemnifying parties. An indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one (1) separate counsel, with the reasonably incurred fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party, to the extent so prejudiced, of any liability to the indemnified party under this Section 5 , but the omission to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 5 . No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation.
5.4 Contribution. If any indemnification provided for in Section 5.1 or Section 5.2 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party, on the one hand, and of the indemnified party, on the other, in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided , however , that, in any such case: (A) no Holder will be required to contribute any amount (after combined with any amounts paid by such Holder pursuant to Section 5.2 ) in excess of the net proceeds to such Holder from the sale of all such Registrable Securities offered and sold by such Holder pursuant to such Registration Statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.
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5.5 Underwriting Agreement. To the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.
5.6 Survival. The obligations of the Company and Holders under this Section 5 shall survive the completion of any offering of Registrable Securities in a Registration Statement under this Agreement, regardless of the expiration of any statutes of limitation or extensions of such statutes.
6. |
Additional Registration-Related Undertakings. |
6.1 Reports under the Exchange Act. With a view to making available to the Holders the benefits of Rule 144, Rule 144A and Regulation S promulgated under the Securities Act and any comparable provision of any Applicable Securities Laws that may at any time permit a Holder to sell securities of the Company to the public without Registration or pursuant to a Registration on Form F-3 or Form S-3 (or any comparable form in a jurisdiction other than the United States), the Company agrees to:
(a) make and keep public information available, as those terms are understood and defined in Rule 144 (or comparable provision, if any, under Applicable Securities Laws in any jurisdiction where the Companys securities are listed), at all times following ninety (90) days after the effective date of the first Registration under the Securities Act filed by the Company for an offering of its securities to the general public;
(b) file with the Commission in a timely manner all reports and other documents required of the Company under all Applicable Securities Laws; and
(c) at any time following ninety (90) days after the effective date of the first Registration under the Securities Act filed by the Company for an offering of its securities to the general public by the Company, promptly furnish to any Holder holding Registrable Securities, upon request (a) a written statement by the Company that it has complied with the reporting requirements of all Applicable Securities Laws at any time after it has become subject to such reporting requirements or, at any time after so qualified, that it qualifies as a registrant whose securities may be resold pursuant to Form F-3 or Form S-3 (or any form comparable thereto under Applicable Securities Laws of any jurisdiction where the Companys securities are listed), (b) a copy of the most recent annual or quarterly report of the Company and such other reports and documents as filed by the Company with the Commission, and (c) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the Commission, that permits the selling of any such securities without Registration or pursuant to Form F-3 or Form S-3 (or any form comparable thereto under Applicable Securities Laws of any jurisdiction where the Companys Securities are listed); and
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(d) take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to Sell Registrable Securities without Registration under the Securities Act in transactions that would otherwise be permitted by this Agreement and within the limitation of the exemption provided by Rule 144, Rule 144A or Regulation S under the Securities Act, as such rules may be amended from time to time, or any comparable provision of any Applicable Securities Laws.
6.2 No Inconsistent Agreements; Limitations on Subsequent Registration Rights. Neither the Company nor any of its subsidiaries shall hereafter enter into, and neither the Company nor any of its subsidiaries is currently a party to, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders by this Agreement. From and after the date of this Agreement, the Company shall not, without the written consent of holders of at least a majority of the voting power of the then outstanding Registrable Securities held by all Holders (calculated on an as-converted basis), enter into any agreement with any holder or prospective holder of any Equity Securities of the Company that would allow such holder or prospective holder (i) to include such Equity Securities in any Registration filed under Section 2 or Section 3 , unless under the terms of such agreement such holder or prospective holder may include such Equity Securities in any such Registration only to the extent that the inclusion of such Equity Securities will not reduce the amount of the Registrable Securities of the Holders that are included, (ii) to demand Registration of their Equity Securities, or (iii) cause the Company to include such Equity Securities in any Registration filed under Section 2 or Section 3 hereof on a basis pari passu with or more favorable to such holder or prospective holder than is provided to the Holders of Registrable Securities.
6.3 Market Stand-Off Agreement. Each holder of Registrable Securities agrees, if so required by the managing underwriter(s), that it will not during the period commencing on the date of the final prospectus relating to the Companys IPO and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days from the date of such final prospectus) (i) lend, offer, pledge, hypothecate, hedge, sell, make any short sale of, loan, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Equity Securities of the Company owned immediately prior to the date of the final prospectus relating to the Companys IPO (other than those included in such offering), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such Equity Securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Equity Securities of the Company or such other securities, in cash or otherwise; provided , that (a) the forgoing provisions of this Section shall not apply to the sale of any securities of the Company to an underwriter pursuant to any underwriting agreement, and shall not be applicable to any Holder unless all directors, officers and all other holders of at least one percent (1%) of the outstanding share capital of the Company (calculated on an as-converted to Ordinary Share basis) are bound by restrictions at least as restrictive as those applicable to any such Holder pursuant to this Section, (y) this Section shall not apply to a Holder to the extent that any other Person subject to substantially similar restrictions is released in whole or in part, and (z) the lockup agreements shall permit a Holder to transfer their Registrable Securities to their respective Affiliates so long as the transferees enter into the same lockup agreement. The Series A Investors, Series A1 Investors, Series B1 Investor, Series B2 Investors, the Series B3 Investors, the Series C1 Investors and the Series C2 Investor agree to execute and deliver to the underwriters a lock-up agreement containing substantially similar terms and conditions as those contained herein.
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6.4 Termination of Registration Rights. The registration rights set forth in Section 2 and Section 3 of this Agreement shall terminate on the earlier of (i) the date that is five (5) years from the date of closing of a Qualified IPO, and (ii) with respect to any Holder, the date on which such Holder no longer holds any Registrable Securities.
6.5 Exercise of Ordinary Share Equivalents. Notwithstanding anything to the contrary provided in this Agreement, the Company shall have no obligation to Register Registrable Securities which, if constituting Ordinary Share Equivalents, have not been exercised, converted or exchanged, as applicable, for Ordinary Shares as of the effective date of the applicable Registration Statement, but the Company shall cooperate and facilitate any such exercise, conversion or exchange as requested by the applicable Holder.
6.6 Intent . The terms of Sections 2 through 6 are drafted primarily in contemplation of an offering of securities in the United States of America. The parties recognize, however, the possibility that securities may be qualified or registered for offering to the public in a jurisdiction other than the United States of America where registration rights have significance or that the Company might effect an offering in the United States of America in the form of American Depositary Receipts or American Depositary Shares. Accordingly:
(a) it is their intention that, whenever this Agreement refers to a Law, form, process or institution of the United States of America but the parties wish to effectuate qualification or registration in a different jurisdiction where registration rights have significance, reference in this Agreement to the Laws or institutions of the United States shall be read as referring, mutatis mutandis, to the comparable Laws or institutions of the jurisdiction in question; and
(b) it is agreed that the Company will not undertake any listing of American Depositary Receipts, American Depositary Shares or any other security derivative of the Ordinary Shares unless arrangements have been made reasonably satisfactory to the holders of at least a majority of the voting power of the then outstanding Registrable Securities held by all Holders (calculated on an as-converted basis) to ensure that the spirit and intent of this Agreement will be realized and that the Company is committed to take such actions as are necessary such that the Holders will enjoy rights corresponding to the rights hereunder to sell their Registrable Securities in a public offering in the United States of America as if the Company had listed Ordinary Shares in lieu of such derivative securities.
7. |
Preemptive Right. |
7.1 Preemptive Right. The Company hereby grants to each Investor the right of first refusal to purchase all (or any part) of such Investors Preemptive Pro Rata Share (as defined in Section 7.2 below) (and any oversubscription, as provided below) of any New Securities (as defined below) that the Company may from time to time issue after the date of this Agreement (the Preemptive Right ).
7.2 Preemptive Pro Rata Share. Each Investors Preemptive Pro Rata Share for purposes of the Preemptive Rights under this Section 7 is the ratio of (a) the number of Ordinary Shares (including Preferred Shares on an as-converted basis) held by such Investor, to (b) the total number of Ordinary Shares (including Preferred Shares on an as-converted basis) then outstanding immediately prior to the issuance of New Securities giving rise to the Preemptive Rights. Each Investor may apportion, at its sole discretion, its Preemptive Pro Rata Share among its Affiliates in any proportion, provided that, for so long as Tencent together with its Affiliates hold more than 50% of the Series B1 Preferred Shares it acquired at the Series B1 Closing (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events), such Affiliates shall not be any of the Restricted Persons II without prior written consent of Tencent).
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7.3 New Securities. For purposes hereof, New Securities shall mean any Equity Securities of the Company issued after the date hereof, except for:
(a) Ordinary Shares and/or options or warrants therefor issued to employees, officers, directors, contractors, advisors or consultants of the Group Companies pursuant to the equity incentive, purchase or participation plan, duly approved in accordance with Section 18 herein;
(b) Ordinary Shares actually issued upon the conversion or exchange of Convertible Securities, provided such issuance is pursuant to the terms of such Convertible Security and the issuance of the Convertible Security has been duly approved in accordance with Section 18 herein;
(c) any Equity Securities of the Company issued pursuant to a bona fide firmly underwritten public offering duly approved in accordance with Section 18 herein;
(d) any Equity Securities of the Company issued pursuant to a bona fide business acquisition of all or substantially all of the assets or fifty percent (50%) or more of the equity ownership or voting power of another corporation or entity by the Company by consolidation, merger, purchase of assets, or other reorganization in a single transaction or a series of related transactions, in each case, duly approved in accordance with Section 18 herein;
(e) any Ordinary Shares issued or issuable upon the conversion of the Preferred Shares.
7.4 Procedures.
(a) First Participation Notice. In the event that the Company proposes to undertake an issuance of New Securities (in a single transaction or a series of related transactions), it shall give to each Investor written notice of its intention to issue New Securities (the First Participation Notice ), describing the amount and type of New Securities, the price and other material terms upon which the Company proposes to issue such New Securities. The Investors shall have ten (10) Business Days from the date of receipt of the First Participation Notice (the First Participation Period ) to agree in writing to purchase up to such Investors Preemptive Pro Rata Share of such New Securities for the price and upon the terms and conditions specified in the First Participation Notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased (not to exceed such Investors Preemptive Pro Rata Share). If any Investor fails to so respond in writing within such ten (10) Business Day period, then such Investor shall forfeit the right hereunder to purchase its Preemptive Pro Rata Share of such New Securities, but shall not be deemed to forfeit any right with respect to any other issuance of New Securities.
(b) Second Participation Notice; Oversubscription . If any Investor fails or declines to exercise its Preemptive Rights in full in accordance with subsection (a) above, the Company shall promptly give notice (the Second Participation Notice , together with the First Participation Notice, the Participation Notice ) to the Investors who exercised in full their Preemptive Rights (the Oversubscription Participants ) in accordance with subsection (a) above, specifying the aggregate number of unpurchased New Securities that remain eligible for purchase by all the Oversubscription Participants. Each Oversubscription Participant shall have five (5) Business Days from the date of the Second Participation Notice (the Second Participation Period , together with the First Participation Period, the Participation Period ) to notify the Company of its desire to purchase more New Securities, stating the number of the additional New Securities it proposes to buy (the Additional Number ). Such notice may be made by telephone if confirmed in writing within two (2) Business Days. If, as a result thereof, such oversubscription exceeds the total number of the remaining New Securities available for purchase, each Oversubscription Participant will be cut back by the Company with respect to its oversubscription to such number of remaining New Securities equal to the lesser of (x) the Additional Number and (y) the product obtained by multiplying (i) the number of the remaining New Securities available for subscription by (ii) a fraction, the numerator of which is the number of Ordinary Shares (including Preferred Shares on an as-converted basis) held by such Oversubscription Participant and the denominator of which is the total number of Ordinary Shares (including Preferred Shares on an as-converted basis) held by all the Oversubscription Participants.
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7.5 Failure to Exercise. In the event no Investor exercises its Preemptive Right within the First Participation Period, or there are otherwise remaining New Securities following the exercise of the Investors respective Preemptive Right, the Company shall have ninety (90) days after the First or Second Participation Period (as applicable) to complete the sale of the New Securities described in the Participation Notice with respect to which the Preemptive Right hereunder were not exercised at the same or higher price and upon non-price terms not more favorable to the purchasers thereof than specified in the Participation Notice, (provided that, for so long as Tencent together with its Affiliates hold more than 50% of the Series B1 Preferred Shares it acquired at the Series B1 Closing (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events), such purchaser shall not be any of the Restricted Persons II without prior written consent of Tencent). In the event that the Company has not issued and sold such New Securities within such ninety (90) day period, then the Company shall not thereafter issue or sell any New Securities without again first offering such New Securities to the Investors pursuant to this Section 7 .
8. |
Restriction on Transfers. |
8.1 Principals and Holding Companies. No Principal or Principal Holding Company, regardless of such Principals employment status with any Group Company, shall directly or indirectly sell, assign, transfer, pledge, hypothecate, or otherwise encumber or dispose of in any way or otherwise grant any interest or right with respect to ( Transfer ) all or any part of any interest in any Equity Securities of the Company now or hereafter owned or held by such Principal or Principal Holding Company prior to a Qualified IPO, without the prior written consents of the Series A Majority, the Series B Majority and the Series C Majority. In the event a Transfer is approved by the Series A Majority, the Series B Majority and the Series C Majority, such Transfer shall take effect strictly in accordance with Sections 9 through 11 hereof.
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8.2 Investors. Each Investor may freely Transfer any Equity Securities of the Company (except for any Ordinary Shares, which shall be subject to the Right of First Refusal the Investors described in Sections 9) now or hereafter owned or held by it without limitation; provided that (i) such Transfer is effected in compliance with all applicable Laws, (ii) unless with prior consent of Mr. Tan Siliang (谭思亮), the transferee shall not be any one of the Restricted Persons I, (iii) the transferee shall execute and deliver a joinder deed in substantially the form attached hereto as Exhibit A to join in and be bound by the terms of this Agreement as a holder of the relevant Preferred Shares subject to the Transfer (if not already a Party hereto) upon the closing of such Transfer and a scanned copy of such joinder deed shall be promptly delivered to each of the other Investors, (iv) prior to such Transfer, such Investor shall notify the Company of such Transfer in writing and (v) if such Investor is proposing to Transfer any Ordinary Shares to any Person, such transfer shall be subject to the Right of First Refusal the Investors described in Sections 9. The Company shall update its register of members upon the consummation of any such permitted Transfer. The rights of first refusal and co-sale of the other Investors as provided in Sections 9 to 11 shall not apply to any Transfer of any Preferred Shares by any Investor. Each Investor shall be entitled to disclose to any bona fide proposed transferee any information, documents or materials concerning any Group Company known to or in possession of such Investor, and the Principals shall and shall procure the Group Companies to, provide any assistance or cooperation reasonably requested by such Investor or the proposed transferee in connection with such proposed transferees due diligence investigation of the Group Companies, provided however that such proposed transferee shall be subject to reasonable confidentiality obligations and execute relevant non-disclosure agreements in advance.
8.3 Ordinary Shareholders. Each Ordinary Shareholder may freely Transfer any Equity Securities of the Company now or hereafter owned or held by it without limitation; provided that (i) such Transfer is effected in compliance with all applicable Laws, (ii) unless with prior consent of Mr. Tan Siliang (谭思亮), the transferee shall not be any one of the Restricted Persons I, (iii) unless with the prior written consent of Tencent, the transferee shall not be any one of the Restricted Persons II, (iv) such transfer shall be subject to the Right of First Refusal the Investors described in Sections 9, (v) the transferee shall execute and deliver a joinder deed in substantially the form attached hereto as Exhibit A to join in and be bound by the terms of this Agreement as a holder of the relevant transferred Ordinary Shares (if not already a Party hereto) upon the closing of such Transfer and a scanned copy of such joinder deed shall be promptly delivered to each of the Investors, and (iv) prior to such Transfer, such Ordinary Shareholder shall notify the Company of such Transfer in writing. The Company shall update its register of members upon the consummation of any such permitted Transfer. Each Ordinary Shareholder shall be entitled to disclose to any bona fide proposed transferee any information, documents or materials concerning any Group Company known to or in possession of such Ordinary Shareholder, and the Principals shall and shall procure the Group Companies to, provide any assistance or cooperation reasonably requested by such Ordinary Shareholder or the proposed transferee in connection with such proposed transferees due diligence investigation of the Group Companies, provided however that such proposed transferee shall be subject to reasonable confidentiality obligations and execute relevant non-disclosure agreements in advance.
8.4 Prohibited Transfers Void. Any Transfer of Equity Securities of the Company not made in compliance with this Agreement shall be null and void as against the Company, shall not be recorded in the register of members of the Company and shall not be recognized by the Company or any other Party.
8.5 No Indirect Transfers. (a)Each Principal and each Principal Holding Company agrees, and (b) each Ordinary Shareholder agrees, in each case, not to circumvent or otherwise avoid the transfer restrictions or intent thereof set forth in this Agreement, whether by holding the Equity Securities of the Company indirectly through another Person (including a Principal Holding Company) or by causing or effecting, directly or indirectly, the Transfer or issuance of any Equity Securities by any such Person (including a Principal Holding Company), or otherwise. Each Principal and each Principal Holding Company furthermore agrees that, so long as such Principal is bound by this Agreement, the Transfer, sale or issuance of any Equity Securities of any Principal Holding Company of such Principal without the prior written consents of the Series A Majority, the Series B Majority and the Series C Majority shall be prohibited, and each such Principal and each such Principal Holding Company agrees not to make, cause or permit any Transfer, sale or issuance of any Equity Securities of such Principal Holding Company without the prior written consents of the Series A Majority, the Series B Majority and the Series C Majority. Any purported Transfer, sale or issuance of any Equity Securities of any Principal Holding Company in contravention of this Agreement shall be void and ineffective for any and all purposes and shall not confer on any transferee or purported transferee any rights whatsoever, and no Party (including without limitation, any Principal or Principal Holding Company) shall recognize any such Transfer, sale or issuance.
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8.6 Domestic Companies. Unless expressly permitted under any of the Transaction Documents or with the prior written consent of the Investors, (a) each Principal shall not, and shall not cause or permit any other Person (including its Permitted Transferees) to Transfer, through one or a series of transactions any equity interest held or Controlled by him in any Domestic Company to any Person. Any Transfer in violation of this Section 8.6 shall be void and each Domestic Company hereby agrees it will not effect such a Transfer nor will it treat any alleged transferee as the holder of such equity interest, and (b) each Domestic Company shall not, and each Principal shall not cause or permit such Domestic Company to, issue to any Person any equity interest of such Domestic Company or any options or warrants for, or any other securities exchangeable for or convertible into, such equity interest of such Domestic Company.
8.7 Performance. Each Principal irrevocably agrees to cause and guarantee the performance by each of such Principals Holding Companies of all of their respective covenants and obligations under this Agreement.
8.8 Exempt Transaction. Notwithstanding any provision to the contrary contained herein, Sections 8 through 13 of this Agreement shall not apply with respect to a transfer made pursuant to Section 15 of this Agreement or Article 119 of the Memorandum and Articles.
8.9 Legend. Each existing or replacement certificate for Equity Securities of the Company now owned or hereafter acquired by any Principal or Principal Holding Company and their permitted transferees shall bear the following legend:
THE SALE, PLEDGE, HYPOTHECATION, ASSIGNMENT OR TRANSFER OF THESE SECURITIES IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN SHAREHOLDERS AGREEMENT (AS AMENDED FROM TIME TO TIME) BY AND BETWEEN THE SHAREHOLDER, THE COMPANY AND CERTAIN OTHER PARTIES THERETO.
(a) The Company may annotate its register of members with an appropriate, corresponding legend. At such time as the related Equity Securities are no longer subject to this Agreement, the Company shall, at the request of the holder of such Equity Securities, issue replacement certificates for such Equity Securities without such legend.
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(b) In order to ensure compliance with the terms of this Agreement, the Company may issue appropriate stop transfer instructions to its transfer agent, if any, and, if the Company acts as transfer agent for its own securities, it may make appropriate notations to the same effect in its own records.
9. |
Rights of First Refusal. |
9.1 Transfer Notice. To the extent the applicable consents of the Series A Majority, the Series B Majority and the Series C Majority have been given pursuant to Section 8 , if any Principal, Principal Holding Company or any Ordinary Shareholder proposes to Transfer any Equity Securities of the Company or any interest therein to any Person or any Investor proposes to Transfer any Ordinary Shares to any Person, then such Principal, Principal Holding Company, Ordinary Shareholder or Investor (in each case, a Transferor ) shall give the Investors and the Company, written notice of the Transferors intention to make the Transfer (the Transfer Notice ), which shall include (i) a description of the Equity Securities to be transferred (the Offered Shares ), (ii) the identity and address of the prospective transferee, and (iii) the consideration and the material terms and conditions upon which the proposed Transfer is to be made. The Transfer Notice shall certify that the Transferor has received a definitive offer from the prospective transferee and in good faith believes a binding agreement for the Transfer is obtainable on the terms set forth in the Transfer Notice. The Transfer Notice shall also include a copy of any written proposal, term sheet or letter of intent or other agreement relating to the proposed Transfer.
9.2 Option of Investors.
(a) Each Investor shall have an option for a period of ten (10) Business Days following receipt of the Transfer Notice (as may be extended pursuant to Section 9.4(b) , the Option Period ) to elect to purchase all or any portion of its respective ROFR Pro Rata Share (as defined in Section 9.2(b) below) of the Offered Shares at the same price and subject to the same terms and conditions as described in the Transfer Notice, by notifying the Transferor in writing before the expiration of the Option Period as to the number of such Offered Shares that it wishes to purchase.
(b) For the purposes of this Section 9.2(b) , an Investors ROFR Pro Rata Share of the Offered Shares shall be equal to (i) the total number of such Offered Shares, multiplied by (ii) a fraction, the numerator of which shall be the aggregate number of Ordinary Shares held by such Investor on the date of the Transfer Notice (including any Preferred Shares held by such Investor on an as-converted basis) and the denominator of which shall be the total number of Ordinary Shares held by all Investors on such date (including all Preferred Shares held by such Investors on an as-converted basis).
(c) If any Investor fails to exercise its right to purchase its full ROFR Pro Rata Share of the Offered Shares, the Transferor shall deliver written notice thereof (the Second Notice ), within two (2) Business Days after the expiration of the Option Period, to each Investor that elected to purchase its entire ROFR Pro Rata Share of the Offered Shares (an Exercising Shareholder ). The Exercising Shareholders shall have a right of re-allotment, and may exercise an additional right to purchase such unpurchased Offered Shares by notifying the Transferor in writing within ten (10) Business Days after receipt of the Second Notice (the Re-allotment Period ); provided, however, that if the Exercising Shareholders desire to purchase in the aggregate more than the number of such unpurchased Offered Shares, then such Exercising Shareholders will be cut back by the Company with respect to its re-allotment to such number of remaining Offered Shares equal to the lesser of (x) the unpurchased Offered Shares and (y) the product obtained by multiplying (i) the number of the unpurchased Offered Shares by (ii) a fraction, the numerator of which is the number of Ordinary Shares (including Preferred Shares on an as-converted basis) held by such Exercising Shareholders and the denominator of which is the total number of Ordinary Shares (including Preferred Shares on an as-converted basis) held by all the Exercising Shareholders.
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(d) Subject to applicable Laws, each Investor shall be entitled to apportion Offered Shares to be purchased among its Affiliates, provided that such Investor notifies the Transferor in writing and such Affiliates shall execute and deliver such documents and take such other actions as may be necessary for such Affiliates to join in and be bound by the terms of this Agreement as a holder of Preferred Shares (if not already a Party hereto) upon and after such Transfer.
9.3 Procedure. If any Investor gives the Transferor notice that it desires to purchase Offered Shares, and, as the case may be, conversion or, then payment for the Offered Shares to be purchased shall be made by check (if agreeable to the Transferor), or by wire transfer in immediately available funds of the appropriate currency, against delivery of such Offered Shares to be purchased, at a place agreed to by the Transferor and all the Exercising Shareholders, and at the time of the scheduled closing therefor, but if they cannot agree, then at the principal executive offices of the Company on the 45th day after the expiration of the Option Period. The said forty-five (45)-day period shall be extended for an additional period of up to forty-five (45) days if necessary to obtain any Consent required for such purchase and payment. The Company shall update its register of members upon the consummation of any such Transfer. Such Offered Shares shall be free and clear of any Lien (other than Liens arising hereunder or attributable to actions by the Investor acquiring such Offered Shares), and the Transferor shall so represent and warrant. The Transferor shall also represent and warrant that it is the beneficial and record owner of such Offered Shares.
9.4 Valuation of Property.
(a) Should the purchase price specified in the Transfer Notice be payable in property other than cash or evidences of indebtedness, the Exercising Shareholders shall have the right to pay the purchase price in the form of cash equal in amount to the fair market value of such property.
(b) The cash value of such property shall be determined by (i) agreement of the Transferor and the Exercising Shareholders, or (ii) if the Transferor and the Exercising Shareholders cannot agree on such cash value within the Option Period, the valuation shall be made by an appraiser of internationally recognized standing jointly selected by the mutual agreement of the Transferor and the Exercising Shareholders or, if they cannot agree on an appraiser within the Option Period, each such Person shall select an appraiser of internationally recognized standing and such appraisers shall designate another appraiser of internationally recognized standing, whose appraisal shall be determinative of such value and shall be final and binding on the Transferor and the Exercising Shareholders. The Option Period shall be extended to expire after the later of (x) the tenth (10th) Business Days following receipt of the Transfer Notice, and (y) the fifth (5th) Business Days after the cash value of such property is determined pursuant to this Section 9.4(b) .
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(c) The cost of such appraisal shall be shared equally by the Transferor, on the one hand, and the Exercising Shareholders pro rata based on the number of Offered Shares such Exercising Shareholder is purchasing, on the other hand.
10. |
Right of Co-Sale. |
10.1 To the extent the Investors do not exercise their respective rights of first refusal as to all the Offered Shares proposed to be sold by the Transferor to the transferee identified in the Transfer Notice, the Transferor (other than any Ordinary Shareholder or any Investor proposing to Transfer Ordinary Shares) shall promptly give written notice (the Co-Sale Notice ) thereof to each Investor not exercising its right of first refusal pursuant to Section 9 (specifying in such Co-Sale Notice the number of the remaining Offered Shares as well as the number of Shares that such Investor may participate in such sale). Each such Investor shall have the right to participate in such sale to the transferee identified in the Transfer Notice of the remaining Offered Shares not purchased pursuant to Section 9 , on the same terms and conditions as specified in the Transfer Notice (but in no event less favorable than the terms and conditions offered to the Transferor) (and for the same consideration on an as converted basis) by notifying the Transferor in writing within ten (10) Business Days following the date of the Co-Sale Notice (each such electing Investor, also a Selling Shareholder ). Such Selling Shareholders notice to the Transferor shall indicate the number of Equity Securities the Selling Shareholder wishes to sell under its right to participate. To the extent one or more Investors exercise such right of participation in accordance with the terms and conditions set forth below, the number of Offered Shares that the Transferor may sell in the Transfer to the prospective transferee identified in the Transfer Notice shall be correspondingly reduced.
10.2 The total number of Equity Securities that each Selling Shareholder may elect to sell shall be equal to the product of (i) the aggregate number of the remaining Offered Shares being transferred to the prospective transferee identified in the Transfer Notice after giving effect to the exercise of all rights of first refusal pursuant to Section 9 hereof, multiplied by (ii) a fraction, the numerator of which is the number of Ordinary Shares (including Preferred Shares on an as-converted basis) owned by such Selling Shareholder on the date of the Transfer Notice and the denominator of which is the total number of Ordinary Shares (including Preferred Shares on an as-converted basis) owned by the Transferor and all Selling Shareholders on the date of the Transfer Notice.
10.3 Each Selling Shareholder shall effect its participation in the sale by promptly delivering to the Company, upon the applicable closing, one or more certificates, which represent the type and number of Equity Securities which such Selling Shareholder elects to sell; provided that if the prospective purchaser objects to the delivery of Ordinary Share Equivalents in lieu of Ordinary Shares, such Selling Shareholder shall only deliver Ordinary Shares (and therefore shall convert any such Ordinary Share Equivalents into Ordinary Shares) and certificates corresponding to such Ordinary Shares, and the Company shall effect any such conversion concurrent with the actual transfer of such shares to the purchaser and contingent on such transfer.
10.4 The share certificate or certificates that a Selling Shareholder delivers to the Company pursuant to this Section 10 shall be cancelled in consummation of the sale of the Equity Securities pursuant to the terms and conditions specified in the Transfer Notice, and the Transferor shall concurrently therewith remit to such Selling Shareholder that portion of the sale proceeds to which the Selling Shareholder is entitled by reason of its participation in such sale. The Company shall update its register of members upon the consummation of any such Transfer.
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10.5 To the extent that any prospective purchaser prohibits the participation by a Selling Shareholder exercising its co-sale rights hereunder in a proposed Transfer or otherwise refuses to purchase Equity Securities from a Selling Shareholder exercising its co-sale rights hereunder, the Transferor shall not sell to such prospective purchaser any Equity Securities unless and until, simultaneously with such sale, the Transferor shall purchase from such Selling Shareholder such Equity Securities that such Selling Shareholder would otherwise be entitled to sell to the prospective purchaser pursuant to its co-sale rights for the same or no less favorable consideration and on the same or no less favorable terms and conditions as the proposed transfer described in the Transfer Notice. Each Selling Shareholder shall not be required to give any representations or warranties with respect to such proposed Transfer or with respect to the Company, except for the ownership and title of such Selling Shareholders Equity Securities co-sold in such proposed Transfer.
11. |
Non-Exercise of Rights of First Refusal and Co-Sale. |
11.1 If the Investors do not elect to purchase all of the Offered Shares in accordance with Section 9 , then, subject to the right of the Investors to exercise their rights to participate in the sale of Offered Shares within the time periods specified in Section 10 , the Transferor shall have a period of ninety (90) days from the expiration of the Option Period in which to sell the remaining Offered Shares that have not been taken up under Section 9 and Section 10 , to the transferee identified in the Transfer Notice upon terms and conditions (including the purchase price) no more favorable to the purchaser than those specified in the Transfer Notice, so long as any such sale is effected in accordance with all applicable Laws. The Parties agree that each such transferee, prior to and as a condition to the consummation of any sale, shall execute and deliver to the Parties documents and other instruments assuming the obligations of such Transferor under this Agreement and Memorandum and Articles, including a joinder deed in substantially the form attached hereto as Exhibit A to join in and be bound by the terms of this Agreement as a holder of Ordinary Shares (if not already a Party hereto) upon the closing of such Transfer and a scanned copy of such joinder deed shall be promptly delivered to each of the Investors, and the transfer shall not be effective and shall not be recognized by any Party until such documents and instruments are so executed and delivered.
11.2 In the event the Transferor does not consummate the sale of such Offered Shares to the transferee identified in the Transfer Notice within such ninety (90) day period, the rights of the Investors under Section 9 and Section 10 , respectively, shall be re-invoked and shall be applicable to each subsequent disposition of such Offered Shares by the Transferor until such rights terminate in accordance with the terms of this Agreement.
11.3 The exercise or non-exercise of the rights of the Investors under Section 9 and Section 10 to purchase Equity Securities from a Transferor or participate in the sale of Equity Securities by a Transferor (as the case may be) shall not adversely affect their rights to make subsequent purchases from the Transferor of Equity Securities or subsequently participate in sales of Equity Securities by the Transferor hereunder.
12. |
Limitations to Rights of First Refusal and Co-Sale. |
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12.1 Subject to the requirements of applicable Law, the restrictions under Section 8 and the right of first refusal and right of co-sale under Section 9 and Section 10 shall not apply to (a) any sale of Equity Securities of the Company to the public pursuant to a Qualified IPO, (b) Transfer of any Equity Securities of the Company by a Principal or his Principal Holding Company to a company that is wholly owned by such Principal, and (c) Transfer of any Equity Securities of the Company now or hereafter held by a Principal or his Principal Holding Company to such Principals parents, children, spouse, or to a trustee, executor, or other fiduciary for the benefit of such Principal or such Principals parents, children, spouse for bona fide estate planning purposes (each such transferee pursuant to clause (b) or (c) above, a Permitted Transferee , and collectively, the Permitted Transferees ); provided , that (i) such Transfer is effected in compliance with all applicable Laws, including without limitation, the SAFE Rules and Regulations, (ii) with respect to any Transfer pursuant to clause (c) above, the Principal has provided the Series A Majority, the Series B Majority and the Series C Majority reasonable evidence of the bona fide estate planning purposes for such Transfer and reasonable evidence of the satisfaction of all applicable filings or registrations required by SAFE under the SAFE Rules and Regulations, (iii) such Transfer will not constitute a Share Sale or a Deemed Liquidation Event, and (iv) each such Permitted Transferee, prior to the completion of the Transfer, shall have executed a joinder deed in substantially the form attached hereto as Exhibit A assuming the obligations of such Principal or Principal Holding Company under this Agreement as a Principal or Principal Holding Company, with respect to the transferred Equity Securities and the scanned copy of such joinder deed shall be sent to each of the Investor upon such the closing of such Transfer; provided further , that the Transferor shall remain liable for any breach by such Permitted Transferee of any provision under this Agreement, and if any Permitted Transferee in clause (c) or (d) above ceases to be a Permitted Transferee, he/she/it shall immediately Transfer all Equity Securities of the Company held by it to the relevant Principal, Principal Holding Company or any other Permitted Transferee.
13. |
Prohibited Transfers. |
13.1 In the event the Transferor should sell any Equity Securities in contravention of the co-sale rights of the Investors under Section 10 (a Prohibited Transfer ), each Investor, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the put option provided below, and such Transferor shall be bound by the applicable provisions of such option.
(a) Put Option . In the event of a Prohibited Transfer, each Investor shall have the right to sell to the Transferor the type and all or a portion of the number of Equity Securities equal to the number of Equity Securities such Investor would have been entitled to transfer to the prospective purchaser under Section 10 hereof had the Prohibited Transfer been effected pursuant to and in compliance with the terms hereof. Such sale shall be made on the following terms and conditions.
(i) The price per share at which the Equity Securities are to be sold to the Transferor shall be equal to the price per Offered Share that would have been paid by the prospective purchaser to such Investor and the Transferor in the Prohibited Transfer. The Transferor shall also reimburse each Investor for any and all reasonable and documented fees and expense, including legal fees and expenses, incurred pursuant to the exercise or the attempted exercise of such Investors rights under Sections 8 through 12 .
(ii) Within sixty (60) days after the later of the dates on which an Investor (x) received notice of the Prohibited Transfer or (y) otherwise becomes aware of the Prohibited Transfer, such Investor shall, if exercising the option created hereby, deliver to the Transferor an instrument of transfer and either the certificate or certificates representing Equity Securities to be sold under this Section 13 by such Investor, each certificate to be properly endorsed for transfer, or an affidavit of lost certificate. The Transferor shall, immediately upon receipt of the foregoing, pay the aggregate purchase price therefor and the amount of reimbursable fees and expenses, in cash by wire transfer of immediately available funds or by other means acceptable to such Investor. The Company shall concurrently therewith record such transfer on its books and update its register of members and will promptly thereafter and in any event within five (5) days reissue certificates, as applicable, to the Transferor and such Investor reflecting the Equity Securities held by them following giving effect to such transfer.
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(b) Voidability of Prohibited Transfer . Notwithstanding anything to the contrary contained herein and the rights afforded to the Investors in this Section 13 , any attempt by a Transferor to transfer Equity Securities in violation of any of Sections 8 , 9 , 10 , 11 and 12 shall be void, and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares.
14. |
Lock-Up. |
In addition to but not in lieu of any other transfer restriction contained herein, each Principal and each Principal Holding Company agrees that such Person will not during the period commencing on the date of the final prospectus relating to the first underwritten registered public offering of the Ordinary Shares (or any other Equity Securities of any Group Company) and ending on the date specified by the Company and the managing underwriter (i) lend, offer, pledge, hypothecate, hedge, sell, make any short sale of, loan, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Equity Securities of the Company or any Principal Holding Company (other than those included in such offering) or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such Equity Securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Equity Securities of the Company or other securities, in cash or otherwise. The underwriters in connection with such public offering are intended third party beneficiaries of this Section 14 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Principal and Principal Holding Company agrees to execute and deliver to the underwriters a lock-up agreement containing substantially similar terms and conditions as those contained herein.
15. |
Drag-Along Rights. |
15.1 Drag-Along Obligations. At any time from the Series B1 Closing and prior to a Qualified IPO, if (i) the Series A Majority, (ii) the Series B Majority, (iii) the Series C Majority and (iv) holders representing a majority of the Ordinary Shares (together as the Drag Holders ) propose to enter into a transaction or a series of transactions that constitute a Share Sale or a Deemed Liquidation Event (the Drag-Along Sale ) with any Person (the Offeror ), provided that such proposed Drag-Along Sale implies a sale price per Share no less than two (2) times the Series B1 Issue Price (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events), the Drag Holders may, at their option, by delivery of a written notice (the Drag-Along Notice ), require all of the other Shareholders, including Principals and Principal Holding Companies, (the Dragged Holders ) to, and whereupon each Dragged Holder shall:
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(a) sell, at the same time as the Drag Holders sell, to the Offeror, in the Drag-Along Sale, all of its Equity Securities of the Company or the same percentage of its Equity Securities of the Company as the Drag Holders sell, upon substantially the same terms and conditions as were agreed to by the Drag Holders; provided, however, that such terms and conditions, including with respect to price paid or received per Equity Security of the Company, may differ as between different classes of Equity Securities of the Company in accordance with their relative liquidation preferences as set forth in the Memorandum and Articles and provided further that some Shareholders may be given the right or opportunity to exchange or roll a portion of their Equity Securities of the Company for Equity Securities of the acquirer or an Affiliate thereof in the Drag-Along Sale, but in such event there shall be no obligation to afford such right or opportunity to all of the Shareholders (provided further that, if such right is given to any Shareholder, it shall also be offered to all the Investors);
(b) vote all of its Equity Securities of the Company (a) in favor of such Drag-Along Sale, (b) against any other consolidation, recapitalization, amalgamation, merger, sale of securities, sale of assets, business combination, or transaction that would interfere with, delay, restrict, or otherwise adversely affect such Drag-Along Sale, and (c) against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the definitive agreement(s) related to such Drag-Along Sale or that could result in any of the conditions to the closing obligations under such agreement(s) not being fulfilled, and, in connection therewith, to be present (in person or by proxy) at all relevant meetings of the Shareholders (or adjournments thereof) or to approve and execute all relevant written consents in lieu of a meeting;
(c) not exercise any dissenters or appraisal rights under applicable Law with respect to such Drag-Along Sale;
(d) take all necessary actions in connection with the consummation of such Drag-Along Sale as reasonably requested by the Drag Holders, including the execution and delivery of any share transfer or other agreements prepared in connection with such Drag-Along Sale, and the delivery, at the closing of such Drag-Along Sale involving a sale of Shares, of all certificates representing Shares held or controlled by such holder, duly endorsed for transfer or accompanied by a duly executed share transfer form, or affidavits and indemnity undertakings with respect to lost certificates; and
(e) approve any restructuring of the Company in connection with such Drag-Along Sale, as and if reasonably requested by the Drag Holders.
In any such Drag-Along Sale, (i) each such Dragged Holder shall make representations and warranties regarding such holders title to and ownership of the Shares, due authorization, enforceability, no violation or breach of or default by such Dragged Holder under (with or without the giving of notice or the lapse of time or both) any law or regulation applicable to such Dragged Holders or any material contract to which such Dragged Holder is a party or by which it is bound as a result of such Dragged Holder participating in the Drag-Along Sale, obtaining all requisite Consents in connection with the Drag-Along Sale, to the extent that such Consents can be obtained without incurring significant expenses, (ii) each such Dragged Holder shall bear a proportionate share (based on the relative proceeds received in such transaction) of the Drag Holders reasonable and documented fees and expenses incurred in the Drag-Along Sale transaction, including legal, accounting and investment banking fees and expenses, and if approved by such Dragged Holder, by deducting such fees and expenses from the proceeds payable to such Dragged Holder, and (iii) each such Dragged Holder shall severally, not jointly, join on a pro rata basis (based upon the relative proceeds received in such transaction) in any indemnification obligations of the Company that are part of the terms and conditions of such Drag-Along Sale (other than those that relate specifically to a particular holder, such as indemnification with respect to representations and warranties given by such holder regarding such holders title to and ownership of the Shares, due authorization, enforceability, and no conflicts, which shall instead be given solely by such holder). In no event shall a holder of Preferred Shares be required to (i) assume any obligations in connection with the Drag-Along Sale other than any customary obligations (which, for the avoidance of doubt, shall not include any non-compete provisions, non-solicitation provisions, exclusivity provisions or other restriction on the business of such holder of Preferred Shares or its Affiliates); or (ii) be liable for the inaccuracy of any representation, warranty or covenant made by, or any obligation of, any other party to the Drag-Along Sale, other than the Company.
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15.2 Other Provisions. In the event that any Dragged Holder fails for any reason to take any of the foregoing actions under this Section 15 following the Drag-Along Notice, such holder hereby grants an irrevocable power of attorney and proxy to any Director to take all necessary actions and execute and deliver all documents deemed by such Director to be reasonably necessary to effectuate the terms hereof.
15.3 Distribution of Proceeds. The proceeds from any Drag-Along Sale shall be distributed in accordance with the terms of Article 8.2(A) of the Memorandum and Articles. Each of the Shareholder hereby agrees and shall procure that the Offeror shall distribute the proceeds of such Drag-Along Sale to the Shareholders in accordance with this Section 15.3 .
15.4 Transfer Restrictions. None of the other transfer restrictions set forth herein shall apply in connection with a Drag-Along Sale, notwithstanding anything contained to the contrary herein.
16. |
Information and Inspection Rights. |
16.1 Delivery of Financial Statements. The Group Companies shall deliver to each Information Rights Holder the following documents or reports:
(a) within ninety (90) days after the end of each financial year of Jifen, a consolidated income statement and statement of cash flows for Jifen for such financial year and a consolidated balance sheet for Jifen as of the end of the financial year, prepared in accordance with the applicable Accounting Standards consistently applied throughout the period and audited and certified by the Auditor, and a management report including a comparison of the financial results of such financial year with the corresponding annual budget, all prepared in Chinese and in accordance with the Accounting Standards applicable in PRC consistently applied throughout the period; and within ninety (90) days after the end of each financial year of the Company, a consolidated income statement and statement of cash flows for the Company for such financial year and a consolidated balance sheet for the Company as of the end of the financial year, all prepared in accordance with applicable Accounting Standards consistently applied throughout the period and audited and certified by the Auditor;
(b) within forty-five (45) days of the end of each of the first three fiscal quarters, an unaudited consolidated income statement and statement of cash flows for such quarter and an unaudited consolidated balance sheet for each of the Company and Jifen as of the end of such quarter, and a comparison of the financial results of such quarter with the corresponding quarterly budget, all prepared in accordance with the applicable Accounting Standards consistently applied throughout the period (except for customary year-end adjustments and except for the absence of notes), and certified by the chief executive officer or chief financial officer of the Company;
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(c) within thirty (30) days of the end of each month, an unaudited consolidated income statement and statement of cash flows for such month and an unaudited consolidated balance sheet for each of the Company and Jifen as of the end of such month, all prepared in accordance with the applicable Accounting Standards consistently applied throughout the period (except for customary year-end adjustments and except for the absence of notes), and certified by the chief executive officer or chief financial officer of the Company;
(d) an annual budget and business plan no later than thirty (30) days prior to the beginning of each financial year, setting forth: the projected income statements for each quarter during such financial year of each Group Company; projected detailed budgets for each such quarter; any dividend or distribution projected to be declared or paid; the projected incurrence, assumption or refinancing of indebtedness; and all other material matters relating to the operation, development and business of the Group Companies;
(e) the updated capitalization of the Company within thirty (30) days of any change to the capitalization of the Company;
(f) copies of all documents or other information sent to any other Shareholders and any reports publicly filed by the Company with any relevant securities exchange or Governmental Authority, no later than five (5) days after such documents or information are filed by the Company;
(g) as soon as practicable, any other information reasonably requested by any such Information Rights Holder.
16.2 Inspection Rights. The Group Companies and the Principals covenant and agree that each Information Rights Holder who solely, or collectively with its Affiliates, hold(s) no less than three percent (3%) of the total issued Shares of the Company shall have the right, at its own expenses, to reasonably inspect facilities, properties, records and books of each Group Company at any time during regular working hours on at least fourteen (14) days prior notice to such Group Company and the right to discuss the business, operation and conditions of a Group Company with any Group Companys directors, officers, employees, accounts, legal counsels and investment bankers. Each Information Rights Holder shall exercise the foregoing inspection rights no more than four (4) times a year.
17. |
Election of Directors. |
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17.1 Board of Directors and Observer. The Company shall have, and the Parties hereto agree to cause the Company to have, a Board consisting of at least nine (9) authorized directors with the composition of the Board determined as follows: (i) the holders of a majority of the outstanding Ordinary Shares (voting as a separate class) shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time six (6) directors on the Board (each an Ordinary Director ), (ii) Chengwei shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time one (1) director on the Board (the Series A Director ), (iii) Tencent shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time one (1) director on the Board (the Series B1 Director ), (iv) the Series C2 Investor shall be exclusively entitled to designate, appoint, remove, replace and reappoint after the Series C2 Closing and from time to time one (1) director on the Board (the Series C Director ) so long as the Series C2 Investor doesnt transfer all or part of its Series C2 Preferred Shares; and (v) the Board may, by the affirmative vote of a simple majority of the directors present and voting at a Board meeting, appoint several persons as independent directors of the Company, to satisfy applicable laws, regulations or stock exchange rules. Any committee formed by the Board (except for any audit committee which will be formed upon the closing of an IPO) shall include at least the Series A Director and the Series B1 Director. For the avoidance of doubt, if the holders of a majority of the outstanding Ordinary Shares (voting as a separate class) fail to appoint all of the six (6) Ordinary Directors, Mr. Tan Siliang (谭思亮) as an Ordinary Director shall have such number of votes in addition to the one (1) vote of Tan Siliang (谭思亮) as an Ordinary Director that is equal to six (6) less the number of Ordinary Directors that have been appointed. Each of (w) the Series A1 Investor, (x) Redpoint, (y) People Better Limited and Shunwei Growth III Limited jointly and (z) Long Range L.P. shall be entitled to appoint a representative (each, an Observer , and collectively, the Observers ) to attend meetings of the Board in a nonvoting observer capacity and the Company shall give such Observers copies of all notices, minutes, consents and other materials that it provides to its directors at the same time and in the same manner as provided to such directors.
17.2 Voting Agreements.
(a) With respect to each election of directors of the Board, each holder of voting securities of the Company shall vote at each meeting of shareholders of the Company, or in lieu of any such meeting shall give such holders written consent with respect to, as the case may be, all of such holders voting securities of the Company as may be necessary (i) to keep the authorized size of the Board at least nine (9) directors, (ii) to cause the election or re-election as members of the Board, and during such period to continue in office, each of the individuals designated pursuant to Section 17.1 , and (iii) against any nominees not designated pursuant to Section 17.1 .
(b) Any Director designated pursuant to Section 17.1 may be removed from the Board, either for or without cause, only upon the vote or written consent of the Person or group of Persons then entitled to designate such Director pursuant to Section 17.1 , and the Parties agree not to seek, vote for or otherwise effect the removal of any such Director without such vote or written consent. Any Person or group of Persons then entitled to designate any individual to be elected as a Director on the Board shall have the exclusive right at any time or from time to time to remove any such Director occupying such position and to fill any vacancy caused by the death, disability, retirement, resignation or removal of any Director occupying such position or any other vacancy therein, and each other Party agrees to cooperate with such Person or group of Persons in connection with the exercise of such right. Each holder of voting securities of the Company agrees to always vote such holders respective voting securities of the Company at a meeting of the members of the Company (or give written consents in lieu thereof) in support of the foregoing.
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17.3 Board Meeting; Quorum. Subject to the provisions of the Memorandum and Articles, the Directors may regulate their proceedings as they think fit, provided however that the board meetings shall be held at least once every three (3) months unless the Board otherwise approves (so long as such approval includes the approvals of the Series A Director, the Series B1 Director and the Series C Director) and that a written notice of each meeting, agenda of the business to be transacted at the meeting and all documents and materials to be circulated at or presented to the meeting shall be sent to all Directors entitled to receive notice of the meeting at least five (5) Business Days before the meeting and a copy of the minutes of the meeting shall be sent to such Persons. A meeting of the Board shall only proceed where there are present (whether in person or by means of a conference telephone or another equipment which allows all participants in the meeting to speak to and hear each other simultaneously) a majority of the number of the Directors in office elected in accordance with Section 17.1 that includes at least (i) one (1) Ordinary Director, (ii) the Series A Director, (iii) the Series B1 Director, and (iv) the Series C Director, and the Parties shall cause the foregoing to be the quorum requirements for the Board. Notwithstanding the foregoing and subject to Section 18.2 , if notice of the board meeting has been duly delivered to all directors of the Board prior to the scheduled meeting in accordance with the notice procedures under the Charter Documents of the applicable Group Company, and the number of directors required to be present under this Section 17.3 for such meeting to proceed is not present within one half hour from the time appointed for the meeting solely because of the absence of the Series A Director, the Series B1 Director or the Series C Director, each holder of voting securities of the Company, or the applicable Group Company, as the case may be, shall procure that the directors present at the meeting shall adjourn the meeting to the seventh (7 th ) following Business Day at the same time and place (or to such other time or such other place as the directors may determine) with notice delivered to all directors three (3) Business Day prior to the adjourned meeting in accordance with the notice procedures under the Charter Documents of the applicable Group Company and, if at the adjourned meeting, the number of directors required to be present under this Section 17.3 for such meeting to proceed is not present within one half hour from the time appointed for the meeting solely because of the absence of the same Director who was absent at the initial board meeting, then the presence of such director shall not be required at such adjourned meeting solely for purpose of determining if a quorum has been established, provided that at such adjourned meeting the business not included in the notice shall not be transacted.
17.4 Expenses. The Company will promptly pay or reimburse each non-employee Board member for all reasonable out-of-pocket expenses incurred in connection with attending board or committee meetings and otherwise performing their duties as directors and committee members.
17.5 Alternates. Subject to applicable Law and this Agreement, each Director shall be entitled to appoint an alternate to serve at any Board meeting, and such alternate shall be permitted to attend all Board meetings and vote on behalf of the director for whom she or he is serving as an alternate.
17.6 Subsidiary Board. Each holder of Preferred Shares shall have the right to: (a) require that the size of the board of each Group Company (other than the Company) be of the same size as the Board and (b) to appoint a number of director(s) to the board of such Group Company equal to the number of director(s) it is entitled to appoint to the Board. Such right shall also carry the right to remove or replace the director so nominated by such holder of Preferred Shares. Each Party shall cause its nominees on the board of directors of any Group Company (whether nominated directly or through any Person) to vote in the manner duly determined by the Board and shall cause any director who fails to vote in such manner to be removed.
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17.7 Indemnification Agreement. The Company shall maintain a valid and binding Indemnification Agreement with respect to the Series A Director nominated by Chengwei, the Series B1 Director nominated by Tencent and the Series C Director nominated by the Series C2 Investor on the boards of the other Group Companies as appointed from time to time in accordance with this Section 17 . The Charter Documents of the Company shall at all times provide that the Company shall indemnify such directors to the maximum extent permitted by applicable law.
18. |
Protective Provisions. |
18.1 Acts of the Group Companies Requiring Approval of Series A Majority, Series B Majority and Series C Majority . Regardless of anything else contained herein or in the Charter Documents of any Group Company, no Group Company shall take, permit to occur, approve, authorize, or agree or commit to do any of the following, and each Party shall procure each Group Company not to, and the Shareholders of the Company shall procure the Company not to, take, permit to occur, approve, authorize, or agree or commit to do any of the following, whether in a single transaction or a series of related transactions, whether directly or indirectly, and whether or not by amendment, merger, consolidation, scheme of arrangement, amalgamation, or otherwise, unless approved in writing by the Series A Majority, the Series B Majority, Tencent (as applicable) and the Series C Majority:
(a) any amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, any series of Preferred Shares (including without limitation the change of the size or composition of the Board or the board of directors of any other Group Company);
(b) any action that creates, authorizes the creation of or issues any Equity Security or other security convertible into or exercisable for any Equity Security, or change the authorized number of shares of any series of Preferred Shares or Ordinary Shares or any reorganization or restructuring of its share capital (other than the Restructuring); provided that in case that the Company proposes a Qualified IPO, the holders of Preferred Shares or their Directors (if applicable) shall not unreasonably disapprove the proposal relating to such Qualified IPO.
(c) any purchase, repurchase, redemption or retirement of any Equity Securities, other than repurchases pursuant to share restriction agreements approved by the Board upon termination of a Director, employee or consultant;
(d) any amendment or modification to or waiver under any of the Charter Documents in a manner adverse to any series of Preferred Shares;
(e) any declaration, set aside or payment of a dividend or other distribution, or the adoption of, or any change to, the dividend policy;
(f) (i) any amendment of the maximum number of Equity Securities that may be granted under the Current ESOP; and (ii) the adoption, amendment or termination of any equity incentive, purchase or participation plan for the benefit of employees, officers, directors, contractors, advisors or consultants other than the Current ESOP (each such plan, a New ESOP );
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(g) (i) any transaction(s) with any Related Party (other than the Principals and their respective Associates and Tencent and its Affiliates), either individually or together with any other transactions with such party, having an aggregate transaction value exceeding US$3,000,000 in any financial year, (ii) any transactions with any Related Party (other than the Principals and their Associates) that are on terms that are less favorable than arms length terms for the relevant Group Company; and (iii) any transactions with a Principal or its Associate;
(h) the commencement of or consent to any proceeding seeking (i) to adjudicate it as bankrupt or insolvent, (ii) liquidation, winding up, dissolution, reorganization, or other arrangement under law relating to bankruptcy, insolvency or reorganization or relief of debtors, or (iii) the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property;
(i) any investment in, or divestiture or sale of an interest in a Subsidiary, partnership or joint venture;
(j) any transaction or a series of transactions that constitute a Share Sale or a Deemed Liquidation Event, provided that, for so long as Tencent together with its Affiliates hold more than 50% of the Series B1 Preferred Shares it acquired at the Series B1 Closing (as adjusted for share splits, share dividends, combinations, recapitalizations and similar events), the transferee, target, offeror or other counterparty to the transaction(s) shall not be any of the Restricted Persons II without prior written consent of Tencent;
(k) approval of, or any deviation from or amendment of, the annual budget or the business and financial plan;
(l) incurrence of Indebtedness or guarantees of Indebtedness in excess of 10% of the net book value of the total assets of the Group as at the end of the preceding financial year;
(m) any sale, transfer, or other disposal of, or the incurrence of any Lien on, any assets valued in excess of 10% of the net book value of the total assets of the Group as at the end of the preceding financial year;
(n) any change in the direct or indirect equity ownership of the Domestic Company or any amendment or modification to or waiver under any of the Control Documents;
(o) any material change to the business scope or nature of business, or cessation of any business line (including entering into any business not within the scope of the Business); or
(p) any action by a Group Company to authorize, approve or enter into any agreement or obligation with respect to any of the actions listed above.
Notwithstanding anything to the contrary contained herein, where any act listed in clauses (a) through (p) above requires the approval of the Shareholders of the Company in accordance with the applicable Laws, and if the Shareholders vote in favor of such act but the approval of the Series A Majority, the Series B Majority, Tencent (as applicable) or the Series C Majority has not yet been obtained, then the Series A Majority, the Series B Majority, Tencent (as applicable) or the Series C Majority shall, in such vote, have the voting rights equal to the aggregate voting power of all the Shareholders who vote in favour of the resolution plus one.
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18.2 Acts of the Group Companies Requiring Board Approval. Regardless of anything else contained herein or in the Charter Documents of any Group Company, no Group Company shall take, permit to occur, approve, authorize, or agree or commit to do any of the following, and no Party shall permit any Group Company to, and the Shareholders of the Company shall not permit the Company to, take, permit to occur, approve, authorize, or agree or commit to do any of the following, whether in a single transaction or a series of related transactions, whether directly or indirectly, and whether or not by amendment, merger, consolidation, scheme of arrangement, amalgamation, or otherwise, unless approved by the Board (which approval must include the approvals of the Series A Director, the Series B1 Director and the Series C Director):
(a) incurrence of Indebtedness or guarantees of Indebtedness in excess of the higher of (i) US$3,000,000; (ii) 5% of the net book value of the total assets of the Group as at the end of the preceding financial year in the aggregate during any financial year;
(b) purchase or lease of any business and/or assets valued in excess of the lower of (i) US$3,000,000; (ii) 5% of the net book value of the total assets of the Group as at the end of the preceding financial year in the aggregate during any financial year
(c) any capital commitment or expenditure in excess of the lower of (i) US$3,000,000; (ii) 5% of the net book value of the total assets of the Group as at the end of the preceding financial year;
(d) the investment in any other entity exceeding US$5,000,000 individually or US$10,000,000 in the aggregate during any financial year, or enter into any joint venture or partnership;
(e) appointment or removal of any auditor, material change in accounting policies or change of financial year; or
(f) any action by a Group Company to authorize, approve or enter into any agreement or obligation with respect to any of the actions listed above.
19. |
Additional Covenants. |
19.1 Business of the Group Companies. The business of each Group Company shall be restricted to the Business, except with the approval of the Board and any required approvals under Section 18 .
19.2 SAFE Registration. Each Principal and Ordinary Shareholder, where applicable, shall have complied with the registration requirements under Circular 37. As soon as practicable after the Series B1 Closing, each applicable Principal and any other holder or beneficial owner of any Equity Security of a Group Company, who is a Domestic Resident as defined in Circular 37 and is subject to any of the registration or reporting requirements of Circular 37, shall, where applicable, comply with all reporting and/or registration requirements (including filings of amendments to existing registrations) under Circular 37 and all applicable rules and regulations, and obtain an SAFE registration certificate with respect to his/her interest in the Company in form and substance satisfactory to the Series A Investors, the Series A1 Investor and Tencent.
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19.3 Control Documents. The Principals, the Principal Holding Companies, and the Group Companies shall ensure that each party to the relevant Control Documents fully perform its/his/her respective obligations thereunder and carry out the terms and the intent thereof. If any of the Control Documents becomes illegal, void or unenforceable under PRC Laws after the date hereof, the Parties shall cooperate with each other in good faith and shall devise a feasible alternative legal structure reasonably satisfactory to the Investors which gives effect to the intentions of the parties in each Control Document and the economic arrangement thereunder as closely as possible.
19.4 Control of Subsidiaries. The Company shall institute and keep in place such arrangements as are reasonably satisfactory to the Series A Majority, the Series B Majority and the Series C Majority such that the Company (i) will at all times Control the operations of each other Group Company, and (ii) will at all times be permitted to properly consolidate the financial results for each other Group Company in the consolidated financial statements for the Company prepared under the Accounting Standards.
19.5 Compliance with Laws; Registrations.
(a) The Group Companies shall, and each Principal and the Principal Holding Company shall cause the Group Companies to, conduct their respective business in compliance in all material respects with all applicable Laws, including but not limited to Laws regarding foreign investments, corporate registration and filing, import and export, customs administration, foreign exchange, telecommunication and e-commerce, intellectual property rights, labor and social welfare, and taxation, and obtain, make and maintain in effect, all Consents from the relevant Governmental Authority or other Person required in respect of the due and proper establishment and operations of each Group Company as now conducted in accordance with applicable Laws. Without limiting the generality of the foregoing, none of the Group Companies shall, and the Parties (other than the Investors) shall cause each Group Company not to, and the Parties (other than the Investors) shall ensure that its and their respective Affiliates and its respective officers, directors, and representatives shall not, directly or indirectly, (a) offer or give anything of value to any Public Official with the intent of obtaining any improper advantage, affecting or influencing any act or decision of any such Person, assisting any Group Company in obtaining or retaining business for, or with, or directing business to, any Person, or constituting a bribe, kickback or illegal or improper payment to assist any Group in obtaining or retaining business, (b) take any other action, in each case, in violation of the Foreign Corrupt Practices Act of the United States of America, as amended (as if it were a US Person), or any other applicable similar anti-corruption, recordkeeping and internal controls Laws, or (c) establish or maintain any fund or assets in which any Group Company has proprietary rights that have not been recorded in its books and records of Group Company.
(b) Without limiting the generality of the foregoing, each Principal, Principal Holding Company, and each Group Company shall ensure that all filings and registrations with the PRC Governmental Authorities so required by them shall be duly completed in accordance with the relevant rules and regulations, including without limitation any such filings and registrations with the Ministry of Commerce, the Ministry of Information Industry, the State Administration of Industry and Commerce, the State Administration for Foreign Exchange, tax bureau, customs authorities, product registration authorities, and the local counterpart of each of the aforementioned governmental authorities, in each case, as applicable.
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19.6 Current ESOP. Notwithstanding any provisions provided herein, none of the transfer restrictions set forth in this Agreement shall apply in connection with any bona fide transfer or disposal of: (a) the 10,000,000 Ordinary Shares held by Qu Word Limited to the Persons who are entitled to receive such Ordinary Shares pursuant to the 2017 ESOP and (b) the 2,964,141 Ordinary Shares reserved for the 2018 ESOP (as defined in Series B3 Share Purchase Agreement) on the date hereof to any Person, in each case, in compliance with the Current ESOP except that the transferee shall not be one of the Restricted Persons I or the Restricted Persons II without the prior written consent of Tencent.
19.7 Intellectual Property Protection. Except with the written consent of the Series A Majority, the Series B Majority and the Series C Majority, the Group Companies shall take all reasonable steps to protect their respective material Intellectual Property rights, including without limitation, registering their material respective trademarks, brand names, domain names and copyrights, and shall require each employee and consultant of each Group Company to enter into an employment agreement in form and substance reasonably acceptable to the Series A Majority, the Series B Majority and the Series C Majority, and a confidential information and intellectual property assignment agreement and a non-competition and non-solicitation agreement requiring such persons to protect and keep confidential such Group Companys confidential information, intellectual property and trade secrets, prohibiting such persons from competing with such Group Company for a reasonable time after their termination of employment with any Group Company, and requiring such persons to assign all ownership rights in their work product to the relevant Group Company, in each case in form and substance reasonably acceptable to the Series A Majority, the Series B Majority and the Series C Majority.
19.8 Non-compete. Unless the Series A Majority, the Series B Majority and the Series C Majority otherwise consent in writing, each Principal (a) so long as such Principal is an employee of or a service provider to a Group Company, shall devote his full time and attention (if he is an employee) or reasonable time and attention (if he is a service provider) to the business of the Group Companies and will use his best efforts to develop the business and interests of the Group Companies, unless an alternative arrangement is approved by the Series A Majority, the Series B Majority and the Series C Majority, and (b) so long as such Principal is a director, officer, employee or a direct or indirect holder of Equity Securities of a Group Company and for two (2) years after such Principal is no longer a director, officer, employee, service provider or a direct or indirect holder of Equity Securities of a Group Company, shall not, and shall cause his Affiliate or direct Associate not to, directly or indirectly, (i) own, manage, engage in, operate, control, work for, consult with, render services for, do business with, maintain any interest in (proprietary, financial or otherwise) or participate in the ownership, management, operation or control of, any business, whether in corporate, proprietorship or partnership form or otherwise, that competes with the businesses of the Group Companies, being the operation of mobile content aggregation platforms and any other major business operations any Group Company may engage in from time to time (a Restricted Business ); provided , however , that the restrictions contained in this clause (i) shall not apply to (X) such Principals investment in an investment fund managed by a professional management company that is not a Related Party of any of the Principals while such Principal does not hold more than 20% equity in such investment fund or management company and is not a member of the investment committee of such investment fund or management company, or (Y) such Principals passively owning, directly or indirectly, less than three percent (3%) of the outstanding share capital of any publicly traded company engaged in a Restricted Business or less than five (5)% of the outstanding share capital of any private company engaged in a Restricted Business, in each case, so long as such Principal is not a director, officer, employee or service provider of such company or otherwise participating in the management of such companys business, (ii) solicit any Person who is or has been at any time a customer of the Group Companies for the purpose of offering to such customer goods or services similar to or competing with those offered by any Group Company, or canvass or solicit any Person who is or has been at any time a supplier or licensor or customer of any Group Company for the purpose of inducing any such Person to terminate its business relationship with such Group Company, or (iii) solicit or entice away or endeavor to solicit or entice away any director, officer, consultant or employee of any Group Company. The Principals expressly agree that the limitations set forth in this Section 19.8 are reasonably tailored and reasonably necessary in light of the circumstances. Furthermore, if any provision of this Section is more restrictive than permitted by the Laws of any jurisdiction in which a Party seeks enforcement thereof, then this Section will be enforced to the greatest extent permitted by Law. Each of the undertakings contained in this Section 19.8 shall be enforceable by each of the Group Companies and each Series A Investor, Series A1 Investor, Series B1 Investor, Series B2 Investor, Series B3 Investor and Series C Investors separately and independently. For the avoidance of doubt, if the Group Companies enter into a new business that is approved in accordance with Section 18 , and any Principal has been engaged in such new business, such Principal shall duly and timely report to the Board regarding the affairs of such new business, such Principal may continue to engage in such new business and such engagement shall not be deemed to be in breach of his non-compete obligations hereunder.
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19.9 No Avoidance; Voting Trust. Each of the Principals, the Principal Holding Companies and the Group Companies will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed by it hereunder, and each of the foregoing Persons will at all times in good faith assist and take action as appropriate in the carrying out of all of the provisions of this Agreement. Each holder of Shares agrees that it shall not enter into any other agreements or arrangements of any kind with respect to the voting of any Shares or deposit any Shares in a voting trust or other similar arrangement.
19.10 Confidentiality.
(a) The terms and conditions of the Transaction Documents (collectively, the Confidential Information ), including their existence, shall be considered confidential information and shall not be disclosed by any of the Parties to any other Person except that (i) each Party (other than the Investors), as appropriate, may disclose any of the Confidential Information to its current or bona fide prospective investors, prospective permitted transferees, employees, investment bankers, lenders, accountants and attorneys, (ii) each Series A Investor and Series A1 Investor may disclose any of the Confidential Information to its shareholders, direct or indirect partners, fund manager and Affiliates of the foregoing and the employees thereof; (iii) each Series B1 Investor, each Series B2 Investor and each Series B3 Investor may disclose any of the Confidential Information to its current or bona fide prospective investors, its Affiliates and its and its Affiliates respective shareholders, partners, directors, employees or advisers (including without limitation bankers, consultants, financial advisers, accountants, legal counsels or members of advisory boards); (iv) each Series C Investor may disclose any of the Confidential Information to its current or bona fide prospective investors, its Affiliates and its and its Affiliates respective shareholders, partners, directors, employees or advisers (including without limitation bankers, consultants, financial advisers, accountants, legal counsels or members of advisory boards), so long as, in each case of (i) to (iv) above, the recipients of the disclosure are receiving such disclosure on a need-to-know basis, have been informed of the confidential nature of the Confidential Information and are under appropriate nondisclosure obligations substantially similar to those set forth herein, and (v) if any Party is requested or becomes legally compelled (including without limitation, pursuant to securities Laws) to disclose the existence or content of any of the Confidential Information in contravention of the provisions of this Section, such Party shall promptly provide the other Parties with written notice of that fact so that such other Parties may seek a protective order, confidential treatment or other appropriate remedy and in any event shall furnish only that portion of the information that is legally required and shall exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded such information.
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(b) The provisions of this Section shall replace and supersede the provisions of any separate nondisclosure agreement executed by any of the Parties hereto with respect to the transactions contemplated hereby, including without limitation, any term sheet, letter of intent, memorandum of understanding or other similar agreement entered into by the Company and the Series A Investors, the Company and the Series A1 Investor, the Company and Series B1 Investor, the Company and the Series B2 Investor(s), the Company and the Series B3 Investor(s) and the Company and the Series C Investors in each case, in respect of the transactions contemplated hereby.
19.11 Option to Purchase the Domestic Companies.
(a) The Parties hereby acknowledge and agree that, as part of the consideration for the Investors investment in the Company and other valuable consideration, the Company has the option, exercisable by the Company or any Subsidiary thereof at any time (provided that such purchase by the Company or such Subsidiary is permitted under the then applicable Laws of the PRC and the exercise timing has been agreed by Mr. Tan Siliang (谭思亮)), to purchase the entire equity interest of the Domestic Companies from the shareholders of Domestic Companies or require the shareholders of the Domestic Companies to transfer such equity interest to an Affiliate of the Company, in each case, at the lowest amount permitted under the Laws of the PRC then applicable. The Parties further agree to effect such transfer of equity interest in the Domestic Companies with respect to the Series A Investors only upon receipt of the written request of the Series A Majority, with respect to the Series B1 Investor, Series B2 Investors and Series B3 Investors the Series B Majority and with respect to the Series C Investors the Series C Majority, provided that such transfer shall at the time of such request be permissible under the Laws of the PRC then applicable.
(b) The Parties hereby acknowledge and agree that, as part of the consideration for the Investors investment in the Company and other valuable consideration, each Investor has the option, exercisable by it at any time following the occurrence of any event, occurrence, fact, condition, change or development that, in the reasonable opinion of such Investor based on objective and reasonable evidence, has had, or could reasonably be expected to have, a material adverse effect on the Captive Structure and/or the Control Documents, or that the Control Documents may no longer be valid, legal and enforceable, pursuant to applicable Laws of the PRC (a VIE Event ), to acquire, or designate an Affiliate incorporated under the Laws of the PRC to acquire, such equity interest in Jifen, whether through a subscription of the equity interest of Jifen or a transfer by the then shareholders of their respective equity interest in Jifen, in each case, at the lowest price permitted under the Laws of the PRC, such that following such acquisition, the Investors equity interest in Jifen will be the same as its then shareholding in the Company. Notwithstanding the foregoing, in the event the Series A Majority, the Series B Majority and the Series C Majority (on an as-converted basis calculated as a single class) approved an alternative arrangement, plan or other solution in response to the foregoing VIE Event (the Alternative Plan ), such that each Investors economic interests, shareholders rights and other rights, preferences and privileges originally provided in the Company could be substantially realized to a reasonable extent under such Alternative Plan, such Investor shall provide cooperation in good faith with other Parties to effect the Alternative Plan in compliance with applicable Laws. To the greatest extent permitted by applicable PRC Laws, the Principals, Principal Holdings Companies and the Group Companies agree to execute all necessary documents, make all necessary filings and take all other necessary actions to give effect to this Section 19.11(b) .
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19.12 Tencents Right to be a Shareholder of Domestic Entities. Tencent shall have the right (such right, the Equity Acquisition Right ) to acquire, at nominal value, a direct equity interest in the Domestic Company, Jifen, each wholly-owned subsidiary of the Company established in the PRC or VIE entity established by the Company from time to time and each of their respective wholly-owned subsidiaries, such equity interest to be in proportion to Tencents shareholding interest in the Company (on a non-diluted basis). Upon request by Tencent to the Company, the Company shall procure that the shareholder(s) of such entities transfer at nominal value, within 30 Business Days after Tencents request, the relevant equity interest in such company to Tencent (or its designated Affiliate), provided that Tencent (or its designated Affiliate) enters into applicable control documents that are substantially similar to the Control Documents or control documents then are entered into by the Companys other nominee shareholders at such time. If Tencent exercises the Equity Acquisition Right, then each of the Series A Investors, Series A1 Investors, Series B2 Investors, Series B3 Investors and Series C Investors may also exercise the Equity Acquisition Right, provided that: (a) the equity interest that may be acquired by it shall be in proportion to its shareholding interest in the Company (on a non-diluted basis) and (b) it shall also enter into applicable control documents described in the preceding sentence.
19.13 PFIC and CFC. (i) Immediately after the Series B1 Closing, the Company will not be a CFC. The Company shall make due inquiry with its tax advisors on at least an annual basis regarding the Companys status as a CFC and regarding whether any portion of the Companys income is subpart F income (as defined in Section 952 of the Code) ( Subpart F Income ). Each Series A Investor shall reasonably cooperate with the Company to provide information about such Series A Investor and such Series A Investors Partners in order to enable the Companys tax advisors to determine the status of such Series A Investor and/or any of such Series A Investors Partners as a United States Shareholder within the meaning of Section 951(b) of the Code. No later than 60 days following the end of each Company taxable year, the Company shall provide the following information to the Investors: (i) the Companys capitalization table as of the end of the last day of such taxable year and (ii) a report regarding the Companys status as a CFC. In addition, the Company shall provide the Investors with access to such other Company information as may be necessary for the Investors to determine the Companys status as a CFC and to determine whether Series A Investor or any of the Investors Partners is required to report its pro rata portion of the Companys Subpart F Income on its United States federal income tax return, or to allow such Investor or such Investors Partners to otherwise comply with applicable United States federal income tax laws. For purposes of the foregoing as well as the representations contained in this Section 19.13 , (i) the term Investor s Partners shall mean each of the Investors partners and any direct or indirect equity owners of such partners, and (iii) the Company shall mean the Company and any of the Group Companies.
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(ii) The Company has never been, and, to the best of its knowledge after consultation with its tax advisors, will not be with respect to its taxable year during which the Series B1 Closing occurs, a PFIC. The Company shall use its best efforts to avoid being a PFIC. In connection with a Qualified Electing Fund election made by any of Series A Investors Partners pursuant to Section 1295 of the Code or a Protective Statement filed by any of Series A Investors Partners pursuant to Treasury Regulation Section 1.1295-3, as amended (or any successor thereto), the Company shall provide annual financial information to the Investor in the form provided in the attached hereto as Exhibit C (PFIC Exhibit) (or in such other form as may be required to reflect changes in applicable law) as soon as reasonably practicable following the end of each taxable year of the Company (but in no event later than 60 days following the end of each such taxable year), and shall provide the Investor with access to such other Company information as may be required for purposes of filing U.S. federal income tax returns of Investors Partners in connection with any such Qualified Electing Fund election or Protective Statement.
(iii) The Company shall take such actions, including making an election to be treated as a corporation or refraining from making an election to be treated as a partnership, as may be required to ensure that at all times the company is classified as corporation for United States federal income tax purposes so long as such actions do not adversely affect the Investors.
(iv) The Company shall make due inquiry with its tax advisors (and shall cooperate with the Investors tax advisors with respect to such inquiry) on at least an annual basis regarding whether the Investors or any Investors Partners direct or indirect interest in the Company is subject to the reporting requirements of either or both of Sections 6038 and 6038B of the Code (and the Company shall duly inform the Investor of the results of such determination), and in the event that the Investors or any Investors Partners direct or indirect interest in Company is determined by the Companys tax advisors or the Investors tax advisors to be subject to the reporting requirements of either or both of Sections 6038 and 6038B Company agrees, upon a request from the Investor, to provide such information to the Investor as may be necessary to fulfill the Investors or Investors Partners obligations thereunder.
19.14 Anti-Dilution Rights for Series B and Series C Investors . If the Company proposes to adopt any New ESOP(s) after the Series B1 Closing, the Series B2 Closing, the Series B3 Closing, the Series C1 Closing and/or the Series C2 Closing, and the aggregate number of Ordinary Shares reserved under any such New ESOP(s) is less than or equal to 10% of the Companys share capital as at the Series B2 Closing on a fully diluted basis (i.e. 6,859,869 Ordinary Shares, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events after the B2 Closing) (the 10% ESOP Quota ), the Company shall issue to each Series B Investor and Series C Investor a number of additional Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, the Series C1 Preferred Shares, or the Series C2 Preferred Shares (with respect to a Series B1 Investor, the Series B1 Preferred Shares; with respect to a Series B2 Investor, the Series B2 Preferred Shares; with respect to a Series B3 Investor, the Series B3 Preferred Shares; with respect to a holder of the Series C1 Preferred Shares, the Series C1 Preferred Shares; and with respect to a holder of the Series C2 Preferred Shares, the Series C2 Preferred Shares) at a consideration equal to the par value of such shares at the same time as the reservation of shares for the New ESOP(s) to ensure that: (i) such Series B Investors shareholding percentage only with respect to its applicable Series B1 Preferred Shares, Series B2 Preferred Shares or Series B3 Preferred Shares in the Company and (ii) such Series C Investors shareholding percentage only with respect to the Series C Preferred Shares shall not be diluted by any such New ESOP(s) ( New ESOP Anti-dilution Right ). For the avoidance of doubt, if the number of Ordinary Shares reserved under the New ESOP(s) cumulatively exceeds the 10% ESOP Quota, the Series B Investors and the Series C Investors shall not have any New ESOP Anti-dilution Right with respect to the portion of Ordinary Shares reserved under the New ESOP(s) which exceeds the 10% ESOP Quota while each Series B Investor and each Series C Investor shall still be entitled to the New ESOP Anti-dilution Right with respect to the portion of Ordinary Shares reserved under the New ESOP(s) up to the 10% ESOP Quota. For the avoidance of doubt, any grant or exercise of such New ESOP(s) shall follow the procedures specified in the ESOP plan. The New ESOP Anti-dilution Right shall expire upon the IPO of the Company.
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19.15 Put Right for Series B Investors and Series C Investors .
(a) If Mr. Tan commits any fraud or criminal acts, each Series B Investor and Series C Investor shall have the right (the Put Right ) to sell to Mr. Tan and require Mr. Tan to purchase from such Series B Investor or Series C Investor all or part of its Preferred Shares at the purchase price equal to the applicable Redemption Price (as defined in the Memorandum and Articles) per share (the Put Consideration ).
(b) Each Series B Investor and Series C Investor may exercise the Put Right by giving written notice to Mr. Tan ( Put Notice ). The Put Notice shall include the number of Redeeming Preferred Shares that such Series B Investor intends to sell to Mr. Tan.
(c) Mr. Tan shall pay such Series B Investor or Series C Investor the Put Consideration for the number of Preferred Shares requested to be purchased in the Put Notice in immediately available funds within thirty (30) days after delivery of the Put Notice
19.16 Coin Offerings . Without the prior written approval of Tencent, the Series A Majority, the Series B Majority and the Series C Majority, no Group Company shall (a) sell, issue or distribute any Company-created digital tokens, coins or cryptocurrency (collectively, Tokens ) for fundraising purposes, whether through a Simple Agreement for Future Tokens or any other agreement, pre-sale, initial coin offering, token distribution event or crowdfunding; or (b) develop any computer network either incorporating Tokens or permitting the generation of Tokens by network participants.
19.17 Content Censorship System . If Jifen or any of its subsidiaries proposes to amend its content censorship system, it shall obtain the prior consent of the relevant management representative appointed by the Series C2 Investor to Jifen, regardless of whether the Series C2 Closing has been fully consummated.
20. |
Miscellaneous. |
20.1 Termination. This Agreement shall terminate (i) against all Parties, upon the unanimous consent of all Parties hereto, and (ii) against any one Party, if such Party ceases to own any Equity Securities of the Company. The provisions of Sections 7 through 19 (except for Section 14 , Section 19.5 and Section 19.10 ) shall terminate on the consummation of the Qualified IPO. If this Agreement terminates, the Parties shall be released from their obligations under this Agreement, except in respect of any obligation stated, explicitly or otherwise, to continue to exist after the termination of this Agreement (including those under Sections 2 through 6 and Section 19.5 , Section 19.10 and this Section 20 ). If any Party breaches this Agreement before the termination of this Agreement, it shall not be released from its obligations arising from such breach notwithstanding the termination of this Agreement.
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20.2 [Intentionally Deleted]
20.3 Further Assurances. Upon the terms and subject to the conditions herein, each of the Parties hereto agrees to use its commercially reasonable efforts to take or cause to be taken all action, to do or cause to be done, to execute such further instruments, and to assist and cooperate with the other Parties hereto in doing, all things necessary, proper or advisable under applicable Laws or otherwise to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement. Each Principal irrevocably agrees to cause each Principal Holding Company to perform and comply with all of its respective covenants and obligations under this Agreement.
20.4 Assignments and Transfers; No Third Party Beneficiaries. Except as otherwise provided herein, this Agreement and the rights and obligations of the Parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives, but shall not otherwise be for the benefit of any third party. The rights of any Investor hereunder (including registration rights) are assignable (together with the related obligations) in connection with the transfer of Equity Securities of the Company held by such Investor but only to the extent of such transfer in accordance with the provisions of this Agreement. This Agreement and the rights and obligations of each Party (other than the Investors) hereunder shall not otherwise be assigned without the mutual written consent of the Investors, except as expressly provided herein.
20.5 Governing Law. This Agreement shall be governed by and construed under the Laws of Hong Kong, without regard to principles of conflict of laws thereunder.
20.6 Dispute Resolution.
(a) Any dispute, controversy or claim (each, a Dispute ) arising out of or relating to this Agreement, or the interpretation, breach, termination, validity or invalidity thereof, shall be referred to arbitration upon the demand of the claimant to the dispute with notice (the Arbitration Notice ) to the respondent(s) to the dispute.
(b) The Dispute shall be settled by arbitration in Hong Kong by the Hong Kong International Arbitration Centre (the HKIAC ) in accordance with the Hong Kong International Arbitration Centre Administered Arbitration Rules (the HKIAC Rules ) in force when the Arbitration Notice is submitted in accordance with the HKIAC Rules. There shall be three (3) arbitrators. The claimant(s) to the dispute shall jointly select one arbitrator and the respondent(s) to the dispute shall jointly select one arbitrator. All selections shall be made within 30 days after the selecting Party gives or receives the demand for arbitration. Such arbitrators shall be freely selected, and the Parties shall not be limited in their selection to any prescribed list. The Chairman of the HKIAC shall select the third arbitrator, who shall be qualified to practice law in Hong Kong.
(c) The arbitral proceedings shall be conducted in English. To the extent that the HKIAC Rules are in conflict with the provisions of this Section, including the provisions concerning the appointment of the arbitrators, the provisions of this Section shall prevail.
(d) Each party to the arbitration shall cooperate with each other parties to the arbitration in making full disclosure of and providing complete access to all information and documents requested by such other party in connection with such arbitral proceedings, subject only to any confidentiality obligations binding on such party.
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(e) The award of the arbitral tribunal shall be final and binding upon the parties thereto, and the prevailing party may apply to a court of competent jurisdiction for enforcement of such award.
(f) The arbitral tribunal shall decide any Dispute submitted by the parties to the arbitration strictly in accordance with the substantive Laws of Hong Kong, without regard to principles of conflict of laws thereunder, and shall not apply any other substantive Law.
(g) Any party to the Dispute shall be entitled to seek preliminary injunctive relief from any court of competent jurisdiction pending the constitution of the arbitral tribunal.
(h) During the course of the arbitral tribunals adjudication of the Dispute, this Agreement shall continue to be performed except with respect to the part in dispute and under adjudication.
20.7 Notices. Any notice required or permitted pursuant to this Agreement shall be given in writing and shall be given either personally or by sending it by next-day or second-day courier service, fax, electronic mail or similar means to the address of the relevant Party as shown on Schedule C (or at such other address as such Party may designate by fifteen (15) days advance written notice to the other Parties to this Agreement given in accordance with this Section). Where a notice is sent by next-day or second-day courier service, service of the notice shall be deemed to be effected by properly addressing, pre-paying and sending by next-day or second-day service through an internationally-recognized courier a letter containing the notice, with a written confirmation of delivery, and to have been effected at the earlier of (i) delivery (or when delivery is refused) and (ii) expiration of two (2) Business Days after the letter containing the same is sent as aforesaid. Where a notice is sent by fax or electronic mail, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organization, with a written confirmation of delivery, and to have been effected on the day the same is sent as aforesaid, if such day is a Business Day and if sent during normal business hours of the recipient, otherwise the next Business Day. Notwithstanding the foregoing, to the extent a with a copy to address is designated, notice must also be given to such address in the manner above for such notice, request, consent or other communication hereunder to be effective.
20.8 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing Party shall be entitled to reasonable attorneys fees, costs and necessary disbursements in addition to any other relief to which such Party may be entitled.
20.9 Rights Cumulative; Specific Performance. Each and all of the various rights, powers and remedies of a Party hereto will be considered to be cumulative with and in addition to any other rights, powers and remedies which such Party may have at Law or in equity in the event of the breach of any of the terms of this Agreement. The exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such Party. Without limiting the foregoing, the Parties hereto acknowledge and agree irreparable harm may occur for which money damages would not be an adequate remedy in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to injunction to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement.
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20.10 Successor Indemnification. If the Company or any of its successors or assignees consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger, then to the extent necessary, proper provision shall be made so that the successors and assignees of the Company assume the obligations of the Company with respect to indemnification of members of the Board of Directors as in effect immediately before such transaction, whether such obligations are contained in the Memorandum and Articles, or elsewhere, as the case may be.
20.11 Severability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. If, however, any provision of this Agreement shall be invalid, illegal, or unenforceable under any such applicable Law in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such Law, or, if for any reason it is not deemed so modified, it shall be invalid, illegal, or unenforceable only to the extent of such invalidity, illegality, or limitation on enforceability without affecting the remaining provisions of this Agreement, or the validity, legality, or enforceability of such provision in any other jurisdiction.
20.12 Amendments and Waivers. Any provision in this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of (i) the Company; (ii) (1) the Series A Majority (in connection with any reserved matter approved in accordance with Section 18 in order to reflect the terms of the transaction contemplated under such approved reserved matter), or (2) the holders of a majority of the Series A Shares and the holders of a majority of the Series A1 Shares (in any other cases than those provided in the foregoing item (1) ); (iii) the Series B Majority; (iv) the Series C Majority, and (v) holders of at least a majority of the Ordinary Shares held by all the Principals and the Principal Holding Companies. Any amendment or waiver effected in accordance with this Section shall be binding upon all the Parties hereto. Notwithstanding the foregoing, no amendment may adversely affect any holder of an existing class of Preferred Shares in a manner that is disproportionate to the other holders of the same class of Preferred Shares, unless otherwise consented by all holders of the relevant class of Preferred Shares; and any Party may waive its rights (but not obligations) under any provision of this Agreement (either generally or in a particular instance and either retroactively or prospectively) by an instrument in writing signed by such Party without obtaining the consent of any other Party.
20.13 No Waiver. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof will not be deemed a waiver of such term, covenant, or condition, nor will any waiver or relinquishment of, or failure to insist upon strict compliance with, any right, power or remedy hereunder at any one or more times be deemed a waiver or relinquishment of such right, power or remedy at any other time or times.
20.14 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Party under this Agreement, upon any breach or default of any other Party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting Party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Party of any breach or default under this Agreement, or any waiver on the part of any Party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.
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20.15 No Presumption. The Parties acknowledge that any applicable Law that would require interpretation of any claimed ambiguities in this Agreement against the Party that drafted it has no application and is expressly waived. If any claim is made by a Party relating to any conflict, omission or ambiguity in the provisions of this Agreement, no presumption or burden of proof or persuasion will be implied because this Agreement was prepared by or at the request of any Party or its counsel.
20.16 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Facsimile and e-mailed copies of signatures shall be deemed to be originals for purposes of the effectiveness of this Agreement.
20.17 Entire Agreement. This Agreement (including the Schedules hereto) constitutes the full and entire understanding and agreement among the Parties with regard to the subjects hereof and thereof, and supersedes all other agreements between or among any of the Parties with respect to the subject matter hereof, including but not limited to the Series B3 Shareholders Agreement.
20.18 Control. In the event of any conflict or inconsistency between any of the terms of this Agreement and any of the terms of any of the Charter Documents for any of the Group Companies (other than Article 28A of the Memorandum and Articles, which shall not be deemed to be a conflict or inconsistency with this Agreement), or in the event of any dispute related to any such Charter Document, the terms of this Agreement shall prevail in all respects, the Parties shall give full effect to and act in accordance with the provisions of this Agreement over the provisions of the Charter Documents, and the Parties hereto shall exercise all voting and other rights and powers (including to procure any required alteration to such Charter Documents to resolve such conflict or inconsistency) to make the provisions of this Agreement effective, and not to take any actions that impair any provisions in this Agreement.
20.19 Adjustments for Share Splits, Etc . Wherever in this Agreement there is a reference to a specific number of Shares of the Company, then, upon the occurrence of any subdivision, combination or share dividend of the relevant class or series of the Shares, the specific number of shares so referenced in this Agreement shall automatically be proportionally adjusted, as appropriate, to reflect the effect on the outstanding shares of such class or series of Shares by such subdivision, combination or share dividend.
20.20 Grant of Proxy. Upon the failure of any Principal or Principal Holding Company to vote its Equity Securities of the Company held thereby, to implement the provisions of and to achieve the purposes of this Agreement, such Principal or Principal Holding Company hereby grants to a Person designated by the Company a proxy, coupled with an interest in all Equity Securities of the Company held by such Principal or Principal Holding Company, which proxy shall be irrevocable until this Agreement terminates pursuant to its terms or this Section is amended to remove such grant of proxy in accordance with Section 20.20 hereof, to vote all such Equity Securities to implement the provisions of and to achieve the purposes of this Agreement.
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20.21 Future Significant Holders. If so requested by the Board, the Company shall cause a future holder of more than one percent (1%) of the Ordinary Shares or a future holder of Equity Securities (other than Preferred Shares) convertible, exchangeable or exercisable for more than one percent (1%) of the Ordinary Shares (in any case, as designated by the Series A Majority, the Series B Majority and the Series C Majority jointly) to enter into this Agreement and become subject to the terms and conditions hereof as a Principal. The Parties hereto hereby agree that such future holders shall become parties to this Agreement by executing a joinder deed in substantially the form attached hereto as Exhibit A , without any amendment of this Agreement, or any consent or approval of any other Party, provided that the scanned copy of such joinder deed shall be sent to each of the Investor upon and after its execution.
20.22 No Use of Name.
(a) Notwithstanding anything to the contrary in this Agreement, without the prior written consent of any Investor, and whether or not it or any Affiliate thereof is then a Shareholder of the Company, no Party (other than such Investor and its Affiliates) shall, or shall permit any Affiliate thereof to, use, publish or reproduce the name or logo of such Investor or any similar name, trademark or logo in any manner, context or format (including references on or links to websites, in press releases, or in other public announcements); and
(b) Without limiting the generality of the foregoing, without the prior written consent of Tencent, and whether or not Tencent or any of its Affiliates is then a shareholder of the Company, none of the Parties shall, and each Party shall cause its Affiliates and the Group Companies not to:
(i) use in advertising, publicity, announcements, or otherwise the name of Tencent, 腾讯, QQ, Wechat, 微信 or any Affiliate of Tencent, either alone or in combination thereof, including 微信, wechat, RTX, 腾讯企业邮EXMAIL.QQ.COM, 微信朋友圈, 微信电视, Tencent腾讯, QQ, imqq.com, QQ秀/QQSHOW, WWW.QQ.COM, QQmusic/QQ音乐, QQ空间, tencent image, 小Q, QQ彩贝/彩贝联盟, 小Q书桌, 微云/腾讯微云, QQ会员, 爱马哥, QQShowSHOW.QQ.COM, Q影, 腾讯印象, 同步助手, 腾讯云, 应用宝, 财付通, QQ电脑管家, 腾讯手机管家, 安全管家, 酷抠族COOL, 路宝/腾讯路宝, QQ浏览器, 微众, 腾讯游戏/腾讯互动娱乐Tencent Interactive Entertainment, 洛克王国Roco Kingdom, 斗战神ASURA, QQ炫舞, QQ西游QQXY.QQ.COM, QQ飞车, 英雄杀YXS.QQ.COM, AI战士AI.QQ.COM, 功夫西游, 逆战NZ.QQ.COM, QQ游戏QQGAME.QQ.COM, Q游记, 功夫企鹅, Q游记17Q.QQ.COM, 腾讯原创动漫AC.QQ.COM, 趣西游, 众神争霸, 天天酷跑, 天天爱消除, 天天连萌, 全民三国, 天天飞车, 腾讯文学Tencent Literature, 腾讯网, FUN秀, 小拇指, 腾讯微漫画, 碰星球PUNG, 翻秀, 腾讯儿童DIY微漫画, 潮童范儿, 广点通, 微彩票518.qq.com, QQ彩票888.QQ.COM, 腾讯微公益基金, 新年新衣, 筑梦新乡村, 米大师, 铜关Tongguan, 益行家, 王者荣耀 , 腾讯地图, 天天快报, TIM, FOXMAIL, 自选股, 疾风之刃, JOOX, VOOV, 理财通, Ipick, the associated devices and logos of the above brands, or any company name, trade name, trademark, service mark, domain name, device, design, symbol or any abbreviation, contraction or simulation thereof owned or used by Tencent or any of its Affiliates; or
58
(ii) represent, directly or indirectly, that any product or services provided by any Group Company or any of their respective Affiliates has been approved or endorsed by Tencent or any of its Affiliates.
(iii) Without the prior written consent of People Better Limited ( Xiaomi ) or any of its Affiliate (if applicable), and whether or not Xiaomi then holds any Shares of the Company, none of the Group Companies or any shareholders of the Group Companies shall, by itself or by instructing a third party, use, publish or reproduce the name or logo of Xiaomi, including but not limited to 雷 军 , 小米, 小米商城,小米网,红米,米兔,米, 米家, 小米生态链,MI, mi, Xiaomi, MIUI, MIJIA, or any other names, trademarks or logos that are registered under the name of Xiaomi or its Affiliates.
20.23 Use of English Language. This Agreement has been executed and delivered in the English language. Any translation of this Agreement into another language shall have no interpretive effect. All documents or notices to be delivered pursuant to or in connection with this Agreement shall be in the English language or, if any such document or notice is not in the English language, accompanied by an English translation thereof, and the English language version of any such document or notice shall control for purposes thereof.
20.24 Aggregation of Shares. All the Shares held by any Investor or its Affiliates shall be aggregated for the purposes of determining the availability of any rights of such Investor under this Agreement.
20.25 Liability.
(a) The liabilities of the Investors (including their respective successors, permitted assigns and transferees) under this Agreement shall be several, and not joint or joint and several.
(b) Notwithstanding any provision to the contrary in Section 7.7(iv) ( Indemnity ) of the Series A Share Purchase Agreement, Section 7.7(iv) ( Indemnity ) of the Series A1 Share Purchase Agreement, Section 7.6(d) ( Indemnity ) of the Series B1 Share Purchase Agreement, Section 7.6(d) ( Indemnity ) of the Series B2 Share Purchase Agreement, Section 7.6(d) ( Indemnity ) of the Series B3 Share Purchase Agreement and Section 7.6(d) ( Indemnity ) of the Series C Share Purchase Agreements, the aggregate indemnification liability of a Principal under Section 7.7 ( Indemnity ) of the Series A Share Purchase Agreement, Section 7.7 ( Indemnity ) of the Series A1 Share Purchase Agreement, Section 7.6 ( Indemnity ) of the Series B1 Share Purchase Agreement, Section 7.6(d) ( Indemnity ) of the Series B2 Share Purchase Agreement, Section 7.6(d) ( Indemnity ) of the Series B3 Share Purchase Agreement or Section 7.6(d) ( Indemnity ) of the Series C Share Purchase Agreements with respect to any Investor seeking indemnification (including all of its relevant Indemnified Parties (as defined in the Series A Share Purchase Agreement, the Series A1 Share Purchase Agreement, the Series B1 Share Purchase Agreement, the Series B2 Share Purchase Agreement, the Series B3 Share Purchase Agreement, and the Series C Share Purchase Agreements, as applicable)) shall be limited to an amount equal to: the fair market value of all the Ordinary Shares then held by such Principal in the Company (through his Principal Holding Company), multiplied by a fraction, the numerator of which is the number of the applicable Preferred Shares then held by such Investor, and the denominator of which is the aggregate number of issued and outstanding Preferred Shares then held by all the Investors seeking indemnification (in each case, on an as-converted basis).
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IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
GROUP COMPANIES : | Qutoutiao Inc. | |||||||
By: |
/s/ Tan Siliang |
|||||||
Name: | Tan Siliang (谭思亮) | |||||||
Title: | Director | |||||||
InfoUniversal Limited | ||||||||
By: |
/s/ Tan Siping |
|||||||
Name: | Tan Siping (谭思萍) | |||||||
Title: | Director | |||||||
上海趣蕴网络科技有限公司 | ||||||||
By: |
/s/ Li Lei |
|||||||
Name: | Li Lei (李磊) | |||||||
Title: | Legal Representative | |||||||
上海基分文化传播有限公司 | ||||||||
By: |
/s/ Chen Sihui |
|||||||
Name: | Chen Sihui (陈思晖) | |||||||
Title: | Legal Representative |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
GROUP COMPANIES : | 上海溪客信息技术服务有限公司 | |||||||
By: |
/s/ Li Lei |
|||||||
Name: | Li Lei (李磊) | |||||||
Title: | Legal Representative | |||||||
上海推乐信息技术服务有限公司 | ||||||||
By: |
/s/ Chen Sihui |
|||||||
Name: | Chen Sihui (陈思晖) | |||||||
Title: | Legal Representative | |||||||
安徽掌端网络科技有限公司 | ||||||||
By: |
/s/ Li Lei |
|||||||
Name: | Li Lei (李磊) | |||||||
Title: | Legal Representative | |||||||
北京趣看点网络科技有限公司 | ||||||||
By: |
/s/ Li Lei |
|||||||
Name: | Li Lei (李磊) | |||||||
Title: | Legal Representative | |||||||
上海点冠网络科技有限公司 | ||||||||
By: |
/s/ Liang Xiang |
|||||||
Name: | Liang Xiang (梁湘) | |||||||
Title: | Legal Representative |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
PRINCIPALS: | Tan Siliang ( 谭思亮 ) | |||
/s/ Tan Siliang |
||||
Li Lei ( 李磊 ) | ||||
/s/ Li Lei |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
PRINCIPAL COMPANIES : | Innotech Overseas Investment Ltd. | |||||||
By: |
/s/ Tan Siping |
|||||||
Name: | Tan Siping (谭思萍) | |||||||
Title: | Director | |||||||
Innotech Group Holdings Ltd. | ||||||||
By: |
/s/ Tan Siping |
|||||||
Name: | Tan Siping (谭思萍) | |||||||
Title: | Director | |||||||
News Optimizer (BVI) Ltd. | ||||||||
By: |
/s/ Li Lei |
|||||||
Name: | Li Lei (李磊) | |||||||
Title: | Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES A INVESTORS : | ||||||||
CW_toutiao Limited | ||||||||
By: |
/s/ Aline Moulia |
|||||||
Title: | Authorized Signatory | |||||||
Name: | Aline Moulia |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES A INVESTORS : | ||||||||
xInternet Limited | ||||||||
By: |
/s/ Tong Anqi |
|||||||
Name: Tong Anqi | ||||||||
Title: Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES A INVESTORS : | ||||||||
ACE Redpoint Ventures China I, L.P. | ||||||||
By: ACE Redpoint Ventures China I GP, L.P., its general partner |
||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: | David Egglishaw | |||||||
Title: | Director | |||||||
ACE Redpoint Associates China I, L.P. | ||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: | David Egglishaw | |||||||
Title: | Director | |||||||
ACE Redpoint China Strategic I, L.P. | ||||||||
By: ACE Redpoint Ventures China I GP, L.P., its general partner |
||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: | David Egglishaw | |||||||
Title: | Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES A1 INVESTOR : | ||||||||
CMC Queen Holdings Limited | ||||||||
By: |
/s/ Peter LI CHUAN |
|||||||
Title: Authorized Signatory | ||||||||
Name: | Peter LI CHUAN |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
Morning Sea Limited | ||||||||
By: |
/s/ Qi Yujie |
|||||||
Name: Qi Yujie | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
Pebble Capital Management Limited | ||||||||
By: |
/s/ GAO Rong |
|||||||
Name: GAO Rong | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
Precious Lead Limited | ||||||||
By: |
/s/ JIA Huili |
|||||||
Name: JIA Huili | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
Double Excel Investment Limited | ||||||||
By: |
/s/ Jiang Rose |
|||||||
Name: Jiang Rose | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
L&L LIMITED | ||||||||
By: |
/s/ Li Jialin |
|||||||
Name: Li Jialin | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
Eton International Investment Limited | ||||||||
By: |
/s/ HU Weijun |
|||||||
Name: HU Weijun | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
EASTWEST HOLDINGS GROUP CO., LTD. | ||||||||
By: |
/s/ LING CHAO |
|||||||
Name: LING CHAO | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
ACE Redpoint Ventures China I, L.P. | ||||||||
By: ACE Redpoint Ventures China I GP, L.P., its general partner |
||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: | David Egglishaw | |||||||
Title: | Director | |||||||
ACE Redpoint Associates China I, L.P. | ||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: | David Egglishaw | |||||||
Title: | Director | |||||||
ACE Redpoint China Strategic I, L.P. | ||||||||
By: ACE Redpoint Ventures China I GP, L.P., its general partner |
||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: | David Egglishaw | |||||||
Title: | Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
SHANG QIANG LIMITED | ||||||||
By: |
/s/ XU IVAN |
|||||||
Name: XU IVAN | ||||||||
Title: Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
Advantage Ace Investment Limited | ||||||||
By: |
/s/ WONG KOK WAI |
|||||||
Name: WONG KOK WAI | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : | ||||||||
Membrane Star LLC | ||||||||
By: |
/s/ GONG Jie |
|||||||
Name: GONG Jie | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : |
||||||||
Qu World Limited |
||||||||
By: |
/s/ Stephen Pak |
|||||||
Name: | Stephen Pak | |||||||
Title: | Authorized Representative |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
ORDINARY SHAREHOLDER : |
||||||||
Under Blinky Hold Limited | ||||||||
By: |
/s/ LIU Wei |
|||||||
Name: | LIU Wei | |||||||
Title: | Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B1 INVESTOR : | ||||||||
Image Flag Investment (HK) Limited | ||||||||
By: |
/s/ Ma Huateng |
|||||||
Name: | Ma Huateng | |||||||
Title: |
Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR : |
Long Range L.P. |
|||||||
By its general partner, Green Vision Partners Limited |
||||||||
By: |
/s/ WONG KOK WAI |
|||||||
Name: | WONG KOK WAI | |||||||
Title: |
Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR : |
People Better Limited |
|||||||
By: |
/s/ Chew Shouzi |
|||||||
Name: | Chew Shouzi | |||||||
Title: | Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR : |
Shunwei Growth III Limited |
|||||||
By: |
/s/ Tuck Lye KOH |
|||||||
Name: Tuck Lye KOH | ||||||||
Title: Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR : |
Shanghai ChuangVest Venture Investment |
|||||||
Partnership (Limited Partnership) ( 上海创伴创业投 资合伙企业 ( 有限合伙 )) |
||||||||
By: |
/s/ LU Yihao |
|||||||
Name: LU Yihao | ||||||||
Title: Managing Partner |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR : |
Double Excel Investment Limited |
|||||||
By: |
/s/ Jiang Rose |
|||||||
Name: Jiang Rose | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR : |
Lighthouse Capital International Inc. |
|||||||
By: |
/s/ ZHENG Xuanle |
|||||||
Name: ZHENG Xuanle | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR: |
CMC Queen Holdings Limited |
|||||||
By: |
/s/ Peter Li Chuan |
|||||||
Name: Peter Li Chuan | ||||||||
Title: Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B2 INVESTOR : | ||||||||
ACE Redpoint Ventures China I, L.P. |
||||||||
By: ACE Redpoint Ventures China I GP, L.P.,
its general partner |
||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: David Egglishaw | ||||||||
Title: Director | ||||||||
ACE Redpoint Associates China I, L.P. |
||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: David Egglishaw | ||||||||
Title: Director | ||||||||
ACE Redpoint China Strategic I, L.P. |
||||||||
By: ACE Redpoint Ventures China I GP, L.P., its general partner |
||||||||
By: ACE Redpoint Ventures China I GP, Ltd., its general partner |
||||||||
By: |
/s/ David Egglishaw |
|||||||
Name: David Egglishaw | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B3 INVESTOR : |
Harvest Ceres Fund, LP |
|||||||
By: |
/s/ QIU Xiaochuan |
|||||||
Name: QIU Xiaochuan | ||||||||
Title: Authorized Signatory |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B3 INVESTOR : |
Hundreds ANTA Fund Limited Partnership |
|||||||
By: Hundreds Capital its general partner |
||||||||
By: |
/s/ HE Yanqing |
|||||||
Name: HE Yanqing | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES B3 INVESTOR : |
Vision Global Capital Limited |
|||||||
By: |
/s/ ZHU Dapeng |
|||||||
Name: ZHU Dapeng | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES C1 INVESTOR : |
CG Partners Opportunity Fund SP, a segregated portfolio of CG Partners Fund SPC |
|||||||
By: |
/s/ Yang Yan |
|||||||
Name: Yang Yan | ||||||||
Title: Director |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
SERIES C1 INVESTOR : |
Shimmering Horizon L.P.
by its general partner Shimmering Investment (BVI) Ltd. |
|||||||
By: |
/s/ Shasha Han |
|||||||
Name: Shasha Han (韩莎莎) | ||||||||
Title: Director |
Exhibit 5.1
4 September 2018 | Our Ref: YX/AWL/Q0297-H16602 |
Qutoutiao Inc.
11/F, Block 3
XingChuang Technology Center
Shen Jiang Road 5005
Pudong New Area
Shanghai 200120
Peoples Republic of China
Dear Sir or Madam
Qutoutiao Inc.
We have acted as Cayman Islands legal advisers to Qutoutiao Inc. (the Company ) in connection with the Registration Statement (as defined in Schedule 1), filed with the Securities and Exchange Commission pursuant to Rule 462(b) under the U.S. Securities Act of 1933, as amended, relating to the offering by the Company of American depositary shares (the ADSs ) representing the Companys Class A ordinary shares of a par value of US$0.0001 each (the Ordinary Shares ). We are furnishing this opinion as exhibit 5.1 to the Registration Statement.
For the purposes of giving this opinion, we have examined and relied upon the originals, copies or translations of the documents listed in Schedule 1.
In giving this opinion we have relied upon the assumptions set out in Schedule 2, which we have not independently verified.
We are Cayman Islands Attorneys at Law and express no opinion as to any laws other than the laws of the Cayman Islands in force and as interpreted at the date of this opinion. We have not, for the purposes of this opinion, made any investigation of the laws, rules or regulations of any other jurisdiction. Except as explicitly stated herein, we express no opinion in relation to any representation or warranty contained in any of the documents cited in this Opinion nor upon matters of fact or the commercial terms of the transactions the subject of this Opinion.
Based upon the foregoing examinations and assumptions and upon such searches as we have conducted and having regard to legal considerations which we consider relevant, and subject to the qualifications set out in Schedule 3, and under the laws of the Cayman Islands, we give the following opinions in relation to the matters set out below.
1. |
The Company is an exempted company duly incorporated with limited liability, validly existing under the laws of the Cayman Islands and in good standing with the Registrar of Companies in the Cayman Islands (the Registrar ). |
WALKERS |
2. |
Based on our review of the A&R M&A (as defined in Schedule 1), the authorised share capital of the Company, with effect immediately prior to the completion of the Companys initial public offering of the ADSs representing the Ordinary Shares, will be US$50,000 divided into 50,000,000 Class A Ordinary Shares of par value of US$0.0001 each, 34,248,442 Class B Ordinary Shares of par value of US$0.0001 each and 415,751,558 shares of par value of US$0.0001 each of such class or classes (however designated) as the Board of Directors may determine in accordance with the A&R M&A. |
3. |
The issue and allotment of the Ordinary Shares pursuant to the Registration Statement has been duly authorised. When allotted, issued and fully paid for as contemplated in the Registration Statement and when appropriate entries have been made in the Register of Members of the Company, the Ordinary Shares will be validly issued, allotted and fully paid, and there will be no further obligation on the holder of any of the Ordinary Shares to make any further payment to the Company in respect of such Ordinary Shares. |
4. |
The statements under the caption Taxation in the prospectus forming part of the Registration Statement, to the extent that they constitute statements of Cayman Islands law, are accurate in all material respects. Such statements constitute our opinion. |
We hereby consent to the use of this opinion in, and the filing hereof, as an exhibit to the Registration Statement and to the reference to our firm under the headings Enforceability of Civil Liabilities, Legal Matters and elsewhere in the prospectus included in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the U.S. Securities Act of 1933, as amended, or the Rules and Regulations of the Commission thereunder.
This opinion is limited to the matters referred to herein and shall not be construed as extending to any other matter or document not referred to herein.
This opinion shall be construed in accordance with the laws of the Cayman Islands.
Yours faithfully
/ S / W ALKERS
WALKERS
Page 2
WALKERS |
SCHEDULE 1
LIST OF DOCUMENTS EXAMINED
1. |
The Certificate of Incorporation dated 17 July 2017, Certificate of Incorproation on Change of Name dated 11 July 2018, Fifth Amended and Restated Memorandum and Articles of Association as adopted on 29 August 2018 and effective immediately prior to the consummation of the Series C1 Closing (the Memorandum and Articles ) and Sixth Amended and Restated Memorandum and Articles of Association as conditionally adopted by special resolution on 4 September 2018 and effective immediately prior to the completion of the initial public offering of the Companys ADSs representing its Ordinary Shares (the A&R M&A ), the Register of Members and Register of Directors of the Company, copies of which have been provided to us by its registered office in the Cayman Islands (together the Company Records ). |
2. |
A Certificate of Good Standing dated 2 August 2018 in respect of the Company issued by the Registrar (the Certificate of Good Standing ). |
3. |
A copy of executed written resolutions of the Board of Directors of the Company dated 17 August 2018 (the First Board Resolutions ), a copy of executed written resolutions of the Board of Directors of the Company dated 4 September 2018 (the Second Board Resolutions ), and a copy of executed written resolutions of the shareholders of the Company dated 4 September 2018 (the Shareholder Resolutions , together with the First Board Resolutions and the Second Board Resolutions, the Resolutions ). |
4. |
A certificate from a director of the Company dated 4 September 2018, a copy of which is attached hereto (the Directors Certificate ). |
5. |
The Companys registration statement on Form F-1 (the Registration Statement ). |
Page 3
WALKERS |
SCHEDULE 2
ASSUMPTIONS
1. |
The originals of all documents examined in connection with this opinion are authentic. All documents purporting to be sealed have been so sealed. All copies are complete and conform to their originals. Any translations are a true translation of the original document they purport to translate. |
2. |
The Company Records are complete and accurate and all matters required by law and the Memorandum and Articles to be recorded therein are completely and accurately so recorded. |
3. |
The contents of the Directors Certificate are true and accurate as at the date of this opinion and there is no information not contained in the Directors Certificate that will in any way affect this Opinion. |
4. |
The conversion of the any shares in the capital of the Company will be effected via legally available means under Cayman law. |
Page 4
WALKERS |
QUALIFICATIONS
1. |
Our opinion as to good standing is based solely upon receipt of the Certificate of Good Standing issued by the Registrar. The Company shall be deemed to be in good standing under section 200A of the Companies Law on the date of issue of the certificate if all fees and penalties under the Companies Law have been paid and the Registrar has no knowledge that the Company is in default under the Companies Law. |
2. |
We accept no responsibility for any liability in relation to any opinion which was given in reliance on the Directors Certificate. |
Page 5
Qutoutiao Inc.
11/F, Block 3
XingChuang Technology Center
Shen Jiang Road 5005
Pudong New Area
Shanghai 200120
Peoples Republic of China
4 September 2018
Walkers
15 th Floor
Alexandra House
18 Chater Road, Central
Hong Kong
Dear Sirs,
Qutoutiao Inc. (the Company) Directors Certificate
I, Eric Siliang Tan, being a director of the Company, am aware that you are being asked to provide a legal opinion (the Opinion ) in relation to certain aspects of Cayman Islands law. Capitalised terms used in this certificate have the meaning given to them in the Opinion. I hereby certify that:
1. |
the Sixth Amended and Restated Memorandum and Articles of Association as conditionally adopted by special resolution on 4 September 2018 and effective immediately prior to the completion of the initial public offering of the Companys ADSs representing its Ordinary Shares remain unamended; |
2. |
the Shareholder Resolution were executed (and where by a corporate entity such execution has been duly authorised if so required) by and on behalf of all shareholders in the manner prescribed in the articles of association of the Company, the signatures and initials thereon are those of a person or persons in whose name the resolutions have been expressed to be signed, are in full force and effect at the date hereof and have not been amended, varied or revoked in any respect; |
3. |
the Board Resolutions were executed by all the directors in the manner prescribed in the articles of association of the Company, the signatures and initials thereon are those of a person or persons in whose name the resolutions have been expressed to be signed, are in full force and effect at the date hereof and have not been amended, varied or revoked in any respect; and |
4. |
there is no contractual or other prohibition (other than as arising under Cayman Islands law) binding on the Company prohibiting it from issuing and allotting the Ordinary Shares. |
I confirm that you may continue to rely on this Certificate as being true and correct on the day that you issue the Opinion unless I have previously notified you personally to the contrary.
[Signature Page to Follow]
Signature: | /s/ Eric Siliang Tan | |
Name: | Eric Siliang Tan | |
Director |
Exhibit 8.1
Simpson Thacher & Bartlett LLP
425 LEXINGTON AVENUE
NEW YORK, NY 10017-3954
TELEPHONE: +1-212-455-2000
FACSIMILE: +1-212-455-2502
September 4, 2018
Qutoutiao Inc.
11/F, Block 3, XingChuang Technology Center
Shen Jiang Road 5005
Pudong New Area, Shanghai, 200120
Peoples Republic of China
Ladies and Gentlemen:
We have acted as U.S. counsel to Qutoutiao Inc., a Cayman Islands company (the Company), in connection with the registration statement on Form F-1 (File No. 333-226913) (the Registration Statement), filed on the date hereof by the Company with the U.S. Securities and Exchange Commission (the Commission) under the U.S. Securities Act of 1933, as amended, relating to the registration of Class A ordinary shares, par value US$0.0001 per share, of the Company (ordinary shares), which will be represented by American depositary shares (ADSs) evidenced by American depositary receipts.
We have examined the Registration Statement (including the form of prospectus contained therein (the Prospectus)) and a form of deposit agreement among the Company, The Bank of New York Mellon, as depositary, and holders from time to time of ADSs (the Deposit Agreement), including the form of American depositary receipt. In addition, we have examined, and have relied as to matters of fact upon, originals, or duplicates or certified or conformed copies, of such records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such other and further investigations as we have deemed necessary or appropriate as a basis for the opinion hereinafter set forth. In such examination, we have assumed the accuracy of the factual matters described in the Registration Statement. We have also assumed that the Deposit Agreement will be executed in the form reviewed by us, that the Deposit Agreement will be a valid and legally binding obligation of each of the parties thereto and that all ordinary shares are validly issued and fully paid.
BEIJING | HONG KONG | HOUSTON | LONDON | LOS ANGELES | PALO ALTO | SÃO PAULO | SEOUL | TOKYO |
WASHINGTON, D.C. |
Qutoutiao Inc. | Simpson Thacher & Bartlett LLP |
In rendering the opinion set forth below, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as duplicates or certified or conformed copies and the authenticity of the originals of such latter documents.
Based upon the foregoing, and subject to the qualifications, assumptions and limitations stated herein and in the Prospectus, we hereby confirm that the discussion set forth in the Prospectus under the caption Taxation Certain United States Federal Income Tax Considerations, insofar as such discussion relates to matters of United States federal income tax law, constitutes our opinion as to the United States federal income tax consequences to United States Holders (as such term is defined in the Prospectus) of the ownership and disposition of the Companys ADSs and ordinary shares.
We note that, because the determination of the Companys status as a passive foreign investment company (a PFIC) for United States federal income tax purposes is based on an annual determination that cannot be made until the close of a taxable year, and involves extensive factual investigation, we do not express any opinion herein with respect to the Companys PFIC status in any taxable year.
We do not express any opinion herein concerning any law other than the United States federal income tax law.
2
Qutoutiao Inc. | Simpson Thacher & Bartlett LLP |
We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement and to the reference to our firm under the heading Taxation in the Prospectus.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT LLP
SIMPSON THACHER & BARTLETT LLP
3
Exhibit 10.1
QUTOUTIAO INC.
FORM OF INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the Agreement) is entered into as of by and between Qutoutiao Inc., a Cayman Islands company (the Company) and the undersigned, a [director/officer] of the Company (Indemnitee).
RECITALS
1. The Company recognizes that highly competent persons are becoming more reluctant to serve corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against risks of claims and actions against them arising out of their services to the corporation.
2. The Board of Directors of the Company (the Board) has determined that the inability to attract and retain highly competent persons to serve the Company would be detrimental to the best interests of the Company and its shareholders and that it is reasonable and necessary for the Company to provide adequate protection to such persons against risks of claims and actions against them arising out of their services to the Company.
3. The Company and Indemnitee do not regard the indemnities available under the Companys memorandum and articles of association, as now or hereinafter in effect (the Articles of Association) as adequate to protect Indemnitee against the risks associated with his service to the Company.
4. The Company is willing to indemnify Indemnitee to the fullest extent permitted by applicable law, and Indemnitee is willing to serve and continue to serve the Company on the condition that he be so indemnified.
AGREEMENT
In consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
I. |
Definitions |
The following terms shall have the meanings defined below:
Change in Control shall be deemed to have occurred if, on or after the date of this Agreement, (i) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act)), other than (a) a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity; (b) a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of ordinary shares of the Company; or (c) any current beneficial shareholder or group, as defined by Rule 13d-5 of the Exchange Act, including the heirs, assigns and successors thereof, of beneficial ownership, within the meaning of Rule 13d-3 of the Exchange Act, of securities possessing more than 50% of the total combined voting power of the Companys outstanding securities; hereafter becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 20% of the total combined voting power represented by the Companys then outstanding ordinary shares, (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Companys shareholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the ordinary shares of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into ordinary shares of the surviving entity) at least 80% of the total voting power represented by the ordinary shares of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Companys assets.
1
Disinterested Director means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
Expenses shall include damages, judgments, fines, penalties, settlements and costs, attorneys fees and disbursements and costs of attachment or similar bond, investigations, liabilities, losses, taxes, any expenses paid or incurred in connection with investigating, defending, being a witness in, participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding, and any taxes, interests, assessments or other charges imposed as a result of the actual or deemed receipt of any payments under this Agreement; provided that if the Indemnitee provides his or her primary professional services based on an hourly fee rate (the Hourly Rate), the Expenses shall also include the product of the amount of time he or she shall spend for any Proceeding and the effective Hourly Rate.
Indemnifiable Event means any event or occurrence that takes place either before or after the execution of this Agreement, related to the fact that Indemnitee is or was a director or an officer of the Company, or any subsidiary or consolidated variable interest entity of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other entity, including services with respect to employee benefit plans, or was a director or officer of an entity that was a predecessor of the Company or another entity at the request of such predecessor entity, or related to anything done or not done by Indemnitee in any such capacity.
Independent Counsel means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five (5) years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitees rights under this Agreement.
2
Participant means a person who is a party to, or witness or participant (including on appeal) in, a Proceeding.
Proceeding means any threatened, pending, or completed action, suit or proceeding, or any inquiry, hearing or investigation, whether civil, criminal, administrative, investigative or other, including any appeal thereof, in which Indemnitee may be or may have been involved as a party or otherwise by reason of an Indemnifiable Event, including, without limitation, any threatened, pending, or completed action, suit or proceeding by or in the right of the Company.
Reviewing Party means (i) the Board by a majority vote of a quorum consisting of Disinterested Directors, or (ii) if a quorum of the Board consisting of Disinterested Directors is not obtainable or, even if obtainable, said Disinterested Directors so direct, Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee.
II. |
Agreement To Indemnify |
1. General Agreement . In the event Indemnitee was, is, or becomes a Participant in, or is threatened to be made a Participant in, a Proceeding, the Company shall indemnify the Indemnitee from and against any and all Expenses which Indemnitee incurs or becomes obligated to incur in connection with such Proceeding, to the fullest extent permitted by applicable law, even if such indemnification is not specifically authorized by the other provisions of this Agreement or any other agreement, the Articles of Association, or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Cayman Islands company to indemnify a member of its Board of Directors or an officer, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Cayman Islands company to indemnify a member of its Board of Directors or an officer, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties rights and obligations hereunder except as set forth in Section 3 hereof.
2. Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of Expenses, but not for the total amount of Expenses, the Company shall indemnify the Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
3. Exclusions . Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not be entitled to indemnification under this Agreement:
3
(a) to the extent that payment is actually made to Indemnitee under a valid, enforceable and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance policy;
(b) to the extent that Indemnitee is fully indemnified and actually paid other than pursuant to this Agreement;
(c) in connection with any Proceeding initiated by Indemnitee against the Company, any director or officer of the Company or any other party, and not by way of defense, unless (i) the Company has joined in or the Reviewing Party (as defined herein) has consented to the initiation of such Proceeding; or (ii) the Proceeding is one to enforce indemnification rights under this Agreement or any applicable law;
(d) to the extent the Proceeding is brought about by the conduct of the Indemnitee that is finally adjudicated to (i) have been knowingly fraudulent or deliberately dishonest or to have constituted willful misconduct, and (ii) be material to the cause of action so adjudicated;
(e) for any judgment, fine or penalty which the Company is prohibited by applicable law from paying as indemnity;
(f) arising out of Indemnitees personal tax matter; or
(g) arising out of Indemnitees breach of an employment agreement with the Company (if any) or any other agreement with the Company or any of its subsidiaries.
4. No Employment Rights . Nothing in this Agreement is intended to create in Indemnitee any right to continued employment with the Company.
5. Contribution . If the indemnification provided in this Agreement is unavailable and may not be paid to the Indemnitee for any reason other than those set forth in Section II. 3, then the Company shall contribute to the amount of Expenses paid in settlement actually and reasonably incurred and paid or payable by the Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and by the Indemnitee on the other hand from the transaction from which such Proceeding arose, and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the events which resulted in such Expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnitee on the other hand shall be determined by reference to, among other things, the parties relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section II. 5 were determined by pro rata allocation or by any other method of allocation which does not take account of the foregoing equitable considerations.
4
III. |
Indemnification Process |
1. Notice and Cooperation By Indemnitee . Indemnitee shall give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be given in accordance with Section VI.7 below. In addition, Indemnitee shall give the Company such information and cooperation as the Company may reasonably request.
2. Indemnification Payment .
(a) Advancement of Expenses . Indemnitee may submit a written request with reasonable particulars to the Company requesting that the Company advance to Indemnitee all Expenses that may be reasonably incurred in advance by Indemnitee in connection with a Proceeding. The Company shall, within ten (10) business days of receiving such a written request by Indemnitee, advance all requested Expenses to Indemnitee. Any excess of the advanced Expenses over the actual Expenses will be repaid to the Company.
(b) Reimbursement of Expenses . To the extent Indemnitee has not requested any advanced payment of Expenses from the Company, Indemnitee shall be entitled to receive reimbursement for the Expenses incurred in connection with a Proceeding from the Company as soon as practicable after Indemnitee makes a written request to the Company for reimbursement.
(c) Determination by the Reviewing Party . Notwithstanding the foregoing, (i) the obligations of the Company under Section II.1 shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the Independent Counsel referred to in Section III.2(e) hereof is involved) that the Indemnitee would not be permitted to be indemnified under applicable law or the Companys Articles of Association, and (ii) the obligation of the Company to make an advance payment of Expenses to the Indemnitee pursuant to Section III. 2(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law or the Companys Articles of Association, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that the Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advanced Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). The Indemnitees obligation to reimburse the Company for any advanced Expenses shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control, the Reviewing Party shall be selected by the Board, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Companys Board who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Counsel referred to in Section III.2(e) hereof.
5
(d) Enforcement of Indemnification Rights . If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, or if Indemnitee has not otherwise been paid in full within 30 days after a written demand has been received by the Company, Indemnitee shall have the right to commence litigation in any court having subject matter jurisdiction thereof and in which venue is proper to recover the unpaid amount of the demand (an Enforcement Proceeding) and, if successful in whole or in part, Indemnitee shall be entitled to be paid any and all Expenses in connection with such Enforcement Proceeding. The Company hereby consents to service of process and to appear in any such proceeding.
(e) Change in Control . The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Companys Board who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitees to payments of Expenses under this Agreement or any other agreement or under the Companys Articles of Association, Independent Counsel shall be selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law, and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
3. Assumption of Defense . In the event the Company is obligated under this Agreement to advance or bear any Expenses for any Proceeding against Indemnitee, the Company shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, upon delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee in writing and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, unless (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have reasonably concluded that, based on written advice of counsel, there may be a conflict of interest of such counsel retained by the Company between the Company and Indemnitee in the conduct of any such defense, or that counsel selected by the Company may not be adequately representing Indemnitee, or (iii) the Company ceases or terminates the employment of such counsel with respect to the defense of such Proceeding, in any of which events the fees and expenses of Indemnitees counsel shall be at the expense of the Company. At all times, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitees expense.
4. Defense to Indemnification, Burden of Proof and Presumptions . It shall be a defense to any action brought by Indemnitee against the Company to enforce this Agreement that it is not permissible under this Agreement or applicable law for the Company to indemnify the Indemnitee for the amount claimed. In connection with any such action or any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified under this Agreement, the burden of proving such a defense or determination shall be on the Company. Neither the failure of the Reviewing Party or the Company to have made a determination prior to the commencement of such action by Indemnitee that indemnification is proper under the circumstances because Indemnitee has met the standard of conduct set forth in applicable law, nor an actual determination by the Reviewing Party or the Company that Indemnitee had not met such applicable standard of conduct shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
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5. No Settlement Without Consent . Neither party to this Agreement shall settle any Proceeding in any manner that would impose any damage, loss, penalty or limitation on Indemnitee without the other partys written consent. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement.
6. Company Participation . Subject to Section II.5, the Company shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial action if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense, conduct and/or settlement of such action.
IV. |
Director and Officer Liability Insurance |
1. Liability Insurance . The Company shall obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses incurred in connection with their services to the Company or to ensure the Companys performance of its indemnification obligations under this Agreement. To the extent the Company determines that it is no longer practicable for the Company to maintain such insurances, it shall notify promptly its directors and officers before it terminates such insurances and such termination must be approved by the majority of the Companys directors.
2. Coverage of Indemnitee . To the extent the Company maintains an insurance policy or policies providing directors and officers liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any of the Companys directors or officers.
3. No Obligation . Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain any director and officer insurance policy if a majority of the Companys directors determines in good faith that such insurance is not reasonably available in the case that (i) premium costs for such insurance are disproportionate to the amount of coverage provided, (ii) the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or (iii) Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company.
V. |
Non-Exclusivity; Federal Preemption; Term |
1. Non-Exclusivity . The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Articles of Association, any vote of shareholders or directors, applicable law or any written agreement between Indemnitee and the Company (including its subsidiaries and affiliates). The indemnification provided under this Agreement shall continue to be available to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in any such capacity at the time of any Proceeding.
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2. Federal Preemption . Notwithstanding the foregoing, both the Company and Indemnitee acknowledge that in certain instances, U.S. federal law or public policy may override applicable law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Such instances include, but are not limited to, the U.S. Securities and Exchange Commissions prohibition on indemnification for liabilities arising under certain U.S. federal securities laws. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the U.S. Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Companys right under public policy to indemnify Indemnitee.
3. Duration of Agreement . All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer and/or a director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding by reason of his former or current capacity at the Company or any other enterprise (including service with respect to employee benefit plans) at the Companys request, whether or not he is acting or serving in any such capacity at the time any Expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer and/or a director of the Company or any other enterprise at the Companys request.
VI. |
Miscellaneous |
1. Amendment of this Agreement . No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall operate as a waiver of any other provisions (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided in this Agreement, no failure to exercise or any delay in exercising any right or remedy shall constitute a waiver.
2. Subrogation . In the event of payment to Indemnitee by the Company under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company to bring suit to enforce such rights.
3. Assignment; Binding Effect . Neither this Agreement nor any of the rights or obligations hereunder may be assigned by either party hereto without the prior written consent of the other party; except that the Company may, without such consent, assign all such rights and obligations to a successor in interest to the Company which assumes all obligations of the Company under this Agreement in a written agreement in form and substance satisfactory to Indemnitee. Notwithstanding the foregoing, this Agreement shall be binding upon and inure to the benefit of and be enforceable by and against the parties hereto and the Companys successors (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or assets of the Company) and assigns, as well as Indemnitees spouses, heirs, and personal and legal representatives.
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4. Severability and Construction . Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Companys inability, pursuant to a court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. In addition, if any portion of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by applicable law. The parties hereto acknowledge that they each have opportunities to have their respective counsels review this Agreement. Accordingly, this Agreement shall be deemed to be the product of both of the parties hereto, and no ambiguity shall be construed in favor of or against either of the parties hereto.
5. Counterparts . This Agreement may be executed in two (2) counterparts, both of which taken together shall constitute one instrument.
6. Governing Law . This agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of New York, U.S.A., without giving effect to conflicts of law provisions thereof.
7. Notices . All notices, demands, and other communications required or permitted under this Agreement shall be made in writing and shall be deemed to have been duly given if delivered by hand, against receipt, on the date of delivery, or mailed, on the third business day after mailing, postage prepaid, certified or registered mail, return receipt requested, and addressed to the Company at:
Qutoutiao Inc.
11/F, Block 3, XingChuang Technology Center
Shen Jiang Road 5005
Pudong New Area, Shanghai 200120
Peoples Republic of China
Attention: Mr. Jingbo Wang
and to Indemnitee at:
[Name]
[Address]
[Address]
[Address]
Notice of change of address shall be effective only when done in accordance with this Section.
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8. Certain Relationships . The obligations and rights created under this Agreement shall not be affected by any amendment to the Companys Articles of Association or any other agreement or instrument to which Indemnitee is not a party, and shall not diminish any other rights which Indemnitee now or in the future has against the Company or any other person or entity.
9. Acknowledgment . The Company expressly acknowledges that it has entered into this Agreement and assumed the obligations imposed on the Company under this Agreement in order to induce Indemnitee to serve or to continue to serve as a director or officer and acknowledges that Indemnitee is relying on this Agreement in serving or continuing to serve in such capacity. The Company further agrees to stipulate in any court proceeding that the Company is bound by all of the provisions of this Agreement.
10. Period of Limitations . No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, or Indemnitees estate, heirs, executors, administrators or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.
11. Entire Agreement . This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof.
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto execute this Agreement as of the date first written above.
QUTOUTIAO INC. |
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Name: Title: |
INDEMNITEE |
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Name: |
Exhibit 10.2
QUTOUTIAO INC.
FORM OF EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement, dated as of [*], 2018 (this Agreement), is executed by and between Qutoutiao Inc., an exempted company with limited liability incorporated and existing under the laws of the Cayman Islands (the Company) and (holding passport of with passport number of /PRC Identification Card No. ) (the Executive).
RECITALS
The Company desires to employ the Executive, and the Executive agrees to be employed by the Company, and act as of the Company, all pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. |
TERM OF EMPLOYMENT |
1.1 |
The Company shall employ the Executive to take the position as set forth in Article 2 hereof, perform the duties and responsibilities as set forth in Article 2 hereof, and render services to the Company during a term of five (5) years commencing on [*], 2018 and ending on [*], 2023 (the Term) . The Term may be early terminated pursuant to the provisions of Articles 4 and 5 hereof. |
2. |
POSITION, DUTIES AND RESPONSIBILITIES |
2.1 |
Position . The Executive shall be employed and act as the of the Company with all responsibilities that are customary for such officer, as well as other responsibilities reasonably assigned to the Executive by the Company. The Executive may take position in any Affiliate (as defined in Article 2.2 hereof) of the Company and is hereby appointed as of , an Affiliate of the Company, subject to the approval of such appointment by the board of directors of such Affiliate, and shall initially work in Shanghai, China. The entity in which the Executive takes position and the location where the Executive works may be appropriately adjusted according to the operative demands of the Company in the future. The Executive shall use his/her best efforts to perform his/her duties and shall comply with all applicable laws, regulations and rules as well as the memorandum and articles of association and corporate and business policies and procedures of the Company. The Executive shall adhere to good business ethics and practices and shall not take advantage of his/her position for personal gains. |
2.2 |
For the purpose of this Agreement, Affiliate means any entity directly or indirectly controlled by the Company. For the purpose of this Article, Control means the direct or indirect possession of the power to direct or cause to direct the management and policies of such entity, whether through ownership of voting securities, by contract or otherwise, including, without limitation, (a) the direct or indirect ownership of 50% or more of the outstanding stocks or other equity interests issued by such entity, (b) direct or indirect ownership of the 50% or more voting power of such entity, or (c) the power to appoint, directly or indirectly, a majority of the members of the board of directors or other similar decision-making organization of such entity. |
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2.3 |
Voting Restriction . If the Executive is elected as a director of the Company, the Executive shall refrain from voting, in his/her capacity of a director of the Company, on matters in relation to his/her employment or termination of his/her employment at meetings of the board of directors of the Company. |
2.4 |
Other Activities . Except with the prior written approval of the Company, the Executive shall not render commercial or professional services of any nature to any person or organization, whether or not for compensation; and the Executive will not directly or indirectly engage, participate, invest, finance or otherwise assist in any business activity that is potentially competitive in any manner with the business of the Company or any Affiliate or any business activity that may cause the Executive to be in conflict of interest with the Company or any Affiliate, whether or not for profit. |
3. |
COMPENSATION AND BENEFITS |
As full consideration for the services to be provided by the Executive under this Agreement and as full compensation for the obligations and restrictions to be imposed on the Executive by this Agreement, the Company shall or have its Affiliate in which the Executive holds a position, as the case may be, pay the Executive, and the Executive agrees to accept, the base salary, bonus, share option and other incentive programs, and other benefits as set forth in this Article 3.
3.1 |
Base salary . The Company shall pay base salaries to the Executive in the amount and by the means as set forth in Part I of Exhibit A hereof. |
3.2 |
Bonus . The Executive may be entitled to the performance-based bonus as set forth in Part II of Exhibit A hereof. |
3.3 |
Share Options and Other Incentive Programs . The Executive shall be eligible to participate in any share option or other incentive program available to officers or employees of the Company as determined by the Company. |
3.4 |
Benefits . The Executive will be eligible to receive any benefit as the Company or the Affiliate with which the Executive works generally provides to its other employees of comparable position in accordance with the benefit plans established and amended from time to time at its sole discretion by the Company or such Affiliate, including without limitation, various mandatory health care, insurance and pension plans required in the jurisdiction where the Company or such Affiliate is located. |
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4. |
TERMINATION BY THE COMPANY. |
4.1 |
Termination for Cause . For purposes of this Agreement, unless otherwise provided under applicable laws, Cause will exist at any time after the occurrence of one or more of the following events: (a) the Executive commits willful misconduct or gross negligence in performance of his duties hereunder (Malfeasance) and fails to correct such Malfeasance within a reasonable period specified by the Company after the Company has sent the Executive a written notice demanding correction within such a period; (b) the Executive has committed Malfeasance and has caused serious losses and damages to the Company; (c) the Executive seriously violates the internal rules of the Company and fails to correct such violation within a reasonable period specified by the Company after the Company has sent the Executive a written notice demanding correction within such a period; (d) the Executive has seriously violated the internal rules of and has caused serious losses and damages to the Company; (e) the Executive is convicted by a court of competent jurisdiction/a competent governmental authority or has pleaded guilty of theft, fraud or other criminal offense/administrative misconduct; or (f) the Executive seriously breaches his/her duty of loyalty to the Company or an Affiliate under the laws of the Cayman Islands, the PRC or other relevant jurisdictions. The Company may terminate the employment of the Executive for Cause at any time without prior written notice. Upon termination, the Company shall pay all compensation of the Executive accrued up to the date of termination pursuant to Article 3 hereof and severance payments as expressly required by applicable law; provided, however, that the Company may deduct and withhold any amount it is entitled to as damages under applicable laws. Thereafter, all obligations of the Company under this Agreement shall terminate. |
4.2 |
Termination without Cause . The Company may terminate the Executives employment by a one-month prior written notice. Upon termination, the Company shall pay all compensation of the Executive accrued up to the date of termination pursuant to Article 3 hereof; provided, however, that the Company may deduct and withhold any amount it is entitled to as damages under applicable laws. Thereafter, all obligations of the Company under this Agreement shall terminate. |
4.3 |
Termination By Reason of Death . The employment of the Executive by the Company shall be automatically ceased upon the death of the Executive. In the event that employment of the Executive by the Company terminates as a result of the Executives death, the Executives estate or heirs will receive all unpaid compensation accrued as of the date of the termination of the employment as provided in Article 3 hereof; provided that, the Company may deduct and withhold any amount it is entitled to as damages under applicable laws. Thereafter, all obligations of the Company under this Agreement shall terminate. Nothing contained herein shall prevent the estate or heirs of the Executive from being entitled to any interest or other applicable benefits under any life insurance programs (if any). If the death of the Executive occurs during the performance of his/her duties for the Company, the Company shall pay to the appropriate beneficiaries a special compensation at an amount to be determined by the Company which shall not exceed the annual base salary of the Executive as set forth in Article 3.1 hereof. |
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4.4 |
Termination By Reason of Disability . In the event that the Executive is entitled to long-term disability benefits of the Company, or in the event that, in the judgment of the Company, the Executive is not able to perform his/her duties for 90 consecutive days or 120 days or longer in a 12-month period due to his/her physical or psychological problems, the Company may terminate the Executives employment, provided that such termination is permitted by the law. Upon termination, the Company shall pay all compensation of the Executive accrued up to the date of termination pursuant to Article 3 hereof; provided, however, that the Company may deduct and withhold any amount it is entitled to as damages under applicable laws. Thereafter, all obligations of the Company under this Agreement shall terminate. The provisions of this Article 4.3 shall not affect the Executives rights under any disability program that he/she participates (if any). |
5. |
TERMINATION BY THE EXECUTIVE |
5.1 |
The Executive may voluntarily terminate his/her employment with the Company with or without cause by a one-month prior written notice. During such one-month notice period, the Executive shall continue to perform diligently his/her duties and responsibilities under this Agreement. The Company shall have the discretion to terminate its employment with the Executive prior to the last day of such one-month period; provided that the Company shall have paid the Executive all of his/her compensation accrued through the last day of such one-month period pursuant to Article 3 hereof; provided further that the Company may deduct and withhold any amount it is entitled to as damages under applicable laws. Thereafter, the Companys obligations hereunder shall terminate. In such case, the Company shall not be responsible for paying any severance pay or other benefits to the Executive. |
6. |
RESPONSIBILITIES UPON TERMINATION |
6.1 |
Return of Documents . The Executive agrees to promptly return to the Company all documents and materials in any form received by the Executive by virtue of his/her employment with the Company upon or prior to the termination of his/her employment with the Company, including, without limitation, all originals and copies of any Proprietary Information as defined in Article 8 hereof as well as any part thereof, together with all equipment and other tangible or intangible assets of the Company. The Executive agrees not to retain any document or material that contains such Proprietary Information or any copy thereof. |
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6.2 |
Survival . The Executive further agrees that (a) all representations, warranties and obligations under Articles 6, 7, 8, 9, 11 and 14 hereof shall survive the termination or expiration of the Term; (b) all representations, warranties and obligations under Articles 6, 7, 8, 9, 11 and 14 hereof shall also survive the termination of this Agreement; and (c) after termination or expiration of the Term, the Executive shall use his/her best efforts to cooperate with the Company in connection with such surviving obligations, including, without limitation to, completion of outstanding work on behalf of the Company, transfer of his/her assignments to designated employees of the Company, and defense of the Company against claims raised by any third party in connection with any action or negligence of the Executive during his employment with the Company. |
7. |
RESTRICTED ACTIVITIES |
7.1 |
No-use of Proprietary Information . The Executive acknowledges that to conduct any activity restricted in this Article will certainly involve the use or disclosure of Proprietary Information as defined in Article 8 hereof and consequently result in a breach of such Article, and it will be difficult to directly demonstrate a breach of Article 8 hereof. Therefore, in order to prevent the Executive from using or disclosing the Proprietary Information as defined in Article 8 and as a condition to employing the Executive, the Executive agrees that during his/her employment with the Company and for a period of two year after the termination or expiration of the employment, the Executive shall not, directly or indirectly: |
(a) |
refer or attempt to refer to any third party any business in which the Company or its Affiliates currently engage or will likely engage or participate, including, without limitation, solicitation or provision of any business or services that are essentially similar to the business of the Company or its Affiliates on behalf of any individual, company or other entity who was then an existing or prospective customer, supplier or partner of the Company or its Affiliates. |
(b) |
seek to solicit the services of any employees who is employed by the Company or its Affiliates on or after the date of the Executives termination, or in the year preceding such termination, without the prior written consent of the Company. |
7.2 |
Non-Competition |
(a) |
During the Restrictive Period set forth in Article 7.2(b) hereof, the Executive shall not, directly or indirectly, engage in any manner in any business that may compete with the business of the Company or its Affiliates anywhere in the world, and without the prior written consent of the Company, the Executive shall not, directly or indirectly, anywhere in the world, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, principal, licensor, consultant or otherwise, any person that competes with the Company or its Affiliates. During the Restrictive Period, the Executive shall not approach financial institutions, dealers or other persons or entities introduced to the Executive in his or her capacity as a representative of the Company for the purpose of doing business with such persons or entities that will harm the Companys business relationships with these persons or entities. |
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(b) |
In this Article 7.2, Restricted Period shall mean the Term of this Agreement and two (2) year after the expiration or early termination thereof. |
(c) |
In the event that the Executive is in breach of the provisions of Article 7.2(a) hereof, the Restricted Period shall be extended by the length of the period of such breach. |
(d) |
The Executive acknowledges that the compensation to be paid by the Company shall have contained any and all economic consideration for each and all obligations of the Executive under this Article 7.2. |
7.3 |
Enforceability . Each covenant contained in this Article 7 constitutes an independent covenant, and if any covenant in unenforceable, other covenants shall continue to be valid and binding. In the event the term of any restriction or the territorial restriction contained in this Article 7 is finally determined by a competent court to have exceeded the maximum extent deemed reasonable and enforceable by such court, then this Agreement shall be amended as such to adopt the longest term or largest territory deemed by such court to be enforceable. |
7.4 |
Independent Covenant . All covenants contained in this Article 7 shall be interpreted as a separate agreement independent of other provisions of this Agreement. Any lawsuit or claim brought by the Executive against the Company (whether by virtue of this Agreement or any other agreement) shall not constitute a defense against the enforcement of this Article 7 by the Company. |
8. |
PROPRIETARY INFORMATION |
8.1 |
The Executive agrees that during his/her employment with the Company and within two (2) years after termination of his/her employment with the Company, he/she will keep in strict confidence all Proprietary Information and, without the prior written consent of the Company, will not use or disclose to any individual, entity or company the Proprietary Information other than the use or disclosure for the purposes of performing his/her duties and responsibilities and in favor of the Company or pursuant to applicable law to the extent necessary. Proprietary Information shall mean any proprietary, confidential or secret information disclosed to the Executive in connection with the Company, the business of the Company, or subsidiaries, Affiliates, customers or business partners of the Company or their respective businesses, or any third party to which the Company has confidentiality obligation (the Related Party) or its business. Such Proprietary Information shall include, without limitation, trade secrets, manuals, hardware, customers personal information, terms of business agreements and contracts, research materials, business strategies, personnel information, market information, technical materials, forecasts, promotion, financial and other business information of the Company or the Related Parties, no matter such information is directly or indirectly disclosed to the Executive in writing, orally, in the form of image or object or otherwise. The Executive understands that the Proprietary Information does not include any of the foregoing that has become known to the public other than as a result of disclosure by the Executive in breach hereof. |
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9. |
INTELLECTUAL PROPERTY |
9.1 |
Inventions Retained and Licensed . Exhibit B of this Agreement sets forth all inventions which were made by the Executive prior to his/her employment with the Company (collectively, the Prior Inventions), including all processes, inventions, technology, original works of authorship, developments, improvements, formulas, patents, discoveries, copyrights and trade secrets. Such Prior Inventions, which belong to the Executive and are related to the Companys proposed business, products or research and development, are not assigned to the Company hereunder. In case that there is no Prior Invention listed in Exhibit B hereof, the Executive hereby confirms that no Prior Invention exist. If in the course of his/her employment with the Company, the Executive incorporates into a Company product, process, machine or other project a Prior Invention owned by the Executive or in which the Executive has an interest, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use, sell and engage in other actions with respect to such Prior Invention as part of or in connection with such product, process or machine. |
9.2 |
Assignment of Inventions . The Executive agrees that he/she will promptly make full written disclosure to the Company in confidence, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, without further compensation, all his/her right, title, and interest in and to any and all inventions, designs, original works of authorship, developments, concepts, improvements or trade secrets, whether or not patentable or registrable under copyright or similar laws, which the Executive may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time the Executive is in the employment of the Company and within twelve (12) months after the termination or expiration of the employment (collectively referred to as Inventions), except as provided in Article 9.3 below. The Executive further agrees to use best efforts to assist the Company in obtaining and enforcing patents, copyrights and other legal rights for these Inventions. The Executive further agrees that all patentable and copyrightable works which are made by the Executive (solely or jointly with others) within the scope of and during the period of his/her employment with the Company, are works made for hire and the Executive hereby assigns all proprietary rights, including patent and copyright, in these works to the Company without further compensation. |
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9.3 |
Unrelated Inventions . Inventions as referenced to in Article 9.2 hereof does not include inventions which the Executive can demonstrate to be developed entirely on his/her own time without using the Companys equipment, supplies, facilities or trade secret information (the Unrelated Inventions), unless those inventions that are either (i) related at the time of conception or reduction to practice of the invention to the Companys business, or actual or demonstrably anticipated research or development of the Company, or (ii) result from any work performed by Executive for the Company. The Executive agrees to disclose promptly to the Company all such Unrelated Inventions and to provide the Company or its assignee first rights of refusal to license such disclosed Unrelated Inventions within three (3) months after his/her disclosure of such Unrelated Inventions based on commercially negotiated terms. |
9.4 |
Maintenance of Records . The Executive agrees to keep and maintain adequate and current written records of all Inventions made by the Executive (solely or jointly with others) during the term of his/her employment with the Company. The records will be in the form of notes, sketches, drawings, and any other format that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times. |
9.5 |
Patent and Copyright Registrations . |
(a) |
The Executive agrees to assist the Company, or its designee, upon the instruction of the Company, in every proper way to secure the Companys rights in the Inventions and any copyrights, patents or other intellectual property rights relating thereto in any and all countries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which the Company shall deem necessary in order to apply for and obtain such rights and in order to assign and convey to the Company, its successors, assigns, and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights, patents or other intellectual property rights relating thereto. |
(b) |
The Executive further agrees that his/her obligation to execute or cause to be executed any such instrument or papers shall continue after the termination of this Agreement. If the Company is unable because of the Executives mental or physical incapacity or for any other reason to secure his/her signature to apply for or to pursue any application for any domestic or foreign patents or copyright registrations covering Inventions assigned to the Company as above, then the Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as his/her agent and attorney in fact, to act for and in his/her behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations thereon with the same legal force and effect as if executed by the Executive. |
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10. |
INFORMATION OF PREVIOUS EMPLOYER |
10.1 |
The Executive agrees that during his/her employment with the Company he/she will not inappropriately use or disclose any proprietary information or trade secrets owned by any previous employer of the Executive or any other individual or entity obtained prior to his/her employment with the Company, nor will he/she bring to the Company any such non-public document or proprietary information. |
11. |
INFORMATION OF THIRD PARTIES |
11.1 |
The Executive hereby acknowledges that the Company has received and may continue to receive from third parties confidential or proprietary information. The Executive agrees to keep in strict confidence all of such confidential or proprietary information in his/her possession and to refrain from using or disclosing to any individual, entity or company such confidential or proprietary information, except that such use or disclosure is in compliance with the agreement between the Company and such third party and is necessary for the performance of relevant work on behalf of the Company. |
12. |
NO-CONFLICT |
12.1 |
The Executive represents and warrants that the execution by the Executive of this Agreement, the employment with the Company, and the performance by the Executive of his/her duties and responsibilities pursuant to this Agreement will not breach any of his/her legal or contractual obligation to any prior employer of the Executive or any other parties, including, without limitation, any obligation in respect of proprietary or confidential information or intellectual property rights of such party. |
13. |
FOREIGN CORRUPTION ACT |
13.1 |
The Executive agrees to diligently adhere to the Foreign Corrupt Practices Act attached as Exhibit E hereof. |
13.2 |
The Executive agrees and promises not to provide or offer any remuneration, gift, service or article of value to any government officials (including working stuff or employees of any government or administrative agencies, political parties or candidates) of any country for any reason. The Executive further agrees and promises that the Executive will not accept any remuneration in the form of cash or other tangible objects from any person in performing his/her duties under this Agreement other than the compensation specified in Article 3 of this Agreement. The Executive promises that all conducts of the Executive under this Agreement shall be in compliance with all relevant laws, regulations and administrative rules of the Peoples Republic of China at all times. |
9
14. |
MISCELLANEOUS |
14.1 |
Continuing Obligation . If the Executive is employed by any existing or future Affiliate of the Company at any time, or provides services to such Affiliate, or otherwise retained by such Affiliate, then the obligations under this Agreement shall continue to apply. Any reference to the Company shall include such Affiliate. In the event that this Agreement expires or terminates for any reason, the Executive shall immediately resign from any position at such Affiliate of the Company, unless otherwise required by the Company. |
14.2 |
Notice to Employer . The Executive hereby authorizes the Company to notify the relevant provisions of this Agreement and the Executives obligations under this Agreement to the actual or future employer of the Executive (including the Affiliate with which the Executive will work). |
14.3 |
Right to Name and Image . The Executive hereby authorizes the Company to use, or authorize any other person to use, once or from time to time during his/her employment with the Company, the names, photos, images (including cartoons), voices and resume of the Executive as well as photocopies and duplicates thereof in any media now known or developed in the future (including but not limited to movies, videos, digital or any other electronic media) for purposes as may be deemed appropriate by the Company. |
14.4 |
Legal Fees . In any dispute arise from or in connection with this Agreement, the winning party shall be entitled to be reimbursed for reasonable legal fees. |
14.5 |
Amendments, Extension and Waiver . This Agreement may not be amended, revised, extended or terminated unless by a written instrument executed by the Executive or a duly authorized representative of the Company (excluding the Executive). Any failure or delay to assert any right, remedy or power shall not be construed as a waiver of such right, remedy or power. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. |
14.6 |
Transfer; Successors and Assigns . The Executive agrees that he/she will not transfer, sell, assign or otherwise dispose of (whether voluntarily, involuntarily or by operation of law) any rights or interests under this Agreement, and the rights of the Executive shall not be subject to any security interest or creditors claims. Any such transfer, assign or other disposal shall be invalid. Nothing contained in this Agreement shall prevent the Company from merging into or with any other company or selling all or substantially all of the assets of the Company, or transfer this Agreement or any obligation under this Agreement. In the event of any change in the ownership interest or the control of the Company, the provisions of this Agreement shall continue to apply and shall be binding upon any successors. Notwithstanding and subject to the foregoing, this Agreement shall be valid and binding upon, and inure to the benefit of, the successor, representative, heirs and permitted assigns of each party, and shall not vest in any other individual or entity any interest. |
10
14.7 |
Notice . All notices or other communications under this Agreement shall be made in writing and delivered to the following addresses or any other addresses designated by each party in writing from time to time: |
To the Company:
Address: | 11/F, Block 3, XingChuang Technology Center | |
Shen Jiang Road 5005 | ||
Pudong New Area, Shanghai 200120 | ||
Peoples Republic of China | ||
Attention: Mr. Jingbo Wang |
To the Executive:
Address:
Fax:
Attention of:
Any notice shall be deemed to have been delivered:
(a) |
If by hand or courier, on the date of actual delivery; |
(b) |
If by prepaid and registered mail, on the fourth business days after the date of dispatch; or |
(c) |
If by fax, on the date on which the fax is transmitted (as evidenced by the confirmatory report with fax number, pages transmitted and date of transmission). |
14.8 |
Severability; Enforceability . If all or any portion of any provision of this Agreement as applied to any person, to any place or to any circumstance shall be ruled by an arbitration commission or a court of competent jurisdiction to be invalid, illegal or incapable of being enforced, the same shall in no way affect (to the maximum extent permissible by Law) that provision or the remaining portions of that provision as applied to any parties, places or circumstances or any other provisions of this Agreement or the validity or enforceability of this Agreement as a whole. |
14.9 |
Governing Law . This Agreement shall be governed and construed in accordance with the laws of the Peoples Republic of China. |
14.10 |
Language . This Agreement is written and executed in English. |
14.11 |
Originals . This Agreement is executed by the parties in two originals. Each of the parties will hold one original, and the two originals shall be equally valid. |
11
The Executive acknowledges that (a) he/she has consulted or has the opportunity to consult with independent counsel of his choice regarding this Agreement, and the Company has suggested that he/she do so and (b) he/she has read and understands this Agreement, fully understands its legal effect, and has entered into this Agreement voluntarily in his/her own judgment. The Executive hereby agrees that the obligations under Articles 7, 8 and 9 hereof and the definition of the Proprietary Information contained in those provisions shall also apply to the Proprietary Information relating to any work performed for the Company prior to the execution of this Agreement.
[Signatures Page to Follow]
12
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first written above.
QUTOUTIAO INC. |
By: |
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Name: |
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Title: |
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EXECUTIVE |
By: |
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Name: |
EXHIBIT A
Compensation
Part I. Base Salary
Part II. Bonus
EXHIBIT B
Prior Inventions
Exhibit 10.21
SERIES C2 PREFERRED SHARE PURCHASE AGREEMENT
THIS SERIES C2 PREFERRED SHARE PURCHASE AGREEMENT (this Agreement ) is made and entered into on August 27, 2018 by and among:
1. |
Qutoutiao Inc., an exempted company organized under the Laws of Cayman Islands (the Company ), |
2. |
InfoUniversal Limited, a company organized under the Laws of Hong Kong (the HK Company ), |
3. |
Shanghai Quyun Internet Technology Co., Ltd. ( 上海趣蕴网络科技有限公司 ), a wholly foreign-owned enterprise incorporated under the Laws of the PRC and a wholly owned subsidiary of the HK Company (the WFOE ), |
4. |
Shanghai Jifen Culture Communications Co., Ltd. ( 上海基分文化传播有限公司 ), a limited liability company incorporated under the Laws of the PRC ( Jifen ), |
5. |
Shanghai Xike Information Technology Service Co., Ltd. ( 上海溪客信息技术服务有限公司 ), a limited liability company incorporated under the Laws of the PRC ( Xike ), |
6. |
Shanghai Tuile Information Technology Service Co., Ltd. ( 上海推乐信息技术服务有限公司 ), a limited liability company incorporated under the Laws of the PRC ( Tuile ), |
7. |
Anhui Zhangduan Internet Technology Co., Ltd. ( 安徽掌端网络科技有限公司 ), a limited liability company incorporated under the Laws of the PRC ( Zhangduan ), |
8. |
Beijing Qukandian Internet Technology Co., Ltd. ( 北京趣看点网络科技有限公司 ), a limited liability company incorporated under the Laws of the PRC ( Qukandian , together with Jifen, Xike, Tuile and Zhangduan, the Domestic Companies ), |
9. |
Shanghai Dian Guan Network Technology Co., Ltd. ( 上海点冠网络科技有限公司 ), a limited liability company incorporated under the Laws of the PRC ( Dian Guan ), |
10. |
the individuals listed on Schedule I attached hereto (each, a Principal and collectively, the Principals ), |
11. |
the holding companies listed on Schedule I attached hereto owned by the Principals set forth opposite each such Principals (each, a Principal Holding Company and collectively, the Principal Holding Companies ), and |
12. |
each Person listed on Schedule II attached hereto (the Purchaser ). |
Each of the parties listed above is referred to herein individually as a Party and collectively as the Parties .
Share Purchase Agreement |
RECITALS
A. |
The ownership structure among the companies listed above is as follows: (i) Company owns 100% interest in the HK Company; (ii) the HK Company owns 100% interest in the WFOE, (iii) the WFOE Controls Jifen by a Captive Structure, and (iv) the WFOE also owns 100% interest in Dian Guan. Such ownership structure shall be modified as agreed upon by the Parties. |
B. |
The Domestic Companies and Dian Guan are engaged in the business of the operation of mobile content aggregation platforms under the name of 趣头条 and 趣多拍 or otherwise and related advertising solution platforms (the Business ). The Company seeks expansion capital to grow the Business and, correspondingly, seeks to secure an investment from the Purchaser, on the terms and conditions set forth herein.The Purchaser wishes to invest in the Company by subscribing for 1,480,123 Series C2 Preferred Shares in aggregate (being 2% of the total issued share capital of the Company on a fully-diluted basis) (calculated based on the assumption that if the Closing takes place before the Companys IPO) to be issued by the Company at the Closing pursuant to the terms and subject to the conditions of this Agreement. |
C. |
The Company wishes to issue and sell 1,480,123 Series C2 Preferred Shares in the aggregate at the Closing pursuant to the terms and subject to the conditions of this Agreement. |
D. |
The Company and the Purchaser or their respective designated and related parties desire to enter into a strategic cooperation framework agreement (the Strategic Cooperation Framework Agreement ) prior to or on the date of this Agreement. |
E. |
On or about the date hereof, Jifen, its current shareholders, and Shanghai Dongfang Newspaper Co., Ltd. ( The Paper ), the parent company of the Purchaser, will enter or have entered into a Capital Increase Agreement (the Domestic Agreement ), pursuant to which, among other things, The Paper or one of its wholly owned subsidiaries will purchase 1% of the enlarged share capital of Jifen at a nominal price. |
F. |
The Parties desire to enter into this Agreement and make the respective representations, warranties, covenants and agreements set forth herein on the terms and conditions set forth herein. |
G. |
Notwithstanding anything herein or therein, the effectiveness, validity and enforceability of this Agreement shall be conditional upon the delivery, execution and validity of the Strategic Cooperation Framework Agreement and the Domestic Agreement, and the effectiveness, validity and enforceability of the Domestic Agreement will be conditional upon the delivery, execution and validity of this Agreement and the Strategic Cooperation Framework Agreement. |
2 | Share Purchase Agreement |
WITNESSETH
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties intending to be legally bound hereto hereby agree as follows:
1. |
Definitions. |
1.1 Defined Terms . The following terms shall have the meanings ascribed to them below:
Accounting Standards means generally accepted accounting principles in the United States or PRC, as applicable, applied on a consistent basis.
Action means any charge, claim, action, complaint, petition, investigation, appeal, suit, litigation, grievance, inquiry or other proceeding, whether administrative, civil, regulatory or criminal, whether at law or in equity, or otherwise under any applicable Law, and whether or not before any mediator, arbitrator or Governmental Authority.
Affiliate means, (a) with respect to a Person other than a natural person, any other Person that, directly or indirectly, Controls, is Controlled by or is under common Control with such Person, and (b) in the case of a natural person, any other Person that is directly or indirectly Controlled by such a Person or is a Relative of such Person; provided that the Company and its Subsidiaries shall be deemed not to be Affiliates of the Purchaser.
Associate means, with respect to any Person, (1) a corporation or organization (other than the Group Companies) of which such Person is an officer or partner or is, directly or indirectly, the record or beneficial owner of five percent (5%) or more of any class of Equity Securities of such corporation or organization, (2) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar capacity, or (3) any Relative of such Person and of such Persons spouse.
Benefit Plan means any employment Contract, deferred compensation Contract, bonus plan, incentive plan (including the Current ESOP), profit sharing plan, retirement Contract or other employment compensation Contract or any other plan which provides or provided benefits for any past or present employee, officer, consultant, contractor and/or director of a Person or with respect to which contributions are or have been made on account of any past or present employee, officer, consultant, contractor and/or director of such a Person.
Board or Board of Directors means the board of directors of the Company.
Business Day means any day that is not a Saturday, Sunday, legal holiday or other day on which commercial banks are required or authorized by law to be closed in the Cayman Islands, the United States, Hong Kong or the PRC.
Captive Structure means the structure under which the WFOE Controls Jifen through the Control Documents.
CFC means a controlled foreign corporation as defined in the Code.
Charter Documents means, with respect to a particular legal entity, the articles of incorporation, certificate of incorporation, formation or registration (including, if applicable, certificates of change of name), memorandum of association, articles of association, bylaws, articles of organization, limited liability company agreement, trust deed, trust instrument, operating agreement, joint venture agreement, business license, or similar or other constitutive, governing, or charter documents, or equivalent documents, of such entity.
3 | Share Purchase Agreement |
Circular 37 means the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Overseas Investment and Financing and Round Trip Investment via Special Purpose Companies issued by SAFE on July 4, 2014.
Code means the United States Internal Revenue Code of 1986, as amended.
Company Owned IP means all Intellectual Property owned by, purported to be owned by, or exclusively licensed to, the Group Companies.
Company Registered IP means all Intellectual Property for which registrations are owned by or held in the name of, or for which applications have been made in the name of, any Group Company.
Consent means any consent, approval, authorization, release, waiver, permit, grant, franchise, concession, agreement, license, exemption or order of, registration, certificate, declaration or filing with, or report or notice to, any Person, including any Governmental Authority.
Contract means, a contract, agreement, understanding, indenture, note, bond, loan, instrument, lease, mortgage, franchise, license, commitment, purchase order, and other legally binding arrangement, whether written or oral.
Control of a given Person means the power or authority, whether exercised or not, to direct the business, management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by Contract or otherwise; provided, that such power or authority shall conclusively be presumed to exist upon possession of beneficial ownership or power to direct the vote of more than fifty percent (50%) of the votes entitled to be cast at a meeting of the members or shareholders of such Person or power to control the composition of a majority of the board of directors of such Person. The terms Controlled and Controlling have meanings correlative to the foregoing.
Control Documents means the following contracts collectively: (i) Exclusive Technology and Consulting Service Agreement ( 独家技术和咨询服务协议 ) entered into by and between the WFOE and Jifen, (ii) Exclusive Option Agreement ( 独家购买权合同 ) entered into by and among the WFOE, Jifen and the equity holders of Jifen, (iii) Voting Rights Proxy Agreement ( 表决权委托协议 ) entered into by and between the WFOE and the equity holders of Jifen, (iv) Loan Agreement ( 借款协议 ) entered into by and between the WFOE and the equity holders of Jifen, and (v) Share Pledge Agreement ( 股权质押协议 ) entered into by and among the WFOE, Jifen and the equity holders of Jifen, in each case as may be amended or supplemented (including any change to the parties to any agreement) from time to time in accordance with this Agreement and the Shareholders Agreement.
Conversion Shares means Ordinary Shares issuable upon conversion of any Series C2 Preferred Shares.
Current ESOP means (i) the 2017 Equity Incentive Plan of the Company duly adopted by the Company on February 15, 2018, with a total number of 10,000,000 Ordinary Shares of the Company (the 2017 ESOP ), thereinto 9,500,000 to be granted or awarded in accordance with such 2017 ESOP and are currentlyheld by Qu World Limited, a wholly owned subsidiary and nominee of the trustee for a trust established for the benefit of the grantees or participants under the 2017 ESOP (the Trust ), and 500,000 Ordinary Shares had been vested and issued to certain participants under the 2017 Plan. And (ii) the 2018 Equity Incentive Plan duly adopted by the Company on February 25, 2018, with a maximum number of 2,964,141 Ordinary Shares of the Company (the 2018 ESOP ) to be granted or awarded under such 2018 ESOP, all of which have been reserved and allocated in the share capital of the Company.
4 | Share Purchase Agreement |
Equity Securities means, with respect to any Person that is a legal entity, any and all shares of capital stock, membership interests, partnership interest, units, profits interests, ownership interests, equity interests, registered capital, and other equity securities of such Person, and any right, warrant, option, call, commitment, conversion privilege, preemptive right or other right to acquire any of the foregoing, or security convertible into, exchangeable or exercisable for any of the foregoing (whether or not such derivative securities have actually been issued by such Person), or any Contract providing for the acquisition of any of the foregoing.
FCPA means Foreign Corrupt Practices Act of the United States of America, as amended from time to time.
Fully-diluted basis means calculating the relevant share numbers based on the assumption that all Ordinary Shares of the Company then capable of being issued on the exercise of all conversion rights, option, warrants and other contractual rights have been issued, irrespective of whether or not such rights are then exercisable, which determination shall take into account the securities under the Current ESOP, and all classes of shares of the Company shall be deemed to be converted into Ordinary Shares.
Fundamental Warranties means collectively, the representations and warranties given by the Warrantors under Sections 3.1 (Organization, Good Standing and Qualification), 3.2 (Capitalization and Voting Rights), 3.3 (Corporate Structure; Subsidiaries), 3.4 (Authorization), 3.5 (Valid Issuance of Shares), 3.6 (Consents; No Conflicts), 3.7 (Offering) and 3.8 (Compliance with Laws; Consents), all of which are subject to the disclosures of the Disclosure Schedule, and a Fundamental Warranty means any one of them.
Governmental Authority means any government of any nation, federation, province or state or any other political subdivision thereof, any entity, authority or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any government authority, agency, department, board, commission or instrumentality of the PRC or any other country, or any political subdivision thereof (including any entity or enterprise owned or controlled by a government), any court, tribunal or arbitrator, any public international organization and any self-regulatory organization.
Governmental Order means any applicable order, ruling, decision, verdict, decree, writ, subpoena, mandate, precept, command, directive, consent, approval, award, judgment, injunction or other similar determination or finding by, before or under the supervision of any Governmental Authority.
Group Company means each of the Company, the HK Company, the WFOE, Dian Guan and the Domestic Companies, together with each Subsidiary of any of the foregoing, and Group refers to all of the Group Companies collectively.
Hong Kong means the Hong Kong Special Administrative Region of the PRC.
5 | Share Purchase Agreement |
Indebtedness of any Person means, without duplication, actual or contingent obligations in respect of each of the following of such Person: (i) all indebtedness for borrowed money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced that are incurred in connection with the acquisition of properties, assets or businesses, (v) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (vi) all obligations that are capitalized (including capitalized lease obligations), (vii) all obligations under bankers acceptance, letter of credit or similar facilities, (viii) all obligations to purchase, redeem, retire, defease or otherwise acquire for value any Equity Securities of such Person, (ix) all obligations in respect of any interest rate swap, hedge or cap agreement, and (x) all guarantees issued in respect of the Indebtedness referred to in clauses (i) through (ix) above of any other Person, but only to the extent of the Indebtedness guaranteed.
Indemnifiable Loss means, with respect to any Indemnified Party, any action, claim, cost, damage, deficiency, diminution in value of any investment, disbursement, expense, Liabilities, loss, obligation, penalty, judgment or settlement of any kind or nature imposed on or otherwise incurred or suffered by such Indemnified Party, including without limitation, legal, accounting and other professional fees and expenses reasonably incurred in the investigation, collection, prosecution and defense of claims and amounts paid in settlement and Taxes payable by such Indemnified Party by reason of the indemnification.
Intellectual Property means any and all (i) patents, patent rights and applications therefor and reissues, reexaminations, continuations, continuations-in-part, divisions, and patent term extensions thereof, (ii) inventions (whether patentable or not), discoveries, improvements, concepts, innovations, utility models and industrial models, (iii) registered and unregistered copyrights, copyright registrations and applications, mask works and registrations and applications therefor, authors rights and works of authorship (including artwork, software, computer programs, source code, object code and executable code, firmware, development tools, files, records and data, and related documentation), (iv) URLs, web sites, web pages and any part thereof, (v) technical information, know-how, trade secrets, drawings, designs, design protocols, specifications, proprietary data, customer lists, databases, proprietary processes, technology, formulae, and algorithms and other intellectual property, (vi) trade names, trade dress, trademarks, domain names, service marks, logos, business names, and registrations and applications therefor, and (vii) the goodwill symbolized or represented by the foregoing and any similar rights situated in any country and the benefit (subject to the burden) of any of the foregoing (in each case whether registered or unregistered and including applications for the grant of any of the foregoing and the right to apply for any of the foregoing in any part of the world).
IPO has the meaning set forth in the Shareholders Agreement.
Key Employee means all key employees of the Group Companies with positions of president, chief executive officer, chief financial officer, chief operating officer, chief technical officer, chief sales and marketing officer, general manager, and the list of all key employees of the Group Companies as of the date hereof is provided in Schedule IV attached hereto.
6 | Share Purchase Agreement |
Law or Laws means any and all provisions of any applicable constitution, treaty, statute, law, regulation, ordinance, code, rule, or rule of common law, any governmental approval, concession, grant, franchise, license, agreement, directive, requirement, or other governmental restriction or any similar form of decision of, or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Authority, in each case as amended, and any and all applicable Governmental Orders.
Liabilities means, with respect to any Person, all liabilities, obligations, Indebtedness and commitments of such Person of any nature, accrued, absolute, contingent or otherwise, due or to become due, liquidated or unliquidated.
Lien means any claim, charge, easement, encumbrance, lease, covenant, security interest, lien, option, pledge, rights of others, or restriction (whether on voting, sale, transfer, disposition or otherwise), whether imposed by Contract, understanding, law, equity or otherwise.
Material Adverse Effect means any (i) event, occurrence, fact, condition, change or development that has had, has, or could reasonably be expected to have, individually or together with other events, occurrences, facts, conditions, changes or developments, a material adverse effect on the business, properties, assets, employees, operations, results of operations, condition (financial or otherwise), prospects, assets or liabilities of the Group, taken as a whole, (ii) material impairment of the ability of any Party (other than the Purchaser) to perform the material obligations of such party under any Transaction Documents, or (iii) material impairment of the validity or enforceability of this Agreement or any other Transaction Document against any Party hereto or thereto (other than the Purchaser).
Memorandum and Articles means (i) the fifth amended and restated memorandum and articles of association of the Company to be adopted by the shareholders of the Company immediately prior to the Series C1 Closing and shall be in the form attached as Exhibit A , as amended or restated from time to time; or (ii) the fifth amended and restated memorandum and articles of association of the Company to be adopted and effective immediately prior to the completion of the Companys IPO if the Series C1 Closing takes place after the Companys IPO.
MOFCOM means the Ministry of Commerce of the PRC or, with respect to any matter to be submitted for examination and approval by the Ministry of Commerce, any Governmental Authority which is similarly competent to examine and approve such matter under the laws of the PRC.
Mr. Tan means Mr. Tan Siliang ( 谭思亮 ), one of the Principals and the ultimate controlling shareholder of the Company.
Order No. 10 means the Rules for Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors 《关于外国投资者并购境内企业的规定》 jointly issued by the MOFCOM, the State-owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission and the SAFE on August 8, 2006.
Ordinary Shares means the Companys ordinary shares, par value US$0.0001 per share.
7 | Share Purchase Agreement |
Permitted Liens means (i) Liens for Taxes not yet delinquent or the validity of which are being contested in good faith and for which there are adequate reserves on the applicable financial statements, and (ii) Liens incurred in the ordinary course of business, which (x) do not individually or in the aggregate materially detract from the value, use, or transferability of the assets that are subject to such Liens, and (y) were not incurred in connection with the borrowing of money.
Person means any individual, sole proprietorship, partnership, limited partnership, limited liability company, firm, joint venture, estate, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or governmental or regulatory authority or other enterprise or entity of any kind or nature.
PFIC means a passive foreign investment company as defined in the Code.
PRC means the Peoples Republic of China, but solely for the purposes of this Agreement and the other Transaction Documents, excluding the Hong Kong Special Administrative Region, the Macau Special Administrative Region and the islands of Taiwan.
Preferred Shares means the Series A Preferred Shares, the Series A1 Preferred Shares, the Series B1 Preferred Shares, the Series B2 Preferred Shares, the Series B3 Preferred Shares, the Series C1 Preferred Shares, and the Series C2 Preferred Shares.
Prohibited Person means any Person that is (1) a national or resident of any U.S. embargoed or restricted country, (2) included on, or Affiliated with any Person on, the United States Commerce Departments Denied Parties List, Entities and Unverified Lists; the U.S. Department of Treasurys Specially Designated Nationals, Specially Designated Narcotics Traffickers or Specially Designated Terrorists, or the Annex to Executive Order No. 13224; the Department of States Debarred List; UN Sanctions, or (3) a Person with whom business transactions, including exports and re-exports, are restricted by a U.S. Governmental Authority, including, in each clause above, any updates or revisions to the foregoing and any newly published rules.
Public Official means any executive, official, or employee of a Governmental Authority, political party or member of a political party, political candidate; executive, employee or officer of a public international organization; or director, officer or employee or agent of a wholly owned or partially state-owned or controlled enterprise, including a PRC state-owned or controlled enterprise.
Public Software means any Software that contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software, open source software ( e.g. , Linux) or similar licensing or distribution models, including, without limitation, software licensed or distributed under any of the following licenses or distribution models, or licenses or distribution models similar to any of the following: (A) GNUs General Public License (GPL) or Lesser/Library GPL (LGPL), (B) the Artistic License (e.g., PERL), (C) the Mozilla Public License, (D) the Netscape Public License, (E) the Sun Community Source License (SCSL), (F) the Sun Industry Standards License (SISL), (G) the BSD License, and (H) the Apache License.
Related Party means any Affiliate, officer, director, supervisory board member, employee, or holder of any Equity Security of any Group Company, and any Affiliate or Associate of any of the foregoing, in each case, other than the Group Companies.
8 | Share Purchase Agreement |
Relative of a natural person means the spouse of such person and any parent, step-parent, grandparent, child, step-child, grandchild, sibling, step-sibling, cousin, in-law, uncle, aunt, nephew, niece or great-grandparent of such person or spouse.
Registrable Securities shall have the meaning set forth in the Shareholders Agreement.
Registration shall have the meaning set forth in the Shareholders Agreement.
Share Restriction Agreements means collectively (a) the Share Restriction Agreement entered into between Li Lei and the Company as of January 3, 2018, a copy of which has been provided to the Purchaser prior to the date hereof, and (b) the Share Restriction Agreement entered into between Mr. Tan and the Company as of January 3, 2018, a copy of which has been provided to the Purchaser on prior to the date hereof.
SAFE means the State Administration of Foreign Exchange of the PRC.
SAFE Rules and Regulations means collectively, the Circular 37 and any other applicable SAFE rules and regulations.
SAIC means the State Administration of Industry and Commerce of the PRC or, with respect to the issuance of any business license or filing or registration to be effected by or with the State Administration of Industry and Commerce, any Governmental Authority which is similarly competent to issue such business license or accept such filing or registration under the laws of the PRC.
SASAC means State-owned Assets Supervision and Administration Commission of the PRC.
Securities Act means the U.S. Securities Act of 1933, as amended and interpreted from time to time.
Series A Investors means CW_toutiao Limited, xInternet Limited, ACE Redpoint Ventures China I, L.P., ACE Redpoint Associates China I, L.P., and ACE Redpoint China Strategic I, L.P.
Series A Preferred Shares means the Series A Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles.
Series A Shareholders Agreemen t means the Shareholders Agreement dated October 13, 2017 entered into by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies, the Series A Investors.
Series A Share Purchase Agreement means the Series A Preferred Share Purchase Agreement dated September 8, 2017 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the Domestic Companies and the Series A Investors (except xInternet Limited).
Series A1 Investor means CMC Queen Holdings Limited.
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Series A1 Preferred Shares means the Series A1 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles.
Series A1 Shareholders Agreemen t means the Amended and Restated Shareholders Agreement dated November 14, 2017 entered into by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies, the Series A Investors and the Series A1 Investor.
Series A1 Share Purchase Agreement means the Series A1 Preferred Share Purchase Agreement dated October 14, 2017 by and among the Company, the Principals, the Principal Holding Company, the HK Company, the WFOE, the Domestic Companies and the Series A1 Investor.
Series B1 Preferred Shares means the Series B1 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles.
Series B1 Closing means the closing of the subscription of the Series B1 Preferred Shares by the Series B1 Investor under the Series B1 Share Purchase Agreement.
Series B1 Investor means Image Flag Investment (HK) Limited.
Series B1 Share Purchase Agreement means the Series B1 Preferred Share Purchase Agreement dated March 4, 2018 by and among the Company, the Principals, the Principal Holding Companies, the HK Company, the WFOE, the Domestic Companies and the Series B1 Investor.
Series B2 Investors means Long Range L.P., People Better Limited, Shunwei Growth III Limited, Shanghai ChuangVest Venture Investment Partnership (Limited Partnership) ( 上海创伴创业投资合伙企业 ( 有限合伙 )) ( Shanghai CC ), Double Excel Investments Limited, Lighthouse Capital International Inc., CMC Queen Holdings Limited, ACE Redpoint Ventures China I, L.P., ACE Redpoint Associates China I, L.P. and ACE Redpoint China Strategic I, L.P.
Series B2 Preferred Shares means the Series B2 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles.
Series B2 Share Purchase Agreement means the Series B2 Preferred Share Purchase Agreement dated March 8, 2018 by and among the Company, the Principals, the Principal Holding Companies, the HK Company, the WFOE, the Domestic Companies and the Series B2 Investors.
Series B3 Investors means Harvest Ceres Fund, LP, Hundreds ANTA Fund Limited Partnership, and Vision Global Capital Holdings Ltd..
Series B3 Preferred Shares means the Series B3 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles.
Series B3 Share Purchase Agreement means the Series B3 Preferred Share Purchase Agreement dated April 19, 2018 by and among the Company, the Principals, the Principal Holding Companies, the HK Company, the WFOE, the Domestic Companies and the Series B3 Investors.
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Series C1 Closing means the initial closing as defined in the Series C1 Share Purchase Agreements.
Series C1 Investors means CG Partners Opportunity Fund SP, a segregated portolio of CG Partners Fund SPC and Shimmering Horizon L.P..
Series C1 Preferred Shares means the Series C1 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles.
Series C1 Share Purchase Agreements means both of the Series C1 Preferred Share Purchase Agreements dated August 17, 2018 by and among the Company, the Principals, the Principal Holding Companies, the HK Company, the WFOE, the Domestic Companies and the Series C1 Investors.
Series C2 Preferred Shares means the Series C2 Preferred Shares of the Company, par value US$0.0001 per share, with the rights and privileges as set forth in the Memorandum and Articles.
Series C2 Issue Price means US$37.2280, as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events with respect to the Series C2 Preferred Shares.
Shareholders Agreement means the Fourth Amended and Restated Shareholders Agreement to be entered into by and among the parties named therein on or prior to the Series C1 Closing, which shall be in the form attached hereto as Exhibit B .
Social Insurance means any form of social insurance required under applicable Laws, including without limitation, the PRC national and local contributions for pensions, medical insurance, unemployment insurance, work-related injury insurance, pregnancy benefits, and housing accumulation funds.
Software means any and all (A) computer programs and any set of instructions for execution by microprocessor, irrespective of application, language or medium, including any and all software implementations of algorithms, models and methodologies, including all source code and executable code, whether embodied in software, firmware or otherwise, documentation, development tools, designs, files, verilog files, RTL files, HDL, VHDL, net lists, records, data and mask works; and (B) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, and all rights therein.
Subsidiary means, with respect to any given Person, any other Person that is Controlled directly or indirectly by such given Person, at any time and from time to time.
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Tax means (i) in the PRC: (a) any national, provincial, municipal, or local taxes, charges, fees, levies, deduction, withholding, impost, or other assessments, including, without limitation, all net income (including enterprise income tax and individual income withholding tax), turnover (including value-added tax, business tax, and consumption tax), resource (including urban and township land use tax), special purpose (including land value-added tax, urban maintenance and construction tax, and additional education fees), property (including urban real estate tax and land use fees), documentation (including stamp duty and deed tax), filing, recording, social insurance (including pension, medical, unemployment, housing, and other social insurance withholding), tariffs (including import duty and import value-added tax), and estimated and provisional taxes, charges, fees, levies, or other assessments of any kind whatsoever imposed, levied, collected, withheld or assessed by any local, municipal, regional, urban, governmental, state, national or other Governmental Authority, (b) all interest, penalties (administrative, civil or criminal), surcharge, fine or additional amounts in connection with any item described in clause (a) above, and (c) any form of transferee liability imposed by any Governmental Authority and any obligations to indemnify or otherwise assume or succeed to the liability of any other Person in connection with any item described in clauses (a) and (b) above, and (ii) in any jurisdiction other than the PRC, all similar taxes and liabilities as described in clause (i) above.
Tax Return means any return, disclosures, report or statement showing Taxes, used to pay Taxes, or required to be filed with respect to any Tax (including any elections, declarations, schedules or attachments thereto, and any amendment thereof), including any information return, claim for refund, amended return or declaration of estimated or provisional Tax.
Tianjin Shan Shi LP means Tianjin Shan Shi Technology Partnership (Limited Partnership) ( 天津珊石科技合伙企业(有限合伙) ), one of the direct shareholders of Jifen holding 20% of the equity interest in Jifen.
Transaction Documents means this Agreement, the Shareholders Agreement, the Memorandum and Articles, the Control Documents and each of the other agreements and documents otherwise required in connection with implementing the transactions contemplated by any of the foregoing.
U.S. real property holding corporation has the meaning as defined in the Code.
Warrantors means, collectively, the Group Companies, the Principals and the Principal Holding Companies.
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1.2 Other Defined Terms . The following terms shall have the meanings defined for such terms in the Sections set forth below:
Term |
Section |
|
Agreement | Preamble | |
Arbitration Notice | 7.3(a) | |
Balance Sheet | 3.11(a) | |
Business | Recitals | |
Closing | 2.3(a) | |
Closing Date | 2.3(a) | |
Company | Preamble | |
Company IP | 3.19(a) | |
Compliance Laws | 3.16(a) | |
Confidential Information | 7.8(a) | |
Dian Guan | Preamble | |
Disclosing Party | 7.8(c) | |
Disclosure Schedule | 3 | |
Dispute | 7.3(a) | |
Disqualifying Event` | 7.6(c) | |
Domestic Companies | Preamble | |
Domestic Resident | 5.1(h) | |
Financial Statements | 3.11(a) | |
HK Company | Preamble | |
HKIAC | 7.3(b) | |
HKIAC Rules | 7.3(b) | |
Indemnification Agreement | 5.1(g) | |
Indemnified Parties | 7.6(a) | |
Indemnifying Party | 7.6(b) | |
Jifen | Preamble | |
Lease | 3.17(b) | |
Licenses | 3.19(e) | |
Material Contracts | 3.15(a) | |
Material Licenses | 6.3(a) | |
Parties | Preamble | |
Party | Preamble | |
Principal | Preamble | |
Principal Holding Companies | Preamble | |
Principal Holding Company | Preamble | |
Principal Liability Cap | 7.5(d) | |
Principals | Preamble | |
Proceeds | 2.5 | |
Qukandian | Preamble | |
Related Party Transactions | 3.18 | |
Representatives | 3.16(a) | |
Required Governmental Consents | 3.8(c) | |
Statement Date | 3.11(a) | |
Subscription Price | 2.1 | |
Subscription Shares | 2.1 | |
Survival Date | 3.30 | |
Tuile | Preamble | |
WFOE | Preamble | |
Xike | Preamble | |
Zhangduan | Preamble |
2. |
Purchase and Sale of Shares. |
2.1 Sale and Issuance of the Shares . Subject to the terms and conditions of this Agreement, at the Closing (as defined below), the Purchaser agrees to subscribe for and purchase, and the Company agrees to issue and sell to such Purchaser, that number of Series C2 Preferred Shares set forth opposite such Purchasers name in the second column of the table of Schedule II attached hereto (the Subscription Shares ), at the purchase price set forth opposite such Purchasers name in the third column of the table of Schedule II (the Subscription Price ).
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Notwithstanding anything to the contrary in the Transaction Documents, if the Closing (as defined below) takes place after the Companys IPO, the Subscription Shares shall be, in lieu of Series C2 Preferred Shares, the same number (as appropriately adjusted for share splits, share dividends, combinations, recapitalizations and similar events) of the Ordinary Shares. The number of Ordinary Shares to which a holder shall be entitled upon conversion of each Series C2 Preferred Share shall be the quotient of the applicable Series C2 Issue Price divided by the then effective Series C2 Conversion Price (the Series C2 Conversion Price ), which shall initially be the applicable Series C2 Issue Price, resulting in an initial conversion ratio for Series C2 Preferred Shares of 1:1. Such Ordinary Shares shall be deposited, at the time of Closing, for issuance of certain America depositary shares, or ADS, to be listed for trading after the Companys IPO. The Company agrees to take all reasonable steps to facilitate such actions.
2.2 Payment of Subscription Price. Unless otherwise agreed by the Parties, the Purchaser shall pay its Subscription Price after deducting an amount equal to US$34,693,890 (while such amount shall deemed to have been paid by way of certain business and strategic cooperation between the Company and the Purchaser or their respective designated and related parties pursuant to certain Strategic Cooperation Framework Agreement), in cash, by wire transfer of United States Dollars in immediately available funds to a designated account of the Company, within one (1) Business Day after the Closing Date (as defined in Section 2.3) .
2.3 Closing.
(a) The consummation of the sale and issuance of the Subscription Shares pursuant to Section 2.1 (collectively the Closing , and the date of the Closing, the Closing Date ) shall take place remotely via the exchange of documents and signatures as soon as practicable, but in no event later than seven (7) Business Days after all closing conditions specified in Section 5.1 and Section 5.2 hereof have been waived or satisfied, as applicable, or at such other time and place as the Company and the Purchaser may mutually agree in writing.
(b) The capitalization table of the Company immediately prior to and after the Closing (if the Closing takes place before the Companys IPO) is shown on Schedule III attached hereto.
2.4 Deliverables by the Company at the Closing . At the Closing, in addition to any items the delivery of which is made an express condition to the Purchasers obligations at the Closing pursuant to Section 5.1 , the Company shall deliver or cause to be delivered to the Purchaser:
(a) a copy of the updated register of members of the Company as of the Closing Date, certified by the registered agent of the Company to be a true, accurate and complete copy, reflecting the issuance to such Purchaser of the Subscription Shares subscribed for by such Purchaser at the Closing pursuant to Section 2.1 ;
(b) a copy of the duly executed share certificate issued in the name of such Purchaser, certified by a director of the Company to be a true, accurate and complete copy, representing the Subscription Shares subscribed for by such Purchaser pursuant to Section 2.1 ; and within five (5) Business Days following the Closing, the Company shall deliver to such Purchaser the original copy of such duly executed share certificate;
(c) scanned copies of the Board resolutions and the shareholders resolutions of the Company duly passed, approving (1) the execution, delivery and performance of the Transaction Documents, and (2) the issuance of the applicable Subscription Shares to the Purchaser; and
(d) scanned copies of the board resolutions and the shareholders resolutions of each of the Group Companies and the Principal Holding Companies duly passed, approving the execution, delivery and performance of the Transaction Documents to which it is a party.
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2.5 Use of Proceeds . Subject to the terms of this Agreement, the Company shall use the proceeds from the issuance and sale of the Subscription Shares (the Proceeds) for purpose of business expansion, capital expenditures and general working capital needs of the Group Companies. The Proceeds shall not be used in the payment of any debts or obligations of any Group Company (except those occurred in the ordinary course of business) or in the repurchase or cancellation of securities held by any shareholders of the Group Companies or for any other purpose.
3. Representations and Warranties of the Warrantors . Subject to such exceptions as may be specifically set forth in the disclosure schedule delivered by the Warrantors to the Purchaser as of the date hereof (the Disclosure Schedule , at attached hereto as Exhibit C ), each of the Warrantors jointly and severally represents and warrants to the Purchaser that each of the statements contained in this Section 3 is true, correct and complete as of the date of this Agreement, and that each of such statements shall be true, correct and complete on and as of the Closing Date (provided that if the Closing Date is before the Companys IPO), with the same effect as if made on and as of the Closing Date (provided that if the Closing Date is before the Companys IPO).
3.1 Organization, Good Standing and Qualification.
(a) Each Group Company is duly incorporated, organized, validly existing and in good standing (or equivalent status in the relevant jurisdiction) under, and by virtue of, the Laws of the place of its incorporation or establishment and has all requisite power and authority to own its properties and assets and to carry on its business as now conducted, and to perform each of its obligations under the Transaction Documents to which it is a party. Each Group Company is qualified to do business and is in good standing (or equivalent status in the relevant jurisdiction) in each jurisdiction. Each Group Company that is a PRC entity has a valid business license issued by the SAIC or its local branch or other relevant Government Authorities (a true and complete copy of which has been delivered to the Purchaser), and has, since its establishment, carried on its business in compliance with the business scope set forth in its business license.
(b) Each Principal Holding Company is duly incorporated, organized, validly existing and in good standing (or equivalent status in the relevant jurisdiction) under, and by virtue of, the Laws of the place of its incorporation or establishment and has all requisite power and authority to perform each of its obligations under the Transaction Documents to which it is a party. Each Principal Holding Company is in good standing (or equivalent status in the relevant jurisdiction) in each jurisdiction.
3.2 Capitalization and Voting Rights.
(a) Company . The authorized share capital of the Company is and immediately prior to the Closing shall be US$50,000 divided into (a) a total of 478,958,005 authorized Ordinary Shares, 50,000,000 of which are issued and outstanding, and 9,500,000 of which are held by a trust established for the 2017 ESOP, (b) a total of 4,945,055 authorized Series A Preferred Shares, all of which are issued and outstanding, (c) a total of 1,373,626 authorized Series A1 Preferred Shares, all of which are issued and outstanding, (d) a total of 5,420,144 authorized Series B1 Preferred Shares, all of which are issued and outstanding, (e) a total of 3,895,728 authorized Series B2 Preferred Shares, 3,684,004 of which are issued and outstanding (f) a total of 1,751,539 authorized Series B3 Preferred Shares, 1,751,539 of which are issued and outstanding, (g) a total of 2,175,780 authorized Series C1 Preferred Shares, none of which are issued and outstanding, and (f) a total of 1,480,123 authorized Series C2 Preferred Shares, none of which are issued and outstanding, provided that if the Closing takes place after the Companys IPO, the Company shall have the authorized share capital as set forth in the Memorandum and Articles. Schedule III sets forth the capitalization table of the Company, and Section 3.2(a) of the Disclosure Schedule sets forth the capitalization table of each Group Company, in each case, as of immediately prior to the Closing and immediately after the Closing, in each case reflecting all then outstanding and authorized Equity Securities of such Company and other Group Company, the record and beneficial holders thereof and the terms of any vesting schedule applicable thereto. Except as disclosed in Section 3.2(a) of the Disclosure Schedule, there is no nominee arrangement or any other similar arrangements for the direct or indirect interest in the Equity Security of any Group Company.
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(b) HK Company . The authorized share capital of the HK Company is and immediately prior to and following the Closing shall be HK$10,000, divided into 10,000 shares of HK$1 each, 10,000 of which are issued and outstanding and held by the Company.
(c) Domestic Companies . The registered capital of each Domestic Company, Dian Guan and the WFOE is set forth opposite its name on Section 3.2(c) of the Disclosure Schedule, together with an accurate list of the record and beneficial owners of such registered capital.
(d) No Other Securities . Except for (a) the conversion privileges of the Subscription Shares, (b) certain rights provided in the Charter Documents of the Company as currently in effect, (c) certain rights provided in the Memorandum and Articles, the Shareholders Agreement and the Control Documents from and after the Closing, (d) the outstanding Equity Securities set forth in Section 3.2(d) of the Disclosure Schedule, (e) options to purchase Ordinary Shares, restricted shares, restricted stock units or other Equity Securities pursuant to the Current ESOP, and (f) shares to be issued in connection with the IPO, (1) there are no and at the Closing there shall be no other authorized or outstanding Equity Securities of any Group Company; (2) no Equity Securities of any Group Company are subject to any preemptive rights, rights of first refusal (except to the extent provided by applicable PRC Laws) or other rights to purchase or create any Lien over such Equity Securities or any other rights or encumbrances with respect to such Equity Securities, and (3) no Group Company is a party or subject to any Contract that affects or relates to the voting or giving of written consents with respect to, or the right to cause the redemption, or repurchase of, any Equity Security of such Group Company. Except as set forth in the Shareholders Agreement (from and after the Closing), the Company has not granted any registration rights or information rights to any other Person, nor is the Company obliged to list, any of the Equity Securities of any Group Companies on any securities exchange. Except as contemplated under the Transaction Documents, there are no voting or similar agreements which relate to the share capital or registered capital of any Group Company.
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(e) Issuance and Status . All presently outstanding Equity Securities of each Group Company were duly and validly issued (or subscribed for) in compliance with all applicable Laws, preemptive or other similar rights of any Person, and applicable Contracts. All share capital or registered capital, as the case may be, of each Group Company have been duly and validly issued, are fully paid (or subscribed for) and nonassessable, and are and as of the Closing shall be free of any and all Liens (except for any restrictions on transfer under the Shareholders Agreement and applicable Laws). Except as contemplated under the Transaction Documents, there are no (a) resolutions pending to increase the share capital or registered capital of any Group Company or cause the liquidation, winding up, or dissolution of any Group Company, nor has any distress, execution or other process been levied against any Group Company, (b) dividends which have accrued or been declared but are unpaid by any Group Company, (c) obligations, contingent or otherwise, of any Group Company to repurchase, redeem, or otherwise acquire any Equity Securities, or (d) outstanding or authorized equity appreciation, phantom equity, equity plans or similar rights with respect to any Group Company. All dividends (if any) or distributions (if any) declared, made or paid by each Group Company, and all repurchases and redemptions of Equity Securities of each Group Company (if any), have been declared, made, paid, repurchased or redeemed, as applicable, in accordance with its Charter Documents and all applicable Laws.
(f) Title . Each Group Company is the sole record and beneficial holder of all of the Equity Securities set forth opposite its name on Section 3.2(f) of the Disclosure Schedule, free and clear of all Liens of any kind other than those arising under applicable Law.
3.3 Corporate Structure; Subsidiaries . Section 3.3 of the Disclosure Schedule sets forth a true and complete structure chart showing the corporate structure of the Group Companies, as of the date hereof and as of the Closing, and indicating the ownership and Control relationships among all Group Companies, as of the date hereof and as of the Closing, and a description of such structure with such ownership and Control relationships, the nature of the legal entity which each Group Company constitutes, as of the date hereof and as of the Closing, the jurisdiction in which each Group Company was or will be organized, and each jurisdiction in which each Group Company is required to be qualified or licensed to do business as a foreign Person as of the date hereof and as of the Closing. No Group Company owns or Controls, or has ever owned or Controlled, directly or indirectly, any Equity Security, interest or share in any other Person or is or was a participant in any joint venture, partnership or similar arrangement. No Group Company is obligated to make any investment in or capital contribution in or on behalf of any other Person. The Company was formed solely to acquire and hold the equity interests in the HK Company and the HK Company was formed solely to acquire and hold the equity interests in the WFOE. Neither the Company nor the HK Company has engaged in any other business and has not incurred any Liability since its formation. The Domestic Companies and Dian Guan are and the WFOE will be engaged in the Business and have no other business. No Principal or Principal Holding Company, and none of their Affiliates (other than a Group Company), is engaged in the Business or has any assets in relation to the Business (other than through an advisory, employment or consulting relationship with a Group Company) or any Contract with any Group Company. None of the Principals and their Affiliates directly or indirectly own, manage, engage in, operate, control, work for, consult with, render services for, do business with, maintain any interest in (proprietary, financial or otherwise) or participate in the ownership, management, operation or control of, any business, whether in corporate, proprietorship or partnership form or otherwise, that competes with the businesses of the Group Companies, being the operation of mobile content aggregation platforms and any other major business operations of any Group Company.
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3.4 Authorization . Each Warrantor has all requisite power and authority to execute and deliver the Transaction Documents to which it is a party and to carry out and perform its obligations thereunder. All action on the part of each party to the Transaction Documents (other than the Purchaser) (and, as applicable, its officers, directors and shareholders) necessary for the authorization, execution and delivery of the Transaction Documents, the performance of all obligations of each such party, and, in the case of the Company, the authorization, issuance (or reservation for issuance), sale and allotment of the Subscription Shares and the Conversion Shares, has been taken or will be taken prior to the Closing. Each Transaction Document has been duly executed and delivered by each party thereto (other than the Purchaser) and constitutes valid and legally binding obligations of such party, enforceable against such party in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other Laws of general application affecting enforcement of creditors rights generally, and (ii) as limited by Laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.
3.5 Valid Issuance of Shares . The Subscription Shares, when issued, delivered and paid for in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and non-assessable, free from any Liens (except for any restrictions on transfer under applicable Laws and under the Shareholders Agreement). The Conversion Shares have been reserved for issuance and, upon issuance in accordance with the terms of the Charter Documents of the Company, will be duly and validly issued, fully paid and non-assessable, free from any Liens (except for any restrictions on transfer under applicable securities Laws and under the Shareholders Agreement). The issuance of the Subscription Shares and the Conversion Shares is not subject to any preemptive rights, rights of first refusal or similar rights.
3.6 Consents; No Conflicts . All Consents from or with any Governmental Authority or any other Person required in connection with the valid execution, delivery and performance of the Transaction Documents, and the consummation of the transactions contemplated by the Transaction Documents, in any case on the part of any party thereto (other than the Purchaser) have been duly obtained or completed (as applicable) and are in full force and effect. The execution, delivery and performance of each Transaction Document by each party thereto (other than the Purchaser) do not, and the consummation by such party of the transactions contemplated thereby will not, (i) result in any violation of, be in conflict with, or constitute a default under, require any Consent under, or give any Person rights of termination, amendment, acceleration or cancellation under, with or without the passage of time or the giving of notice, any Governmental Order, any provision of the Charter Documents of any Group Company, any applicable Laws (including without limitation, Order No. 10 and the SAFE Rules and Regulations), or any Material Contract, (ii) result in any termination, modification, cancellation, or suspension of any material right of, or any augmentation or acceleration of any material obligation of, any Group Company (including without limitation, any indebtedness of such Group Company), or (iii) result in the creation of any Lien upon any of the material properties or assets of any Group Company other than Permitted Liens.
3.7 Offering . Subject in part to the accuracy of the Purchasers representations set forth in Section 4 of this Agreement, the offer, sale and issuance of the Subscription Shares are, and the issuance of the Conversion Shares will be, exempt from the qualification, registration and prospectus delivery requirements of the Securities Act and any other applicable securities Laws.
3.8 Compliance with Laws; Consents.
(a) Each Group Company is, and has been, in compliance with all applicable Laws in all material aspects. No event has occurred and no circumstance exists that (with or without notice or lapse of time) (a) may constitute or result in a violation by any Group Company, or a failure on the part of such entity to comply with, any applicable Laws in any material aspect, or (b) may give rise to any obligation on the part of any Group Company to undertake, or to bear all or any portion of the cost of, any remedial action of any nature in any material aspect. None of the Group Companies has received any notice from any Governmental Authority regarding any of the foregoing. None of the Group Companies is, to the knowledge of the Warrantors, under investigation with respect to a violation of any Law.
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(b) Neither the Captive Structure when implemented nor the Control Documents (individually or when taken together) when executed violate any applicable Laws (including without limitation, SAFE Rules and Regulations, Order No. 10 and any other applicable PRC rules and regulations).
(c) All Consents from or with the relevant Governmental Authority required in respect of the due and proper establishment and operations of each Group Company as now conducted, including but not limited to the Consents from or with MOFCOM, SAIC, SAFE, the Ministry of Information Industry, the Ministry of Culture, Press and Publication Administration, any Tax bureau, customs authorities, and product registration authorities, and the local counterpart thereof, as applicable (or any predecessors thereof, as applicable) (collectively, the Required Governmental Consents ), has been duly obtained or completed in accordance with all applicable Laws.
(d) No Required Governmental Consent contains any materially burdensome restrictions or conditions, and each Required Governmental Consent is in full force and effect and will remain in full force and effect upon the consummation of the transactions contemplated hereby. None of the Group Companies is in default under any Required Governmental Consent. There is no reason to believe that any Required Governmental Consent which is subject to periodic renewal will not be granted or renewed. None of the Group Companies has received any letter or other communication from any Governmental Authority threatening or providing notice of revocation of any Required Governmental Consent issued to such Group Company or the need for compliance or remedial actions in respect of the activities carried out directly or indirectly by such Group Company.
3.9 Tax Matters.
(a) All Tax Returns required to be filed on or prior to the date hereof with respect to each Group Company has been duly and timely filed by such entity within the requisite period and completed on a proper basis in accordance with the Accounting Standards and applicable Law, and are up to date and correct. All Taxes owed by each Group Company under applicable Laws (whether or not shown on every Tax Return) have been paid in full or provision for the payment thereof have been made, except such Taxes, if any, as are being contested in good faith and as to which adequate reserves (determined in accordance with the Accounting Standards) have been provided in the Financial Statements. No deficiencies for any Taxes with respect to any Tax Returns have been asserted in writing by, and no notice of any pending action with respect to such Tax Returns has been received from, any Tax authority, and no dispute relating to any Tax Returns with any such Tax authority is outstanding or contemplated. Each Group Company has timely paid all Taxes owed by it under applicable Law which are due and payable (whether or not shown on any Tax Return) and withheld and remitted to the appropriate Governmental Authority all Taxes which it is obligated to withhold and remit under applicable Law from amounts owing to any employee, creditor, customer or third party.
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(b) No audit of any Tax Return of each Group Company and no formal investigation with respect to any such Tax Return by any Tax authority is currently in progress and no Group Company has waived any statute of limitations with respect to any Taxes, or agreed to any extension of time with respect to an assessment or deficiency for such Taxes.
(c) No written claim has been made by a Governmental Authority in a jurisdiction where the Group does not file Tax Returns that any Group Company is or may be subject to taxation by that jurisdiction.
(d) The assessment of any additional Taxes with respect to the applicable Group Company for periods for which Tax Returns have been filed is not expected to exceed the recorded Liability therefor in the most recent balance sheet in the Financial Statements (as defined below), and there are no unresolved questions or claims concerning any Tax Liability of any Group Company. Since the Statement Date (as defined below), no Group Company has incurred any liability for Taxes outside the ordinary course of business or otherwise inconsistent with past custom and practice. There is no pending dispute with, or notice from, any Tax authority relating to any of the Tax Returns filed by any Group Company, and there is no proposed Liability for a deficiency in any Tax to be imposed upon the properties or assets of any Group Company.
(e) No Group Company has been the subject of any examination or investigation by any Tax authority relating to the conduct of its business or the payment or withholding of Taxes that has not been resolved or is currently the subject of any examination or investigation by any Tax authority relating to the conduct of its business or the payment or withholding of Taxes. No Group Company is responsible for the Taxes of any other Person by reason of contract, successor liability or otherwise.
(f) All Tax credits and Tax holidays enjoyed by any Group Company established under the Laws of the PRC under applicable Laws since its establishment have been in compliance with all applicable Laws and is not subject to reduction, revocation, cancellation or any other changes (including retroactive changes) in the future, except through change in applicable Laws published by relevant Governmental Authority.
(g) No Group Company is or has ever been a PFIC or CFC or a U.S. real property holding corporation. No Group Company anticipates that it will become a PFIC or CFC or a U. S. real property holding corporation for the current taxable year or any future taxable year.
(h) The Company is treated as a corporation for U.S. federal income tax purposes.
3.10 Charter Documents; Books and Records . The Charter Documents of each Group Company is in the form provided to the Purchaser. Each Group Company has been in compliance with its Charter Documents, and no Group Company has violated or breached any of their respective Charter Documents. Each Group Company maintains its books of accounts and records in the usual, regular and ordinary manner, on a basis consistent with prior practice, and which permits its Financial Statements (as defined below) to be prepared in accordance with the Accounting Standards. The register of members and directors (if applicable) of each Group Company are correct, there has been no notice of any proceedings to rectify any such register, and there are no circumstances which might lead to any application for its rectification. All documents required to be filed by each Group Company with the applicable Governmental Authority in respect of the relevant jurisdiction in which the relevant Group Companies is being incorporated have been properly made up and filed. There is no committee for any board of any Group Company.
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3.11 Financial Statements.
(a) The Company has delivered to the Purchaser the unaudited consolidated balance sheet (the Balance Sheet ) and statements of operations and cash flows for the Company as of and for year ending December 31, 2017, (the Statement Date ) as included in Annex II of the Disclosure Schedule (collectively, the financial statements referred to above, the Financial Statements ). The Financial Statements (a) have been prepared in accordance with the books and records of Domestic Companies, (b) fairly present in all material respects the financial condition and position of Domestic Companies as of the dates indicated therein and the results of operations and cash flows of Domestic Companies for the periods indicated therein, except in the case of unaudited financial statements for the omission of notes thereto and normal year-end audit adjustments that are not expected to be material, and (c) were prepared in accordance with the applicable Accounting Standards applied on a consistent basis throughout the periods involved. All of the accounts receivable owing to any of the Group Companies, including without limitation all accounts receivable set forth on the Financial Statements, constitute valid and enforceable claims and are current and collectible in the ordinary course of business, net of any reserves shown on the Financial Statements (which reserves are adequate and were calculated on a basis consistent with the Accounting Standards), and no further goods or services are required to be provided in order to complete the sales and to entitle the applicable Group Company to collect in full in respect of any such receivables. There are no material contingent or asserted claims, refusals to pay, or other rights of set-off with respect to any accounts receivable of any Group Company.
(b) Specifically, but not by way of limitation, the respective balance sheets included in the Financial Statements disclose all of the Group Companies Indebtedness, Liability, whether due or to become due, as of their respective dates to the extent such Indebtedness and Liabilities are required to be disclosed in accordance with the Accounting Standards, and each Group Company has good and marketable and unencumbered title to all assets set forth on the balance sheets of the respective Financial Statements.
3.12 Changes . Since the Statement Date, each Group Company (i) has operated its business in the ordinary course consistent with its past practice, (ii) used its reasonable best efforts to preserve its business, (iii) collected receivables and paid payables and similar obligations in the ordinary course of business consistent with past practice, and (iv) not engaged in any new line of business or entered into any agreement, transaction or activity or made any commitment except those in the ordinary course of business consistent with past practice. Since the Statement Date, there has not been any Material Adverse Effect or any material change in the way any Group Company conducts its business, and there has not been by or with respect to any Group Company:
(a) any purchase, acquisition, sale, lease, disposal of or other transfer of any assets that are individually or in the aggregate material to its business, whether tangible or intangible, other than the purchase or sale of inventory in the ordinary course of business consistent with its past practice or changes in the ordinary course of business;
(b) any acquisition (by merger, consolidation or other combination, or acquisition of stock or assets, or otherwise) of any business or other Person or division thereof, or any sale or disposition of any business or division thereof;
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(c) any waiver, termination, cancellation, settlement or compromise by a Group Company of a material right, debt or claim owed to it;
(d) any incurrence, creation, assumption, repayment, satisfaction, or discharge of (1) any material Lien (other than Permitted Liens) or (2) any Indebtedness or guarantee, or the making of any loan or advance (other than reasonable and normal advances to employees for bona fide expenses that are incurred in the ordinary course of business consistent with its past practice), or the making of any investment or capital contribution;
(e) any amendment to or termination of any Material Contract, or any amendment to or waiver under any Charter Document;
(f) any change in any compensation arrangement or Contract with any employee of any Group Company, or adoption of any new Benefit Plan, or made any material change in any existing Benefit Plan;
(g) any declaration, setting aside or payment or other distribution in respect of any Equity Securities of any Group Company, or any issuance, transfer, redemption, purchase or acquisition of any Equity Securities by any Group Company;
(h) any material damage, destruction or loss, whether or not covered by insurance, on the assets, properties, financial condition, operation or business of any Group Company;
(i) any material change in accounting methods or practices or any revaluation of any of its assets;
(j) except in the ordinary course of business consistent with its past practice, entry into any agreement in respect of Taxes, settlement of any claim or assessment in respect of any Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of any Taxes, entry or change of any Tax election, change of any method of accounting resulting in an amount of additional Tax or filing of any material amended Tax Return;
(k) any commencement or settlement of any Action;
(l) any authorization, sale, issuance, transfer, pledge or other disposition of any Equity Securities of any Group Company;
(m) any resignation or termination of any Key Employee of any Group Company or any material group of employees of any Group Company;
(n) (i) any transaction with any Related Party (other than the Principals and their respective associates) with an aggregate transaction amount greater than or equal to US$2,000,000, (ii) any transactions with any Related Party (other than the Principals and their respective associates) that are on terms that are less favorable than arms length terms for the relevant Group Company, and (iii) any transactions with a Principal or its Associate; or
(o) any agreement or commitment to do any of the things described in this Section 3.12 .
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3.13 Actions . There is no Action pending or to the Warrantors knowledge threatened in writing against or affecting any Group Company or any of its officers, directors or Key Employees with respect to its businesses or proposed business activities, or any officers, directors or Key Employees of any Group Company in connection with such persons respective relationship with such Group Company. Without limiting the generality of the foregoing, there are no Actions pending against any of the Group Companies or, to the knowledge of the Warrantors, threatened against any of the Group Companies, relating to the use by any employee of any Group Company of any information, technology or techniques allegedly proprietary to any of their former employers, clients or other parties. There is no judgment or award unsatisfied against any Group Company, nor is there any Governmental Order in effect and binding on any Group Company or their respective assets or properties. There is no Action pending by any Group Company against any third party nor does any Group Company intend to commence any such Action. No Governmental Authority has at any time challenged or questioned the legal right of any Group Company to conduct its business as presently being conducted.
3.14 Liabilities . No Group Company has any Liabilities except for (i) liabilities set forth in the Balance Sheet that have not been satisfied since the Statement Date, and (ii) current liabilities incurred since the Statement Date in the ordinary course of the Groups business consistent with its past practices. No Group Company has any Indebtedness outside the ordinary course of business that it has directly or indirectly created, incurred, assumed, or guaranteed, or with respect to which the Group Company has otherwise become directly or indirectly liable. No Group Company is a guarantor or indemnitor of any Liabilities of any other Person (other than a Group Company).
3.15 Commitments.
(a) Section 3.15( a ) of the Disclosure Schedule contains a complete and accurate list of all Material Contracts. Material Contracts means, collectively, each Contract to which a Group Company, or any of their properties or assets is bound or currently subject to that (a) involves outstanding obligations (contingent or otherwise) or outstanding payments in excess of RMB10,000,000, (b) involves Intellectual Property that is material to a Group Company or the Business (other than generally-available off-the-shelf shrink-wrap software licenses obtained by the Group on non-exclusive and non-negotiated terms), including without limitation, the Licenses, (c) restricts the ability of a Group Company to compete or to conduct or engage in any business or activity or in any territory, (d) relates to the sale, issuance, grant, exercise, award, purchase, repurchase or redemption of any Equity Securities, (e) involves any provisions providing for exclusivity, change in control, most favored nations, rights of first refusal or first negotiation or similar rights, or grants a power of attorney, agency or similar authority, (f) is with a Related Party, (g) involves outstanding Indebtedness over RMB10,000,000, an extension of credit, a guaranty, surety or assumption of any obligation or any secondary or contingent Liabilities, deed of trust, or the grant of a Lien, (h) involves the lease, license, sale, use, disposition or acquisition of any material assets of the Group, (i) involves the waiver, compromise, or settlement of any dispute, claim, litigation or arbitration over RMB1,000,000, (j) involves the ownership or lease of, title to, use of, or any leasehold or other interest in, any real or personal property (except for personal property leases in the ordinary course of business and involving payments of less than RMB1,000,000), including without limitation, the Leases, (k) involves the establishment, contribution to, or operation of a partnership, joint venture, alliance or similar entity, or involving a sharing of profits or losses (including joint development and joint marketing Contracts), or any investment in, loan to or acquisition or sale of the securities, equity interests or assets of any Person, (l) is between any Domestic Company and another Group Company, (m) is with a Governmental Authority, state-owned enterprise, or sole-source supplier of any material product or service (other than utilities), (n) is a Benefits Plan, or a collective bargaining agreement or is with any labor union or other representatives of the employees, (o) is a brokerage or finders agreement, or (p) material sales agency, marketing or distributorship Contract valued at over RMB10,000,000, (q) is the Dian Guan Contract, (r) is any of the Share Restriction Agreements or (s) is outside of the ordinary course of business of any Group Company or is otherwise material to a Group Company or is one on which a Group Company is substantially dependent.
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(b) Each Material Contract is a valid and binding agreement of the Group Company that is a party thereto, the performance of which does not and will not violate any applicable Law or Governmental Order, and is in full force and effect and enforceable against the parties thereto, except (x) as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors rights generally, and (y) as may be limited by laws relating to the availability of specific performance, injunctive relief or other remedies in the nature of equitable remedies. Each Group Company has duly performed all of its obligations under each Material Contract to the extent that such obligations to perform have accrued, and no breach or default, alleged breach or alleged default, or event which would (with the passage of time, notice or both) constitute a breach or default thereunder by such Group Company or any other party or obligor with respect thereto, has occurred, or as a result of the execution, delivery, and performance of the Transaction Documents will occur. No Group Company has given notice (whether or not written) that it intends to terminate a Material Contract or that any other party thereto has breached, violated or defaulted under any Material Contract. No Group Company has received any notice (whether written or not) that it has breached, violated or defaulted under any Material Contract or that any other party thereto intends to terminate such Material Contract, nor is any Warrantor aware of any circumstances that may lead to the termination of any Material Contract.
3.16 Anti-Bribery, Anti-Corruption, Anti-Money Laundering and Sanctions; Absence of Government Interests.
(a) Each Warrantor and its respective directors, officers, employees, agents and other persons acting on its behalf (collectively, Representatives ) are familiar with and are and have been in compliance with all applicable Laws relating to anti-bribery, anti-corruption, anti-money laundering, record keeping and internal control laws (collectively, the Compliance Laws ) including the FCPA, as if it were a U.S. Person. Furthermore, no Public Official (i) holds an ownership or other economic interest, direct or indirect, in any of the Group Companies or in the contractual relationship formed by this Agreement, or (ii) serves as an officer, director or employee of any Group Company. Without limiting the foregoing, neither any Group Company nor any Representative has, directly or indirectly, offered, authorized, promised, condoned, participated in, consummated, or received notice of any allegation of,
(i) the making of any gift or payment of anything of value to any Public Official by any Person to obtain any improper advantage, affect or influence any act or decision of any such Public Official, or assist any Group Company in obtaining or retaining business for, or with, or directing business to, any Person.
(ii) the taking of any action by any Person which (i) would violate the FCPA, if taken by an entity subject to the FCPA, or (ii) could reasonably be expected to constitute a violation of any applicable Compliance Law, or
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(iii) the making of any false or fictitious entries in the books or records of any Group Company by any Person, or
(iv) the using of any assets of any Group Company for the establishment of any unlawful or unrecorded fund of monies or other assets, or the making of any unlawful or undisclosed payment.
(b) No Group Company or any of its Representatives has ever been found by a Governmental Authority to have violated any criminal or securities Law or is subject to any indictment or any government investigation for bribery. None of the beneficial owners of any Equity Securities or other interest in any Group Company or the current or former Representatives of any Group Company are or were Public Officials.
(c) No Group Company or any of its Representatives is a Prohibited Person, and no Prohibited Person will be given an offer to become an employee, officer, consultant or director of any Group Company. No Group Company has conducted or agreed to conduct any business, or entered into or agreed to enter into any transaction with a Prohibited Person.
3.17 Title; Properties.
(a) Title; Personal Property . Each Group Company has good and valid title to all of its respective assets, whether tangible or intangible (including those reflected in the Balance Sheet, together with all assets acquired thereby since the Statement Date, but excluding those that have been disposed of since the Statement Date), in each case free and clear of all Liens, other than Permitted Liens. The foregoing assets collectively represent all assets (including all rights and properties) necessary for the conduct of the business of each Group Company as presently conducted. Except for leased or licensed assets, no Person other than a Group Company owns any interest in any such assets. All leases of real or personal property to which a Group Company is a party are fully effective and afford the Group Company valid leasehold possession of the real or personal property that is the subject of the lease. All machinery, vehicles, equipment and other tangible personal property owned or leased by a Group Company are in good condition and repair (reasonable wear and tear excepted). There are no facilities, services, assets or properties which are used in connection with the business of the Group and which are shared with any other Person that is not a Group Company.
(b) Real Property . No Group Company owns or has legal or equitable title or other right or interest in any real property other than as held pursuant to Leases. Section 3.17( b ) of the Disclosure Schedule sets forth each leasehold interest pursuant to which any Group Company holds any real property (a Lease ), indicating the parties to such Lease and the address of the property demised under the Lease, the rent payable under the Lease and the term of the Lease. The particulars of the Leases as set forth in Section 3.17( b ) of the Disclosure Schedule are true and complete. The lessor under each Lease is qualified and has obtained all Consents necessary to enter into such Lease, including without limitation any Consents required from the owner of the property demised pursuant to the Lease if the lessor is not such owner. There is no material claim asserted or, to the knowledge of the Warrantors, threatened in writing by any Person regarding the lessors ownership of the property demised pursuant to each Lease. Each Lease is in compliance with applicable Laws, including with respect to the ownership and operation of property and conduct of business as now conducted by the applicable Group Company which is a party to such Lease. Each Group Company which is party to a Lease has accepted possession of the property demised pursuant to the Lease and is in actual possession thereof and has not sublet, assigned or hypothecated its leasehold interest. No Group Company uses any real property in the conduct of its business except insofar as it has secured a Lease with respect thereto. The leasehold interests under the Leases held by each Group Company are adequate for the conduct of the business of such Group Company as currently conducted.
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3.18 Related Party Transactions . Other than as set forth in Section 3.18 of the Disclosure Schedule (the Related Party Transactions), no Related Party has any Contract, understanding, or proposed transaction with, or is indebted to, any Group Company or has any direct or indirect interest in any Group Company other than as set forth in Section 3.2(a) of the Disclosure Schedule, nor is any Group Company indebted (or committed to make loans or extend or guarantee credit) to any Related Party (other than for accrued salaries, for the current pay period, reimbursable expenses or other standard employee benefits). The Related Party Transactions are entered into in the ordinary course of business of the relevant Group Company on terms that are no less favorable to the relevant Group Company than arms length terms. No Related Party has any direct or indirect interest in any Person with which a Group Company is affiliated or with which a Group Company has a material business relationship (including any Person which purchases from or sells, licenses or furnishes to a Group Company any goods, intellectual or other property rights or services), or in any Contract to which a Group Company is a party or by which it may be bound or affected, and no Related Party directly or indirectly competes with, or has any interest in any Person that competes with the businesses of the Group Companies, being the operation of mobile content aggregation platforms and any other major business operations of any Group Company, except those disclosed in Section 3.3 of the Disclosure Schedule.
3.19 Intellectual Property Rights.
(a) Company IP . Except as disclosed in Section 3.19( a ) of the Disclosure Schedule, each Group Company owns or otherwise has sufficient rights (including but not limited to the rights of development, maintenance, licensing and sale) to or otherwise has the licenses to use all Intellectual Property necessary and sufficient to conduct its business as currently conducted and proposed to be conducted by such Group Company ( Company IP ) without any conflict with or infringement of the rights of any other Person. Section 3.19( a ) of the Disclosure Schedule sets forth a complete and accurate list of all Company Registered IP for each Group Company, including for each the relevant name or description, registration/certification or application number, and filing, registration or issue date.
(b) IP Ownership . All Company Registered IP is owned by and registered or applied for solely in the name of a Group Company, is valid and subsisting and has not been abandoned, and all necessary registration, maintenance and renewal fees with respect thereto and currently due have been satisfied. No Group Company or any of its employees, officers or directors has taken any actions or failed to take any actions that would cause any Company Owned IP to be invalid, unenforceable or not subsisting. No funding or facilities of a Governmental Authority or a university, college, other educational institution or research center was used in the development of any material Company Owned IP. No material Company Owned IP is the subject of any Lien, license or other Contract granting rights therein to any other Person. No Group Company is or has been a member or promoter of, or contributor to, any industry standards bodies, patent pooling organizations or similar organizations that could require or obligate a Group Company to grant or offer to any Person any license or right to any material Company Owned IP. No Company Owned IP is subject to any proceeding or outstanding Governmental Order or settlement agreement or stipulation that (a) restricts in any manner the use, transfer or licensing thereof, or the making, using, sale, or offering for sale of any Group Companys products or services, by any Group Company, or (b) may affect the validity, use or enforceability of such Company Owned IP. Each Principal has assigned and transferred to a Group Company any and all of his/her Intellectual Property related to the Business. No Group Company has (a) transferred or assigned any Company IP; (b) authorized the joint ownership of, any Company IP; or (c) permitted the rights of any Group Company in any Company IP to lapse or enter the public domain.
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(c) Infringement, Misappropriation and Claims . No Group Company has violated, infringed or misappropriated any Intellectual Property of any other Person, nor has any Group Company received any written notice alleging any of the foregoing. To the knowledge of each of the Warrantors, no Person has violated, infringed or misappropriated any Company IP of any Group Company, and no Group Company has given any written notice to any other Person alleging any of the foregoing. No Person has challenged the ownership or use of any Company IP by a Group Company. No Group Company has agreed to indemnify any Person for any infringement, violation or misappropriation of any Intellectual Property by such Person.
(d) Assignments and Prior IP . Except as disclosed in Section 3.19( d ) of the Disclosure Schedule, all inventions and know-how conceived by employees of a Group Company related to the business of such Group Company are currently owned exclusively by a Group Company. All employees, contractors, agents and consultants of a Group Company who are or were involved in the creation of any Intellectual Property for such Group Company have executed an assignment of inventions agreement that vests in a Group Company exclusive ownership of all right, title and interest in and to such Intellectual Property, to the extent not already provided by Law. All employee inventors of Company Owned IP have received reasonable reward and remuneration from a Group Company for his/her service inventions or service technology achievements in accordance with the applicable PRC Laws. It will not be necessary to utilize any Intellectual Property of any such Persons made prior to their employment by a Group Company and none of such Intellectual Property has been utilized by any Group Company, except for those that are exclusively owned by a Group Company. None of the employees, consultants or independent contractors, currently or previously employed or otherwise engaged by any Group Company, (a) is in violation of any current or prior confidentiality, non-competition or non-solicitation obligations to such Group Company or to any other Persons, including former employers, or (b) is obligated under any Contract, or subject to any Governmental Order, that would interfere with the use of his or her best efforts to promote the interests of the Group Companies or that would conflict with the business of such Group Company as presently conducted.
(e) Licenses . Section 3.19( e ) of the Disclosure Schedule contains a complete and accurate list of the Licenses. The Licenses means, collectively, (a) all licenses, sublicenses, and other Contracts to which any Group Company is a party and pursuant to which any third party is authorized to use, exercise or receive any benefit from any material Company IP, and (b) all licenses, sublicenses and other Contracts to which any Group Company is a party and pursuant to which such Group Company is authorized to use, exercise, or receive any benefit from any material Intellectual Property of another Person, in each case except for (1) agreements involving off-the-shelf commercially available software, and (2) non-exclusive licenses to customers of the Business in the ordinary course of business consistent with past practice. The Group Companies have paid all license and royalty fees required to be paid under the Licenses.
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(f) Protection of IP . Each Group Company has taken reasonable and appropriate steps to protect, maintain and safeguard Company IP and made all applicable filings, registrations and payments of fees in connection with the foregoing. Without limiting the foregoing, all current and former officers, employees, consultants and independent contractors of any Group Company and all suppliers, customers, distributors, and other third parties having access to any Company IP have executed and delivered to such Group Company an agreement requiring the protection of such Company IP. To the extent that any Company IP has been developed or created independently or jointly by an independent contractor or other third party for any Group Company, or is incorporated into any products or services of any Group Company, such Group Company has a written agreement with such independent contractor or third party and has thereby obtained ownership of, and is the exclusive owner of all such independent contractors or third partys Intellectual Property in such work, material or invention by operation of law or valid assignment.
(g) No Public Software. No Public Software forms part of any product or service provided by any Group Company or was or is used in connection with the development of any product or service provided by any Group Company or is incorporated into, in whole or in part, or has been distributed with, in whole or in part, any product or service provided by any Group Company. No Software included in any Company Owned IP has been or is being distributed, in whole or in part, or was used, or is being used in conjunction with any Public Software in a manner which would require that such Software be disclosed or distributed in source code form or made available at no charge.
3.20 Labor and Employment Matters.
(a) Each Group Company has complied with all applicable Laws related to labor or employment, including provisions thereof relating to wages, hours, working conditions, benefits, retirement, social welfare, equal opportunity and collective bargaining. There is not pending or threatened, and there has not been since the incorporation of each Group Company, any Action relating to the violation or alleged violation of any applicable Laws by such Group Company related to labor or employment, including any charge or complaint filed by an employee with any Governmental Authority or any Group Company.
(b) Section 3.20(b) of the Disclosure Schedule contains a true and complete list of each Benefit Plan currently or previously adopted, maintained, or contributed to by any Group Company or under which any Group Company has any Liability or under which any employee or former employee of any Group Company has any present or future right to benefits. True, complete and accurate copies of the plans of the Current ESOP, the documents relating to the Trust and the transfer of Ordinary Shares to the ESOP Trustee have been provided to the Purchaser. Except for required contributions or benefit accruals for the current plan year, no Liability has been or is expected to be incurred by any Group Companies under or pursuant to any applicable Laws relating to any Benefit Plan or individual employment compensation agreement, and, no event, transaction or condition has occurred or exists that would result in any such Liability to any Group Companies. Each of the Benefit Plans listed in Section 3.20( b ) of the Disclosure Schedule is and has at all times been in compliance with all applicable Laws (including without limitation, SAFE Rules and Regulations, if applicable), and all contributions to, and payments for each such Benefit Plan have been timely made. There are no pending or threatened Actions involving any Benefit Plan listed in Section 3.20( b ) of the Disclosure Schedule (except for claims for benefits payable in the normal operation of any Benefit Plan). Each Group Company maintains, and has fully funded, each Benefit Plan and any other labor-related plans that it is required by Law or by Contract to maintain. Each Group Company is in compliance with all Laws and Contracts relating to its provision of any form of Social Insurance, and has paid, or made provision for the payment of, all Social Insurance contributions required under applicable Laws and Contracts.
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(c) There has not been, and there is not now pending or, to the knowledge of the Warrantors, threatened, any strike, union organization activity, lockout, slowdown, picketing, or work stoppage or any unfair labor practice charge against any Group Company. No Group Company is bound by or subject to (and none of their assets or properties is bound by or subject to) any written or oral Contract, commitment or arrangement with any labor union or any collective bargaining agreements.
(d) Schedule IV enumerates each Key Employee, along with each such individuals title. Each such individual is currently devoting all of his or her business time to the conduct of the business of the applicable Group Company. To the knowledge of the Warrantors, no such individual is subject to any covenant restricting him/her from working for any Group Company. No such individual is obligated under, or in violation of any term of, any Contract or any Governmental Order relating to the right of any such individual to be employed by, or to contract with, such Group Company. No Group Company has received any notice alleging that any such violation has occurred. No such individual is currently working or plans to work for any other Person that competes with any Group Company, whether or not such individual is or will be compensated by such Person. No such individual or any group of employees of any Group Company has given any notice of an intent to terminate their employment with any Group Company, nor does any Group Company have a present intention to terminate the employment of any such individual or any group of employees.
3.21 Customers and Suppliers . Section 3.21 of the Disclosure Schedule is a correct list of each of the top five (5) business customers (by attributed revenues) and top five (5) suppliers (by attributed expenses), (in each case, with related or affiliated Persons aggregated for purposes hereof) of the Group Companies for the 12-month period ending on the Statement Date. Each such supplier can provide sufficient and timely supplies of goods and services in order to meet the requirements of the Groups Business consistent with prior practice. No Group Company has experienced or been notified of any shortage in goods or services provided by its suppliers or other providers and has no reason to believe that any Person listed on Section 3.21 of the Disclosure Schedule would not continue to provide to, or purchase from, or cooperate with, respectively, or that it would otherwise alter its business relationship with, the Group at any time after the Closing, on terms substantially similar to those in effect on the date hereof. There is not currently any dispute pending between any Group Company and any Person listed on Section 3.21 of the Disclosure Schedule.
3.22 Internal Controls . Each Group Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions by it are executed in accordance with managements general or specific authorization, (ii) transactions by it are recorded as necessary to permit preparation of financial statements in conformity with the Accounting Standards and to maintain asset accountability, (iii) access to assets of it is permitted only in accordance with managements general or specific authorization, (iv) the recorded inventory of assets is compared with the existing tangible assets at reasonable intervals and appropriate action is taken with respect to any material differences, (v) segregating duties for cash deposits, cash reconciliation, cash payment, proper approval is established, and (vi) no personal assets or bank accounts of the employees, directors, officers are mingled with the corporate assets or corporate bank account, and no Group Company uses any personal bank accounts of any employees, directors, officers thereof during the operation of the business.
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3.23 Entire Business . No Group Company shares or provides any facilities, operational services, assets or properties with or to any other entity which is not a Group Company.
3.24 No Brokers . Except as set for the in Section 3.24 of the Disclosure Schedule, neither any Group Company nor any of its Affiliates has any Contract with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement or by any of the Transaction Documents, or has incurred any Liability for any brokerage fees, agents fees, commissions or finders fees in connection with any of the Transaction Documents or the consummation of the transactions contemplated therein.
3.25 Certain Transactions . All transactions and agreements entered into between any Group Company and any operators of advertising platforms or agents have been entered into in the ordinary course of business and on terms that are no less favorable than arms length terms. The execution, delivery and performance of the these Contract by each party thereto do not, and the consummation by such party of the transactions contemplated thereby will not, (a) result in any violation of, be in conflict with, or constitute any default under any Contract to which such party is bound or (b) violate any rights (including any intellectual property rights) of any Person.
3.26 No General Solicitation . Neither any Group Company, nor any of its officers, directors, employees, agents, stockholders or partners has either directly or indirectly, including through a broker or finder (a) engaged in any general solicitation, or (b) published any advertisement in connection with the offer and sale of the Subscription Shares.
3.27 Control Documents . (a) Each of the parties to the Control Documents has the legal right, power and authority to enter into and perform its/his/her obligations under each Control Document to which it/he/she is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of, and has authorized, executed and delivered, each Control Document to which it/he/she is a party; (b) each Control Document constitutes a legally binding obligation of the parties thereto, enforceable in accordance with its terms; and (c) each Control Document is in full force and effect.
3.28 General Partner of Tianjin Shan Shi LP . The general partner of Tianjin Shan Shi LP is Tianjin Shengxuan, which will be wholly owned and controlled by Mr. Tan as of the Closing.
3.29 Disclosure . No representation or warranty by the Warrantors in this Agreement and no information or materials provided by the Warrantors to the Purchaser in connection with the negotiation or execution of this Agreement or any agreement contemplated hereby contains any untrue statement of a material fact, or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading. Except as set forth in this Agreement or the Disclosure Schedule, there is no fact that the Company has not disclosed to the Purchaser in writing and of which any of its officers, directors or executive employees or the Principals has knowledge or is reasonably expected to have knowledge and which, if disclosed, might reasonably affect the willingness of the Purchaser to subscribe for the Series C2 Preferred Shares for the consideration or otherwise on the terms specified in this Agreement.
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3.30 Survival Period of Representations and Warranties . The representations and warranties of the Warrantors provided in this Section 3 with respect to the Purchaser (other than any Fundamental Warranty which shall survive the Closing indefinitely) shall survive until the later of (such later date, the Survival Date ) (i) fifteen (15) months after the Series B1 Closing; or (ii) the expiration of the lock-up period applicable to such Purchaser after the Company consummates the IPO and when such Purchaser may freely transfer all its Equity Securities of the Company without any volume, manner of sale or timing restriction.
4. Representations and Warranties of the Purchaser . The Purchaser represents and warrants to the Company, as of the date hereof and as of the Closing Date, that:
4.1 Authorization . Such Purchaser has all requisite power and authority to execute and deliver the Transaction Documents to which it is a party and to carry out and perform its obligations thereunder. All action on the part of such Purchaser necessary for the authorization, execution and delivery of the Transaction Documents to which it is a party, has been taken or will be taken prior to the Closing. Each Transaction Document has been duly executed and delivered by such Purchaser (to the extent such Purchaser is a party), enforceable against such Purchaser in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other Laws of general application affecting enforcement of creditors rights generally, and (ii) as limited by Laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.
4.2 Purchase for Own Account . The Subscription Shares being purchased by such Purchaser and the Conversion Shares thereof will be acquired for such Purchasers own account, not as a nominee or agent, and not with a view to or in connection with the sale or distribution of any part thereof.
4.3 Restricted Securities . Such Purchaser understands that the Subscription Shares and the Conversion Shares are restricted securities within the meaning of Rule 144 under the Securities Act; that the Subscription Shares and the Conversion Shares are not registered or listed publicly and must be held indefinitely unless they are subsequently registered or listed publicly or an exemption from such registration or listing is available.
4.4 Legitimate Source of Investment Funds . The funds used by such Purchaser to pay its Subscription Price are legally acquired by such Purchaser which shall not violate any applicable Laws, including without limitation, applicable anti-money laundering laws.
5. |
Conditions to the Closing. |
5.1 Conditions of the Purchaser s Obligations at the Closing . The obligations of the Purchaser to consummate the Closing with respect to its applicable Subscribed Shares under Section 2 of this Agreement are subject to the fulfillment, to the satisfaction of such Purchaser on or prior to the Closing, or waiver by such Purchaser, of the following conditions:
(a) Representations and Warranties . Each of the representations and warranties of the Warrantors contained in Section 3 shall have been true, correct and complete when made and shall be true and complete on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing Date, except in either case for those representations and warranties that address matters only as of a particular date, which representations will have been true and complete as of such particular date.
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(b) Performance . Each Warrantor shall have performed and complied with all obligations and conditions contained in the Transaction Documents that are required to be performed or complied with by them, on or before the Closing.
(c) Authorizations . All Consents of any competent Governmental Authority or of any other Person that are required to be obtained by any Warrantor in connection with the consummation of the transactions that are required to be consummated prior to the Closing as contemplated by the Transaction Documents (including but not limited to those related to the formation of the Company, the lawful issuance and sale of the Subscription Shares, and any waivers of notice requirements, rights of first refusal, preemptive rights, put or call rights or other similar rights) shall have been duly obtained and effective as of the Closing, and evidence thereof shall have been delivered to the Purchaser.
(d) Proceedings and Documents . All corporate and other proceedings in connection with the transactions to be completed at the Closing and all documents incident thereto, including without limitation written approval from all of the then current holders of equity interests of each Group Company, as applicable, with respect to this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby, shall have been completed in form and substance satisfactory to the Purchaser, and the Purchaser shall have received all such copies of such documents as it may reasonably request.
(e) Memorandum and Articles . The Memorandum and Articles, in the form attached hereto as Exhibit A , shall have been duly adopted by all necessary action of the Board of Directors and/or the members of the Company (which Memorandum and Articles shall have been duly filed with the appropriate authority(ies) of the Cayman Islands within five (5) Business Days after the Closing), and such adoption shall have become effective prior to the Closing with no alternation or amendment as of the Closing, and reasonable evidence thereof shall have been delivered to the Purchaser, provided that if the Closing takes place after the Companys IPO, the foregoing condition shall not be required. The Charter Documents of each of the other Group Companies shall be in the form and substance reasonably satisfactory to the Purchaser.
(f) Transaction Documents . Each of the parties to the Transaction Documents, other than the Purchaser and, where applicable, its Affiliates, shall have executed and delivered such Transaction Documents to the Purchaser, provided that if the Closing takes place after the Companys IPO, the Transaction Documents shall not include the Shareholders Agreement.
(g) Employment Agreement; Confidentiality, Non-compete and Invention Assignment Agreement . Jifen and each Principal (except Mr. Tan) and each Key Employee shall have entered into an employment agreement and a confidentiality, non-compete and invention assignment agreement or an employment agreement containing confidentiality, non-compete and invention assignment provisions, in a form reasonably satisfactory to the Purchaser, and reasonable evidence thereof shall have been delivered to the Purchaser.
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(h) SAFE Registration . Except with respect to the 10,000,000 Ordinary Shares transferred by Mr. Tan to Qu World Limited, (i) each Principal who is a Domestic Resident as defined in Circular 37 and is subject to any of the registration or reporting requirements of Circular 37 (a Domestic Resident ) shall have, and (ii) the Group Companies shall have ensured that those individuals described in (i) above shall have, and shall have used commercially reasonable efforts to cause that any other holder or beneficial owner of Equity Securities of any Group Company who is a Domestic Resident shall have, in each case, complied with all reporting and/or registration requirements (including filings of amendments to existing registrations) under Circular 37, and obtained a SAFE registration certificate with respect to his/her interest in the Company, in form and substance satisfactory to the Purchaser.
(i) No Material Adverse Effect . There shall have been no Material Adverse Effect since the Statement Date.
(j) Due Diligence . The Purchaser shall have completed its business, legal, and financial due diligence investigation of the Group Companies to its satisfaction.
(k) Consent of Governmental Authorities . All Consents of the competent Government Authorities or entities in the PRC necessary for the Subscription ( PRC Approvals ) have been obtained by the Purchaser, including but not limited to: (A) the Consent of National Development and Reform Commission ( NDRC ) or its local counterpart; (B) the Consent of Ministry of Commerce ( MOFCOM ) or its local counterpart; (C) the Consent of SAFE or any applicable commercial banks under the supervision of SAFE; (d) the Consent (including but not limited to state-owned assets appraisal report as required by competent Government Authorities) of State-owned Assets Supervision and Administration Commission ( SASAC ) or its local counterpart.
(l) Governmental Order . There shall not be any Governmental Order or any condition imposed under any Law which would prohibit or restrict the sale and issuance of the Subscription Shares or the consummation of the transactions contemplated hereby or by any other Transaction Documents, and no Governmental Authority shall have requested any information in connection with, or instituted or threatened any action or investigation to restrain, prohibit or otherwise challenge, the transactions contemplated by the Transaction Documents.
(m) No Litigation . Except as disclosed in the Disclosure Schedule, no action shall have been threatened or instituted against the Purchaser or any Group Company seeking to enjoin or challenge the validity of, or assert any Liability against any of them on account of, any transactions contemplated by the Transaction Documents.
(n) Closing Certificate . A director of the Company shall have executed and delivered to the Purchaser at the Closing a certificate dated as of the Closing (i) stating that the conditions specified in this Section 5.1 have been fulfilled as of the Closing, (ii) all corporate and other proceedings in connection with the transactions to be completed at the Closing and all documents incident thereto, including without limitation written approval from all of the then current holders of equity interests of each Group Company, as applicable, with respect to this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby, shall have been completed, and each Group Company shall have delivered to the Purchaser all such copies of such documents as such Purchaser may reasonably request, and (iii) attaching thereto (a) the Charter Documents of the Group Companies as then in effect, and (b) copies of all resolutions approved by the shareholders and boards of directors of each Group Company related to the transactions contemplated hereby.
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Each of the Warrantors shall use their respective best efforts to cause each of the condition precedents set forth in this Section 5.1 to be satisfied as soon as possible following the date hereof.
5.2 Conditions of the Company s Obligations at Closing . The obligations of the Company to consummate the Closing under Section 2 of this Agreement with respect to the Purchaser, unless otherwise waived in writing by the Company, are subject to the fulfillment on or before the Closing of each of the following conditions:
(a) Representations and Warranties . The representations and warranties of the Purchaser contained in Section 4 shall have been true and complete when made and shall be true and complete on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing, except in either case for those representations and warranties that address matters only as of a particular date, which representations will have been true and complete as of such particular date.
(b) Performance . The Purchaser shall have performed and complied with all covenants, obligations and conditions contained in this Agreement that are required to be performed or complied with by such Purchaser on or before the Closing.
(c) Authorizations . All Consents of any competent Governmental Authority or of any other Person that are required to be obtained by the Purchaser in connection with the consummation of the transactions that are required to be consummated prior to the Closing as contemplated by the Transaction Documents (including but not limited to those related to execution, delivery and performance of the Transaction Documents by such Purchaser and the formation of the holding company designated by such Purchaser and to be registered as holder of the Subscription Shares) shall have been duly obtained and effective as of the Closing, and evidence thereof shall have been delivered to the Company.
(d) Written Notice . The Purchaser shall have executed and delivered to the Company at least ten (10) business prior to the Closing a written notice stating that (i) all Consents of any competent Governmental Authority and of any other Person required have been obtained, and (ii) the holding company has been incorporated and validly existing to be registered as the holder of the Subscription Shares, and evidence thereof shall have been delivered to the Company.
The Purchaser shall use its best efforts to cause each of the condition precedents set forth in this Section 5.2 to be satisfied as soon as possible following the date hereof.
6. |
Covenants. |
6.1 [Reserved]
6.2 Pre-Closing Covenants.
(a) Cayman Legal Opinion . As soon as possible but in any event no later than five (5) Business Days after the execution of this Agreement, the Company shall deliver a legal opinion from the Cayman legal counsel of the Group Companies to the Purchaser in the form and substance satisfactory to the Purchaser. Such Cayman legal opinion shall substantially indicate that, including but without limitation to, the Purchaser is entitled to receive and be registered as the holder of its Subscription Shares, i.e. Series C2 Preferred Shares if the Closing takes place prior to the Companys IPO or the same number of Ordinary Shares if the Closing takes place after the Companys IPO, in accordance with this Agreement provided that conditions to Closing in the Section 5 have been met or waived by relevant parties.
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(b) U.S. Legal Memorandum . As soon as possible but in any event no later than five (5) Business Days after the execution of this Agreement, the Company shall deliver a legal memorandum from the U.S. legal counsel of the Group Companies in form and substance satisfactory to the Purchaser. Such U.S. legal memorandum shall substantially indicate that, including but without limitation to, (i) any necessary action which the Company and/or the Purchaser shall take to list or trade the shares received by the Purchaser pursuant to this Agreement on the primary exchange on which the Companys securities are then listed or traded and (ii) the lock-up period of the shares received by the Purchaser provided by the applicable Securities Act or listing rules.
(c) Most Favorable Terms . After the date hereof and prior to the Closing, if the Company grants any more favorable preferred rights to any new investor compared to those granted to the Purchaser, the Purchaser shall be automatically entitled to those more favorable preferred rights.
6.3 Post-Closing Covenants . Each of the Warrantors jointly and severally undertakes that it/he will procure the following post-closing covenants to be fully performed by relevant party.
(a) Lock-up Period . The shares received by the Purchaser shall be subject to a lock-up period of one hundred and eighty (180) days after the closing of the IPO.
(b) Registration Other Than on Form F-3 or Form S-3 . Notwithstanding anything to the contrary in the Transaction Documents, at any time or from time to time after the earlier of (i) the date that is six (6) months after the closing of the IPO, or the date that the lock-up by underwriters is partially or wholly released, the Purchaser is entitled to request in writing that the Company effect a Registration of Registrable Securities held by the Purchaser. Upon receipt of such request, the Company shall use its best efforts to cause the Registrable Securities held by the Purchaser to be registered. The Company shall be obligated to effect only one (1) Registration at the request of the Purchaser pursuant to this Section 6.3(b) that has been declared and ordered effective. All expenses incurred in connection with Registration in this Section6.3(b), including all Registration, filing and qualification fees (including to the Commission and FINRA), printers and accounting fees, fees and disbursements of legal counsel for the Company and any reasonable fees and expenses of underwriters (if any) customarily paid by an issuer shall be borne by the Company . In addition, if the Company proposes to Register for its own account any of its Equity Securities, or for the account of any holder (other than the Purchaser) of Equity Securities any of such holders Equity Securities, in connection with the public offering of such securities (except for Exempt Registrations), the Company shall promptly (but in no event fewer than twenty (20) days prior to the proposed date of filing such Registration Statement, or in the case of a Shelf Registration Statement, the anticipated pricing or trade date) give the Purchaser written notice of such Registration and, upon the written request of the Purchaser given within fifteen (15) days after delivery of such notice, the Company shall use its reasonable best efforts to include in such Registration any Registrable Securities thereby requested to be Registered by the Purchaser. If the Purchaser decides not to include all or any of its Registrable Securities in such Registration by the Company, the Purchaser shall nevertheless continue to have the right to include any Registrable Securities in any subsequent Registration Statement or Registration Statements as may be filed by the Company, all upon the terms and conditions set forth in the Shareholders Agreement. In order to avoid any doubt, the Purchaser is entitled to participate in all registrations rights set forth in the Shareholders Agreement as if it was a signatory to such agreement.
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(c) Content Censorship System. The Company shall take all necessary corporate action to ensure that if Jifen or any of its subsidiaries proposes to amend its content censorship system, such company shall obtain the prior consent of the relevant management representative appointed by the holder of the Series C2 Preferred Shares to Jifen, regardless of whether the Closing has been fully consummated.
(d) Board of Directors . The Company shall take all necessary corporate action such that immediately following the Closing, the Purchaser shall have the right to designate one (1) director of the Board, with one (1) vote at any Board Meeting. The Purchaser shall receive a copy of the Companys register of directors, certified by the registered agent of the Company as true and complete as of the Closing Date.
(e) Grants under the Current ESOP . The Company shall ensure that the Current ESOP complies with all applicable Laws and ensure that all award grants shall be made in accordance with the Current ESOP.
(f) Memorandum and Articles . The Company shall file the Memorandum and Articles with the Registrar of Companies of the Cayman Islands within five (5) Business Days following the Closing.
(g) Other Issues in the Disclosure Schedule. As soon as practicable following the Closing, each of the Warrantors shall resolve in a reasonably practicable manner the issues which are disclosed in the Disclosure Schedule but not expressly specified as a covenant under this Section 6.3 or a specific condition precedent to the Closing under Section 5.1.
(h) Compliance with Applicable Law . Following the Closing, each of the Warrantors shall cause each of the Group Companies to, comply with all applicable Laws in any material respect, including but not limited to applicable PRC Laws relating to telecommunication, publication, advertisement, culture, Intellectual Property, anti-monopoly, taxation, employment and social welfare, foreign exchange and benefits. For the purpose to perform and implement the foregoing obligations, each of the Warrantors shall cause each of the Group Companies to, by using its best efforts, operate its Business and/or adjust its operations in a way to comply with of applicable Laws or the requirements of Governmental Authorities.
(i) Qualifications. Following the Closing, each of the Warrantors shall cause each of the Group Companies to, at all times maintain the validity of, and comply with all legal and regulatory requirements with respect to, the Consents that it has obtained and may need to obtain after the Closing for the conduct of its Business.
(j) Further Assurances . Upon the terms and subject to the conditions herein, each of the Parties hereto agrees to use its best efforts to take or cause to be taken all action, to do or cause to be done, to execute such further instruments, and to assist and cooperate with the other Parties hereto in doing, all things necessary, proper or advisable under applicable Laws or otherwise to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement and the other Transaction Documents, provided that except as expressly provided herein, no Party shall be obligated to grant any waiver of any condition or other waiver hereunder
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(k) Effective Period of Post-Closing Covenants . The covenants of the Warrantors provided in this Section 6.3 with respect to the Purchaser shall remain effective until the earlier of (i) fifteen (15) months after the Series B1 Closing; and (ii) the expiration of the lock-up period applicable to the Purchaser after the Company consummates the IPO.
7. |
Miscellaneous Provisions. |
7.1 Successors and Assigns . Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the Parties hereto whose rights or obligations hereunder are affected by such terms and conditions. This Agreement and the rights and obligations therein may not be assigned by any Warrantor without the prior written consent of the Purchaser.
7.1A Assignment by the Purchaser . The Purchaser (and its successor and assign) is entitled to assign its rights and obligations hereunder together as a whole to its Affiliates, without the prior consent of other Parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any Party other than the Parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
In the event that the Purchaser assigns its rights and obligations hereunder together as a whole to its domestic Affiliate (the Domestic Transferee ), each of the Company and the other parties to this Agreement agrees to continue to perform this Agreement and be bound by its terms in every way as if the Domestic Transferee were the original party to this Agreement in place of the Purchaser. Each of the Company and the other parties to this Agreement releases the Purchaser from all liabilities and obligations under this Agreement.
In the event that the Domestic Transferee further assigns its rights and obligations hereunder together as a whole to its overseas Affiliate (the Overseas Transferee ), each of the Company and the other parties to this Agreement agrees to continue to perform this Agreement and be bound by its terms in every way as if the Overseas Transferee were the original party to this Agreement in place of the Domestic Transferee. Each of the Company and the other parties to this Agreement releases the Domestic Transferee from all liabilities and obligations under this Agreement.
7.2 Governing Law . This Agreement shall be governed by and construed under the Laws of Hong Kong, without regard to principles of conflict of Laws thereunder.
7.3 Dispute Resolution.
(a) Any dispute, controversy or claim (each, a Dispute ) arising out of or relating to this Agreement, or the interpretation, breach, termination, validity or invalidity thereof, shall be referred to arbitration upon the demand of the claimant to the dispute with notice (the Arbitration Notice ) to the respondents(s) to the dispute.
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(b) The Dispute shall be settled by arbitration in Hong Kong by the Hong Kong International Arbitration Centre (the HKIAC ) in accordance with the Hong Kong International Arbitration Centre Administered Arbitration Rules (the HKIAC Rules ) in force when the Arbitration Notice is submitted in accordance with the HKIAC Rules. There shall be three (3) arbitrators. The claimant(s) to the dispute shall jointly select one arbitrator and the respondent(s) to the dispute shall jointly select one arbitrator. All selections shall be made within 30 days after the selecting Party gives or receives the demand for arbitration. Such arbitrators shall be freely selected, and the Parties shall not be limited in their selection to any prescribed list. The Chairman of the HKIAC shall select the third arbitrator, who shall be qualified to practice law in Hong Kong.
(c) The arbitral proceedings shall be conducted in English. To the extent that the HKIAC Rules are in conflict with the provisions of this Section, including the provisions concerning the appointment of the arbitrators, the provisions of this Section shall prevail.
(d) Each party to the arbitration shall cooperate with each other parties to the arbitration in making full disclosure of and providing complete access to all information and documents requested by such other party in connection with such arbitral proceedings, subject only to any confidentiality obligations binding on such party.
(e) The award of the arbitral tribunal shall be final and binding upon the parties thereto, and the prevailing party may apply to a court of competent jurisdiction for enforcement of such award.
(f) The arbitral tribunal shall decide any Dispute submitted by the parties to the arbitration strictly in accordance with the substantive Laws of Hong Kong (without regard to principles of conflict of Laws thereunder) and shall not apply any other substantive Law.
(g) Any party to the Dispute shall be entitled to seek preliminary injunctive relief, if possible, from any court of competent jurisdiction pending the constitution of the arbitral tribunal.
(h) During the course of the arbitral tribunals adjudication of the Dispute, this Agreement shall continue to be performed except with respect to the part in dispute and under adjudication.
7.4 Notices . Any notice required or permitted pursuant to this Agreement shall be given in writing and shall be given either personally or by sending it by next-day or second-day courier service, fax, electronic mail or similar means to the address of the relevant Party as shown on Schedule V (or at such other address as such Party may designate by fifteen (15) days advance written notice to the other Parties to this Agreement given in accordance with this Section). Where a notice is sent by next-day or second-day courier service, service of the notice shall be deemed to be effected by properly addressing, pre-paying and sending by next-day or second-day service through an internationally-recognized courier a letter containing the notice, with a written confirmation of delivery, and to have been effected at the earlier of (i) delivery (or when delivery is refused) and (ii) expiration of two (2) Business Days after the letter containing the same is sent as aforesaid. Where a notice is sent by fax or electronic mail, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organization, with a written confirmation of delivery, and to have been effected on the day the same is sent as aforesaid, if such day is a Business Day and if sent during normal business hours of the recipient, otherwise the next Business Day. Notwithstanding the foregoing, to the extent a with a copy to address is designated, notice must also be given to such address in the manner above for such notice, request, consent or other communication hereunder to be effective.
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7.5 Survival of Representations, Warranties and Covenants . The representations, warranties and covenants of the Warrantors contained in this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby with the survival period provided herein respectively.
7.6 Indemnity.
(a) The Warrantors hereby agree to jointly and severally indemnify and hold harmless the Purchaser, and such Purchasers respective employees, Affiliates, Associates, agents and assigns (collectively, the Indemnified Parties and each, an Indemnified Party ), from and against any and all Indemnifiable Losses suffered by any of the Indemnified Parties, directly or indirectly, as a result of, or based upon or arising from any inaccuracy in or breach or nonperformance of any of the representations, warranties, covenants or agreements made by any Warrantors in or pursuant to this Agreement or any of the other Transaction Documents.
(b) Any Indemnified Party seeking indemnification with respect to any Indemnifiable Loss shall give written notice to the party required to provide indemnity hereunder (the Indemnifying Party ), provided that such written notice shall only be given after the aggregated amounts of Indemnifiable Losses are greater than or equal to US$100,000, in which case the Warrantors shall be liable for the total aggregated amounts of the Indemnifiable Loss back to the first dollar and not for the excess amount only. For the purposes of calculating the amounts for any Indemnifiable Losses, all materiality or Material Adverse Effect qualifiers contained in any representations, warranties or covenants shall be disregarded.
(c) Notwithstanding the above, the aggregate indemnification liability of the Warrantors under the Transaction Documents with respect to the Purchaser (including all of its relevant Indemnified Parties) shall be limited to the amount equal to one hundred percent (100%) of the aggregate amount of Subscription Price (the cash part only) paid by such Purchaser for its Subscription Shares, provided however, the aggregate indemnification liability cap of the Warrantors in this Section 7.6(c) shall not apply to any Liability of any Warrantor in connection with fraud or criminal acts of such Warrantor that materially jeopardizes the interests of the Group Companies or the Business or any other future business that the Group Companies may be engaged in (such fraud or criminal acts, Disqualifying Event ).
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(d) With respect to any Indemnifiable Loss suffered by the Purchaser as a result of the breach of any Group Company, the Principals shall bear and assume the relevant indemnification liability only when all the Group Companies fail to bear and assume the relevant indemnification liability pursuant to Section 7.6(a) . In the event the Group Companies fail to pay any portion of the Indemnifiable Loss suffered by the Purchaser, within six (6) months after receiving a valid claim for indemnification raised by such Purchaser, the Principals shall, within one (1) month after the expiry of such six (6) months period, pay to such Purchaser by wire transfer in immediately available funds in U.S. dollars to the bank account as designated by such Purchaser, any shortfall in respect of such claim not paid by the Group Companies. Notwithstanding the above, the aggregate indemnification liability of a Principal under the Transaction Documents with respect to the Purchaser (including all of their relevant Indemnified Parties) shall be limited to the amount (such amount, the Principal Liability Cap ) equal to the fair market value of all the Ordinary Shares then held by such Principal in the Company (through his Principal Holding Company), multiplied by a fraction, the numerator of which is the number of Series C2 Preferred Shares then held by such Purchaser, and the denominator of which is the aggregate number of issued and outstanding Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, Series C1 Preferred Shares and Series C2 Preferred Shares then held by all the holders of the Series A Preferred Shares, Series A1 Preferred Shares, Series B1 Preferred Shares, Series B2 Preferred Shares, Series B3 Preferred Shares, Series C1 Preferred Shares and Series C2 Preferred Shares of the Company seeking indemnification (in each case, on an as-converted basis).
(e) If any claim, demand or Liability is asserted by any third party against any Indemnified Party, the Indemnifying Party shall upon the written request of the Indemnified Party, defend in a diligent manner any actions or proceedings brought against the Indemnified Party in respect of matters covered by the indemnity under this Section 7.6 . A judgment under the foregoing legal proceedings against the Indemnified Party suffered by it in good faith shall be conclusive evidence of the amount of Indemnifiable Losses suffered by it against the Indemnifying Party, provided , however , that, if the Indemnifying Party has not received reasonable notice of the action or proceeding against the Indemnified Party or is not allowed to control its defense, judgment against the Indemnified Party shall only constitute presumptive evidence against the Indemnifying Party.
(f) Each of the Warrantors hereby acknowledges that, regardless of any investigation or diligence made (or not made) by or on behalf of any Indemnified Party, the Purchaser has entered into the Transaction Documents in express reliance upon the representations, warranties, covenants and other agreements made therein.
(g) This Section 7.6 shall not be deemed to preclude or otherwise limit in any way the exercise of any other rights or pursuit of other remedies for the breach of this Agreement or with respect to any misrepresentation.
(h) The indemnity obligations of the Warrantors with respect to the Purchaser provided in this Section 7.6 shall remain effective until the earlier of (1) fifteen (15) months after the Series B1 Closing; and (2) the expiration of the lock-up period applicable to the Purchaser after the Company consummates the IPO.
7.7 Rights Cumulative; Specific Performance . Each and all of the various rights, powers and remedies of a Party will be considered to be cumulative with and in addition to any other rights, powers and remedies which such Party may have at Law or in equity in the event of the breach of any of the terms of this Agreement. The exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such Party. Without limiting the foregoing, the Parties hereto acknowledge and agree irreparable harm may occur for which money damages would not be an adequate remedy in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to injunction to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement.
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7.8 Confidentiality.
(a) The terms and conditions of this Agreement, any term sheet or memorandum of understanding entered into pursuant to the transactions contemplated hereby, all exhibits and schedules attached hereto and thereto, the transactions contemplated hereby and thereby, including their existence, and all information furnished by any Party hereto and by representatives of such Parties to any other Party hereof or any of the representatives of such Parties (collectively, the Confidential Information ), shall be considered confidential information and shall not be disclosed by any Party hereto to any third party except in accordance with the provisions set forth below.
(b) Notwithstanding the foregoing, each Party may disclose (i) the Confidential Information to its Affiliates and its and its Affiliates respective shareholders, directors, employees or advisers (including without limitation bankers, consultants, financial advisers, accountants, legal counsels or members of advisory boards) on a need-to-know basis, in each case only where such persons or entities are informed of the confidential nature of the Confidential Information and are under appropriate nondisclosure obligations substantially similar to those set forth in this Section 7.7, (ii) such Confidential Information as is required to be disclosed pursuant to routine examination requests from Governmental Authorities with authority to regulate such Partys operations, in each case as such Party deems appropriate in good faith, and (iii) the Confidential Information to any Person to which disclosure is approved in writing by the other Parties. Any Party hereto may also provide disclosure in order to comply with applicable Laws, as set forth in Section 7.7(c) below.
(c) Except as set forth in Section 7.7(b) above, in the event that any Party is requested or becomes legally compelled (including without limitation, pursuant to any applicable tax, securities, other Laws of any jurisdiction, or any applicable stock exchange rules or regulations) to disclose the existence of this Agreement or any Confidential Information, such Party (the Disclosing Party ) shall provide the other Parties hereto with prompt written notice of that fact and shall consult with the other Parties hereto regarding such disclosure. At the request of any other Parties, the Disclosing Party may, to the extent reasonably possible and with the cooperation and reasonable efforts of the other Parties, seek a protective order, confidential treatment or other appropriate remedy. In any event, the Disclosing Party shall furnish only that portion of the information that is legally required and shall exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded such information.
(d) Notwithstanding any other provision of this Section 7.7 , the confidentiality obligations of the Parties shall not apply to: (i) information which a restricted party learns from a third party which the receiving party reasonably believes to have the right to make the disclosure; (ii) information which is rightfully in the restricted partys possession prior to the time of disclosure by the protected party; or (iii) information which enters the public domain without breach of the confidentiality obligations hereunder of the restricted party.
(e) Notwithstanding the foregoing, no Warrantor shall use the name or logo of the Purchaser in any manner, context or format (including but not limited to reference on or links to websites, press releases) without the prior consent of such Purchaser.
7.9 Severability . In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. If, however, any provision of this Agreement shall be invalid, illegal, or unenforceable under any such applicable Law in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such Law, or, if for any reason it is not deemed so modified, it shall be invalid, illegal, or unenforceable only to the extent of such invalidity, illegality, or limitation on enforceability without affecting the remaining provisions of this Agreement, or the validity, legality, or enforceability of such provision in any other jurisdiction.
7.10 Amendments and Waivers . Any term of this Agreement may be amended, only with the written consent of each of (i) the Company, (ii) each Principal, and (iii) the Purchaser. Any amendment effected in accordance with this paragraph shall be binding upon each of the Parties hereto. Notwithstanding the foregoing, the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Party against whom such waiver is sought.
7.11 No Waiver . Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof will not be deemed a waiver of such term, covenant, or condition, nor will any waiver or relinquishment of, or failure to insist upon strict compliance with, any right, power or remedy power hereunder at any one or more times be deemed a waiver or relinquishment of such right, power or remedy at any other time or times.
7.12 Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to any Party under this Agreement, upon any breach or default of any other Party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting Party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Party of any breach or default under this Agreement, or any waiver on the part of any Party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.
7.13 No Presumption . The Parties acknowledge that any applicable Law that would require interpretation of any claimed ambiguities in this Agreement against the Party that drafted it has no application and is expressly waived. If any claim is made by a Party relating to any conflict, omission or ambiguity in the provisions of this Agreement, no presumption or burden of proof or persuasion will be implied because this Agreement was prepared by or at the request of any Party or its counsel.
41 | Share Purchase Agreement |
7.14 Headings and Subtitles; Interpretation . The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. Unless a provision hereof expressly provides otherwise: (i) the term or is not exclusive; (ii) words in the singular include the plural, and words in the plural include the singular; (iii) the terms herein, hereof, and other similar words refer to this Agreement as a whole and not to any particular section, subsection, paragraph, clause, or other subdivision; (iv) the term including will be deemed to be followed by, but not limited to, (v) the masculine, feminine, and neuter genders will each be deemed to include the others; (vi) the terms shall, will, and agrees are mandatory, and the term may is permissive; (vii) the term day means calendar day, and month means calendar month, (viii) all references in this Agreement to designated Sections and other subdivisions are to the designated Sections and other subdivisions of the body of this Agreement, (ix) all references in this Agreement to designated Schedules, Exhibits and Appendices are to the Schedules, Exhibits and Appendices attached to this Agreement, (x) the phrase directly or indirectly means directly, or indirectly through one or more intermediate Persons or through contractual or other arrangements, and direct or indirect has the correlative meaning, (xi) references to laws include any such law modifying, re-enacting, extending or made pursuant to the same or which is modified, re-enacted, or extended by the same or pursuant to which the same is made, (xii) each representation, warranty, agreement, and covenant contained herein will have independent significance, regardless of whether also addressed by a different or more specific representation, warranty, agreement, or covenant, (xiii) all accounting terms not otherwise defined herein have the meanings assigned under the Accounting Standards, (xiv) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, (xv) references to this Agreement, any other Transaction Documents and any other document shall be construed as references to such document as the same may be amended, supplemented or novated from time to time, and (xvi) all references to dollars or to US$ are to currency of the United States of America and all references to RMB are to currency of the PRC.
7.15 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Facsimile and e-mailed copies of signatures shall be deemed to be originals for purposes of the effectiveness of this Agreement.
7.16 Entire Agreement . This Agreement and the Transaction Documents, together with all schedules and exhibits hereto and thereto, constitute the full and entire understanding and agreement among the Parties with regard to the subjects hereof and thereof, and supersede all other agreements between or among any of the Parties with respect to the subject matters hereof and thereof.
7.17 Use of English Language . This Agreement has been executed and delivered in the English language. Any translation of this Agreement into another language shall have no interpretive effect. All documents or notices to be delivered pursuant to or in connection with this Agreement shall be in the English language or, if any such document or notice is not in the English language, accompanied by an English translation thereof, and the English language version of any such document or notice shall control for purposes thereof.
7.18 Termination.
(a) Termination of this Agreement . This Agreement may be terminated prior to the Closing: (i) by mutual written consent of the Company and the Purchaser, or (ii) by the Company (x) if the Companys IPO is consummated prior to December 31, 2018 yet the Closing has not been consummated within the earlier of (1) twelve (12) months upon the consummation of the IPO, or (2) eighteen (18) months after the date of this Agreement; or (y) if the Companys IPO is consummated after December 31, 2018 yet the Closing has not been consummated within the earlier of (1) twelve (12) months upon the consummation of the IPO, or (2) twenty-four (24) months after the date of this Agreement. For the avoidance of doubt, if the Company fails to consummate the IPO within twenty-four (24) months after the date of this Agreement, the Company and the Purchaser may mutually negotiate to extend the foregoing termination terms of this Agreement.
(b) Effects of Termination . If this Agreement is terminated as provided under this Section 7.18 , this Agreement will be of no further force or effect upon termination provided that (i) the termination will not relieve any Party from any Liability for any antecedent breach of this Agreement, and (ii) Sections 7.2 , 7.3 , 7.7 , and 7.8 through 7.18 shall survive the termination of this Agreement.
[ The remainder of this page has been left intentionally blank ]
42 | Share Purchase Agreement |
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
GROUP COMPANIES : | Qutoutiao Inc. | |||||
By: |
/s/ Tan Siliang |
|||||
Name: | Tan Siliang ( 谭思亮 ) | |||||
Title: | Director | |||||
InfoUniversal Limited | ||||||
By: |
/s/ Tan Siping |
|||||
Name: | Tan Siping ( 谭思萍 ) | |||||
Title: | Director | |||||
Shanghai Quyun Internet Technology Co., Ltd. ( 上海趣蕴网络科技有限公司 ) | ||||||
By: |
/s/ Li Lei |
|||||
Name: | Li Lei ( 李磊 ) | |||||
Title: | Legal Representative | |||||
Shanghai Jifen Culture Communications Co., Ltd. ( 上海基分文化传播有限公司 ) | ||||||
By: |
/s/ Chen Sihui |
|||||
Name: | Chen Sihui ( 陈思晖 ) | |||||
Title: | Legal Representative |
[Signature Page to the Series C2 Share Purchase Agreement]
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
GROUP COMPANIES : | Shanghai Xike Information Technology Service Co., Ltd. ( 上海溪客信息技术服务有限公司 ) | |||||
By: |
/s/ Li Lei |
|||||
Name: | Li Lei ( 李磊 ) | |||||
Title: | Legal Representative | |||||
Shanghai Tuile Information Technology Service Co., Ltd. ( 上海推乐信息技术服务有限公司 ) | ||||||
By: |
/s/ Chen Sihui |
|||||
Name: | Chen Sihui ( 陈思晖 ) | |||||
Title: | Legal Representative | |||||
Anhui Zhangduan Internet Technology Co., Ltd. ( 安徽掌端网络科技有限公司 ) | ||||||
By: |
/s/ Li Lei |
|||||
Name: | Li Lei ( 李磊 ) | |||||
Title: | Legal Representative | |||||
Beijing Qukandian Internet Technology Co., Ltd. ( 北京趣看点网络科技有限公司 ) | ||||||
By: |
/s/ Li Lei |
|||||
Name: | Li Lei ( 李磊 ) | |||||
Title: | Legal Representative | |||||
Shanghai Dianguan Internet Technology Co., Ltd. ( 上海点冠网络科技有限公司 ) | ||||||
By: |
/s/ Liang Xiang |
|||||
Name: | Liang Xiang ( 梁湘 ) | |||||
Title: | Legal Representative |
[Signature Page to the Series C2 Share Purchase Agreement]
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
PRINCIPALS: | Tan Siliang ( 谭思亮 ) | |||||
/s/ Tan Siliang |
||||||
Li Lei ( 李磊 ) | ||||||
/s/ Li Lei |
[Signature Page to the Series C2 Share Purchase Agreement]
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
PRINCIPAL HOLDING COMPANIES : | Innotech Overseas Investment Ltd. | |||||
By: |
/s/ Tan Siping |
|||||
Name: | Tan Siping ( 谭思萍 ) | |||||
Title: | Director | |||||
Innotech Group Holdings Ltd. | ||||||
By: |
/s/ Tan Siping |
|||||
Name: | Tan Siping ( 谭思萍 ) | |||||
Title: | Director | |||||
News Optimizer (BVI) Ltd. | ||||||
By: |
/s/ Li Lei |
|||||
Name: | Li Lei ( 李磊 ) | |||||
Title: | Director |
[Signature Page to the Series C2 Share Purchase Agreement]
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement on the date and year first above written.
PURCHASER : | Shanghai Pengpai Online Network Technology Co., Ltd. ( 上海澎湃在线网络科技有限公司 ) | |||||
By: |
/s/ Xu Xiang |
|||||
Name: | Xu Xiang | |||||
Title: | Director |
[Signature Page to the Series C2 Share Purchase Agreement]
SCHEDULE I
List of Principals and Principal Holding Companies
Principal |
PRC ID Card Number/Passport Number |
Principal Holding
|
Ownership Interest
|
|||
Tan Siliang ( 谭思亮 ) |
[Redacted] |
Innotech Overseas Investment Ltd. Innotech Group Holdings Ltd. |
100% | |||
Li Lei ( 李磊 ) |
[Redacted] | News Optimizer (BVI) Ltd. | 100% |
Schedule I | Share Purchase Agreement |
SCHEDULE II
Schedule of Purchaser
Name |
Number of Subscription Shares |
Subscription Price |
||
Shanghai Pengpai Online Network Technology Co., Ltd. ( 上海澎湃在线网络科技有限公司 ) |
1,480,123 | US$55,102,061 (consisting of certain business and strategic cooperation under the Strategic Cooperation Framework Agreement) | ||
Total |
1,480,123 | US$55,102,061 |
Schedule II | Share Purchase Agreement |
SCHEDULE III
Schedule of Capitalization Immediately before the Closing
Shareholder |
Class of Shares |
Number of Shares |
Percentage (on a
fully diluted and as- converted basis) |
|||||||
Innotech Group Holdings Ltd. |
ordinary shares | 27,123,442 | 38.5549 | % | ||||||
News Opimizer (BVI) Ltd. |
ordinary shares | 7,125,000 | 10.1279 | % | ||||||
Morning Sea Limited |
ordinary shares | 96,136 | 0.1367 | % | ||||||
Pebble Capital Management Limited |
ordinary shares | 3,054,218 | 4.3414 | % | ||||||
Precious Lead Limited |
ordinary shares | 563,187 | 0.8005 | % | ||||||
Double excel investment |
ordinary shares | 977,650 | 1.3897 | % | ||||||
L&L LIMITED |
ordinary shares | 84,690 | 0.1204 | % | ||||||
Eton International Investment Limited |
ordinary shares | 42,345 | 0.0602 | % | ||||||
EASTWEST HOLDINGS GROUP CO., LTD. |
ordinary shares | 211,724 | 0.3010 | % | ||||||
Membrane Star LLC |
ordinary shares | 296,414 | 0.4213 | % | ||||||
ACE Redpoint Ventures China I, L.P. |
ordinary shares | 46,881 | 0.0666 | % | ||||||
ACE Redpoint Associates China I, L.P. |
ordinary shares | 2,660 | 0.0038 | % | ||||||
ACE Redpoint China Strategic I, L.P. |
ordinary shares | 653 | 0.0009 | % | ||||||
SHANG QIANG LIMITED |
ordinary shares | 211,724 | 0.3010 | % | ||||||
Advantage Ace Investment Limited |
ordinary shares | 163,276 | 0.2321 | % | ||||||
Current ESOP |
ordinary shares | 12,464,141 | 17.7173 | % | ||||||
Under Blinky Hold Limited |
ordinary shares | 500,000 | 0.7107 | % | ||||||
CW_toutiao Limited |
Series A Preferred Shares | 3,071,428 | 4.3659 | % | ||||||
xInternet Limited |
Series A Preferred Shares | 225,275 | 0.3202 | % | ||||||
ACE Redpoint Ventures China I, L.P. |
Series A Preferred Shares | 1,539,560 | 2.1884 | % | ||||||
ACE Redpoint Associates China I, L.P. |
Series A Preferred Shares | 87,363 | 0.1242 | % |
Schedule III | Share Purchase Agreement |
Shareholder |
Class of Shares |
Number of Shares |
Percentage (on a
fully diluted and as- converted basis) |
|||||||
ACE Redpoint China Strategic I, L.P. |
Series A Preferred Shares | 21,429 | 0.0305 | % | ||||||
CMC Queen Holdings Limited |
Series A1 Preferred Shares | 1,373,626 | 1.9526 | % | ||||||
Image Flag Investment (HK) Limited |
Series B1 Preferred Shares | 5,420,144 | 7.7045 | % | ||||||
Long Range L.P. |
Series B2 Preferred Shares | 1,371,974 | 1.9502 | % | ||||||
People Better Limited |
Series B2 Preferred Shares | 342,993 | 0.4876 | % | ||||||
Shunwei Growth III Limited |
Series B2 Preferred Shares | 342,993 | 0.4876 | % | ||||||
Shanghai Shanghai ChuangVest Venture Investment Partnership(Limited Partnership)( 上海创伴创业投资合伙企业 ( 有限合伙 )) |
Series B2 Preferred Shares |
211,724 | 0.3010 | % | ||||||
Double Excel Investment Limited |
Series B2 Preferred Shares | 716,145 | 1.0180 | % | ||||||
Lighthouse Capital International Inc. |
Series B2 Preferred Shares | 127,035 | 0.1806 | % | ||||||
CMC Queen Holdings Limited |
Series B2 Preferred Shares | 423,449 | 0.6019 | % | ||||||
ACE Redpoint Ventures China I, L.P. |
Series B2 Preferred Shares | 335,693 | 0.4772 | % | ||||||
ACE Redpoint Associates China I, L.P. |
Series B2 Preferred Shares | 19,049 | 0.0271 | % | ||||||
ACE Redpoint China Strategic I, L.P. |
Series B2 Preferred Shares | 4,673 | 0.0066 | % | ||||||
Harvest Ceres Fund, LP |
Series B3 Preferred Shares | 654,421 | 0.9302 | % | ||||||
Hundreds ANTA Fund Limited Partnership |
Series B3 Preferred Shares | 962,384 | 1.3680 | % | ||||||
Vision Global Capital Limited |
Series B3 Preferred Shares | 134,734 | 0.1915 | % | ||||||
Total |
70,350,233 | 100.0000 | % |
Schedule III | Share Purchase Agreement |
Schedule of Capitalization Immediately after the Closing
Shareholder |
Class of Shares |
Number of Shares |
Percentage
(on a fully diluted and as- converted basis) |
|||||||
Innotech Group Holdings Ltd. |
ordinary shares | 27,123,442 | 36.6503 | % | ||||||
News Opimizer (BVI) Ltd. |
ordinary shares | 7,125,000 | 9.6276 | % | ||||||
Morning Sea Limited |
ordinary shares | 96,136 | 0.1299 | % | ||||||
Pebble Capital Management Limited |
ordinary shares | 3,054,218 | 4.1270 | % | ||||||
Precious Lead Limited |
ordinary shares | 563,187 | 0.7610 | % | ||||||
Double excel investment |
ordinary shares | 977,650 | 1.3210 | % | ||||||
L&L LIMITED |
ordinary shares | 84,690 | 0.1144 | % | ||||||
Eton International Investment Limited |
ordinary shares | 42,345 | 0.0572 | % | ||||||
EASTWEST HOLDINGS GROUP CO., LTD. |
ordinary shares |
211,724 | 0.2861 | % | ||||||
Membrane Star LLC |
ordinary shares | 296,414 | 0.4005 | % | ||||||
ACE Redpoint Ventures China I, L.P. |
ordinary shares | 46,881 | 0.0633 | % | ||||||
ACE Redpoint Associates China I, L.P. |
ordinary shares | 2,660 | 0.0036 | % | ||||||
ACE Redpoint China Strategic I, L.P. |
ordinary shares | 653 | 0.0009 | % | ||||||
SHANG QIANG LIMITED |
ordinary shares | 211,724 | 0.2861 | % | ||||||
Advantage Ace Investment Limited |
ordinary shares | 163,276 | 0.2206 | % | ||||||
Current ESOP |
ordinary shares | 12,464,141 | 16.8420 | % | ||||||
Under Blinky Hold Limited |
ordinary shares | 500,000 | 0.6756 | % | ||||||
CW_toutiao Limited |
Series A Preferred Shares | 3,071,428 | 4.1502 | % | ||||||
xInternet Limited |
Series A Preferred Shares | 225,275 | 0.3044 | % | ||||||
ACE Redpoint Ventures China I, L.P. |
Series A Preferred Shares | 1,539,560 | 2.0803 | % | ||||||
ACE Redpoint Associates China I, L.P. |
Series A Preferred Shares | 87,363 | 0.1180 | % | ||||||
ACE Redpoint China Strategic I, L.P. |
Series A Preferred Shares | 21,429 | 0.0290 | % | ||||||
CMC Queen Holdings Limited |
Series A1 Preferred Shares | 1,373,626 | 1.8561 | % |
Schedule III | Share Purchase Agreement |
Shareholder |
Class of Shares |
Number of Shares |
Percentage
(on a fully diluted and as- converted basis) |
|||||||
Image Flag Investment (HK) Limited |
Series B1 Preferred Shares | 5,420,144 | 7.3239 | % | ||||||
Long Range L.P. |
Series B2 Preferred Shares | 1,371,974 | 1.8539 | % | ||||||
People Better Limited |
Series B2 Preferred Shares | 342,993 | 0.4635 | % | ||||||
Shunwei Growth III Limited |
Series B2 Preferred Shares | 342,993 | 0.4635 | % | ||||||
Shanghai ChuangVest Venture Investment Partnership(Limited Partnership)( 上海创伴创业投资合伙企业 ( 有限合伙 )) |
Series B2 Preferred Shares | 211,724 | 0.2861 | % | ||||||
Double Excel Investment Limited |
Series B2 Preferred Shares | 716,145 | 0.9677 | % | ||||||
Lighthouse Capital International Inc. |
Series B2 Preferred Shares | 127,035 | 0.1717 | % | ||||||
CMC Queen Holdings Limited |
Series B2 Preferred Shares | 423,449 | 0.5722 | % | ||||||
ACE Redpoint Ventures China I, L.P. |
Series B2 Preferred Shares |
335,693 | 0.4536 | % | ||||||
ACE Redpoint Associates China I, L.P. |
Series B2 Preferred Shares | 19,049 | 0.0257 | % | ||||||
ACE Redpoint China Strategic I, L.P. |
Series B2 Preferred Shares | 4,673 | 0.0063 | % | ||||||
Vision Global Capital Limited |
Series B3 Preferred Shares | 134,734 | 0.1821 | % | ||||||
Harvest Ceres Fund, LP |
Series B3 Preferred Shares | 654,421 | 0.8843 | % | ||||||
Hundreds ANTA Fund Limited Partnership |
Series B3 Preferred Shares | 962,384 | 1.3004 | % | ||||||
CG Partners Opportunity Fund SP, a segregated portfolio of CG Partners Fund SPC |
Series C1 Preferred Shares | 1,450,520 | 1.9600 | % | ||||||
Shimmering Horizon L.P. |
Series C1 Preferred Shares | 725,260 | 0.9800 | % | ||||||
Shanghai Pengpai Online Network Technology Co., Ltd. ( 上海澎湃在线网络科技有限公司 ) |
Series C2 Preferred Shares | 1,480,123 | 2.0000 | % | ||||||
Total |
74,006,136 | 100 | % |
Schedule III | Share Purchase Agreement |
SCHEDULE IV
List of Key Employees
No. |
Name |
Position |
||
1 |
Li Lei ( 李磊 ) |
Chief Executive Officer |
||
2 |
Dong Jianfei ( 董剑飞 ) |
Co-President |
||
3 |
Feng Guanqiang ( 冯观强 ) |
Co-President |
||
4 |
Wang Jingbo ( 王静波 ) |
Chief Financial Officer |
||
5 |
Chen Yucheng ( 陈昱丞 ) |
Chief Strategy Officer |
||
6 |
Chen Sihui ( 陈思晖 ) |
Chief Operating Officer |
||
7 |
Wang Zhiliang ( 王志良 ) |
Chief Technology Officer |
||
8 |
Zhu Bingjie ( 朱斌杰 ) |
Chief Growth Officer |
Schedule IV | Share Purchase Agreement |
SCHEDULE V
Address for Notices
If to the Group Companies :
Address: | 11/F, Block 3, Xing Chuang Technology Center, Shen Jiang Road | |
5005, Pudong New Area, Shanghai, PRC | ||
Tel: | [Redacted] | |
Fax: | N/A | |
Attention: | Tan Siliang ( 谭思亮 ) |
If to the Principals and Principal Holding Companies:
Address: | 11/F, Block 3, Xing Chuang Technology Center, Shen Jiang Road | |
5005, Pudong New Area, Shanghai, 200120, PRC | ||
Tel: | [Redacted] | |
Fax: | N/A | |
Attention: | Tan Siliang ( 谭思亮 ) |
If to Purchaser:
Address: |
Room 1009, Yan an Middle Road 839, Jingan, Shanghai, PRC |
|
Tel: | N/A | |
Fax: | N/A | |
Attention: | Liu Yonggang ( 刘永钢 ) |
Schedule V | Share Purchase Agreement |
EXHIBIT A
FORM OF FIFTH AMENDED AND RESTATED MEMORANDUM AND ARTICLES OF ASSOCIATION OF ASSOCIATION
Exhibit A | Share Purchase Agreement |
EXHIBIT B
FORM OF FORTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
Exhibit B | Share Purchase Agreement |
EXHIBIT C
DISCLOSURE SCHEDULE
Exhibit C | Share Purchase Agreement |
TABLE OF CONTENTS
1. |
Definitions |
3 | ||||||
1.1 |
Defined Terms |
3 | ||||||
1.2 |
Other Defined Terms |
13 | ||||||
2. |
Purchase and Sale of Shares |
13 | ||||||
2.1 |
Sale and Issuance of the Shares |
13 | ||||||
2.2 |
Payment of Subscription Price |
14 | ||||||
2.3 |
Closing |
14 | ||||||
2.4 |
Deliverables by the Company at the Closing |
14 | ||||||
2.5 |
Use of Proceeds |
15 | ||||||
3. |
Representations and Warranties of the Warrantors |
15 | ||||||
3.1 |
Organization, Good Standing and Qualification |
15 | ||||||
3.2 |
Capitalization and Voting Rights |
15 | ||||||
3.3 |
Corporate Structure; Subsidiaries |
17 | ||||||
3.4 |
Authorization |
18 | ||||||
3.5 |
Valid Issuance of Shares |
18 | ||||||
3.6 |
Consents; No Conflicts |
18 | ||||||
3.7 |
Offering |
18 | ||||||
3.8 |
Compliance with Laws; Consents |
18 | ||||||
3.9 |
Tax Matters |
19 | ||||||
3.10 |
Charter Documents; Books and Records |
20 | ||||||
3.11 |
Financial Statements |
21 | ||||||
3.12 |
Changes |
21 | ||||||
3.13 |
Actions |
23 | ||||||
3.14 |
Liabilities |
23 | ||||||
3.15 |
Commitments |
23 | ||||||
3.16 |
Anti-Bribery, Anti-Corruption, Anti-Money Laundering and Sanctions; Absence of Government Interests |
24 | ||||||
3.17 |
Title; Properties |
25 | ||||||
3.18 |
Related Party Transactions |
26 | ||||||
3.19 |
Intellectual Property Rights |
26 | ||||||
3.20 |
Labor and Employment Matters |
28 | ||||||
3.21 |
Customers and Suppliers |
29 | ||||||
3.22 |
Internal Controls |
29 | ||||||
3.23 |
Entire Business |
30 | ||||||
3.24 |
No Brokers |
30 | ||||||
3.25 |
Certain Transactions |
30 | ||||||
3.26 |
No General Solicitation |
30 | ||||||
3.27 |
Control Documents |
30 | ||||||
3.28 |
General Partner of Tianjin Shan Shi LP |
30 | ||||||
3.29 |
Disclosure |
30 | ||||||
3.30 |
Survival Period of Representations and Warranties |
31 | ||||||
4. |
Representations and Warranties of the Purchaser |
31 | ||||||
4.1 |
Authorization |
31 | ||||||
4.2 |
Purchase for Own Account |
31 |
Share Purchase Agreement |
4.3 | Restricted Securities | 31 | ||||||||
4.4 | Legitimate Source of Investment Funds | 31 | ||||||||
5. |
Conditions to the Closing | 31 | ||||||||
5.1 | Conditions of the Purchasers Obligations at the Closing | 31 | ||||||||
5.2 | Conditions of the Companys Obligations at Closing | 34 | ||||||||
6. |
Covenants | 34 | ||||||||
6.1 | [Reserved] | 34 | ||||||||
6.2 | Pre-Closing Covenants. | 34 | ||||||||
6.3 | Post-Closing Covenants | 35 | ||||||||
7. |
Miscellaneous Provisions | 37 | ||||||||
7.1 | Successors and Assigns | 37 | ||||||||
7.2 | Governing Law | 37 | ||||||||
7.3 | Dispute Resolution | 37 | ||||||||
7.4 | Notices | 38 | ||||||||
7.5 | Survival of Representations, Warranties and Covenants | 39 | ||||||||
7.6 | Indemnity | 39 | ||||||||
7.7 | Rights Cumulative; Specific Performance | 40 | ||||||||
7.8 | Confidentiality | 41 | ||||||||
7.9 | Severability | 41 | ||||||||
7.10 | Amendments and Waivers | 41 | ||||||||
7.11 | No Waiver | 41 | ||||||||
7.12 | Delays or Omissions | 41 | ||||||||
7.13 | No Presumption | 41 | ||||||||
7.14 | Headings and Subtitles; Interpretation | 42 | ||||||||
7.15 | Counterparts | 42 | ||||||||
7.16 | Entire Agreement | 42 | ||||||||
7.17 | Use of English Language | 42 | ||||||||
7.18 | Termination | 42 |
SCHEDULES
SCHEDULE I |
LIST OF PRINCIPALS AND PRINCIPAL HOLDING COMPANIES | |
SCHEDULE II |
SCHEDULE OF PURCHASER | |
SCHEDULE III |
SCHEDULE OF CAPITALIZATION IMMEDIATELY BEFORE THE CLOSING / SCHEDULE OF CAPITALIZATION IMMEDIATELY AFTER THE CLOSING | |
SCHEDULE IV |
LIST OF KEY EMPLOYEES | |
SCHEDULE V |
ADDRESS FOR NOTICES |
Share Purchase Agreement |
EXHIBITS
EXHIBIT A |
FORM OF FIFTH AMENDED AND RESTATED MEMORANDUM AND ARTICLES OF ASSOCIATION | |
EXHIBIT B |
FORM OF FORTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT | |
EXHIBIT C |
DISCLOSURE SCHEDULE |
Share Purchase Agreement |
Exhibit 21.1
LIST OF PRINCIPAL SUBSIDIARIES AND CONSOLIDATED VARIABLE INTEREST ENTITY AND ITS SUBSIDIARIES OF QUTOUTIAO INC.
Subsidiaries |
Jurisdiction of Incorporation |
|
InfoUniversal Limited | Hong Kong | |
Qtech USA Inc. | Delaware, United States | |
QTT Asia Ltd. | British Virgin Islands | |
Kubik Media International Ltd. | British Virgin Islands | |
Kubik Technology Pt. Ltd. | Singapore | |
Shanghai Quyun Internet Technology Co., Ltd.* 上海趣蕴网络科技有限公司 | PRC | |
Shanghai Dianguan Internet Technology Co., Ltd. * 上海点冠网络科技有限公司 | PRC | |
Consolidated Variable Interest Entity (VIE) |
Jurisdiction of Incorporation |
|
Shanghai Jifen Culture Communications Co., Ltd.* 上海基分文化传播有限公司 | PRC | |
Subsidiaries of the Consolidated VIE |
Jurisdiction of Incorporation |
|
Anhui Zhangduan Internet Technology Co., Ltd.* 安徽掌端网络科技有限公司 | PRC | |
Beijing Qukandian Internet Technology Co., Ltd.* 北京趣看点网络科技有限公司 | PRC | |
Shanghai Xike Information Technology Service Co., Ltd.* 上海溪客信息技术服务有限公司 | PRC | |
Shanghai Tuile Information Technology Co., Ltd.* 上海推乐信息技术服务有限公司 | PRC | |
Tianjin Quwen Internet Technology Co., Ltd.* 天津趣闻网络科技有限公司 | PRC |
* |
The English name of this subsidiary, consolidated VIE or subsidiary of consolidated VIE, as applicable, has been translated from its Chinese name. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Amendment No. 2 to the Registration Statement on Form F-1 of Qutoutiao Inc. of our report dated March 9, 2018, relating to the financial statements, which appears in this Registration Statement. We also consent to the reference to us under the heading Experts in such Registration Statement.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shanghai, Peoples Republic of China
September 4, 2018
Exhibit 99.2
September 4, 2018
To: Qutoutiao Inc.
11/F, Block 3, XingChuang Technology Center
Shen Jiang Road 5005,
Pudong New Area, Shanghai, 200120
Peoples Republic of China
+86-21-6858-3790
Referred as the Company
Dear Sirs:
We are qualified lawyers of the Peoples Republic of China (the PRC , for purposes of this opinion, excluding the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan) and as such, are qualified to issue this opinion in respect of the laws and regulations of the PRC effective as at the date hereof.
We have acted as PRC legal counsel for Qutoutiao Inc. (the Company ), an exempted company incorporated under the laws of the Cayman Islands, in connection with (i) the Companys Registration Statement on Form F-1, including all amendments or supplements thereto (the Registration Statement ), filed by the Company with the Securities and Exchange Commission under the U.S. Securities Act of 1933 (as amended) in relation to the offering by the Company of American Depositary Shares ( ADSs ) each representing a certain number of ordinary shares, par value US$ 0.0001 per share, and (ii) the Companys initial public offering and listing of its ADSs on the NASDAQ Global Market (the Offering ).
We have been requested to give this opinion on certain legal matters set forth herein.
In so acting, we have examined the originals or photocopies of documents provided to us by the Company and such other documents, corporate records, certificates issued by Government Agencies (as defined below) in the PRC and officers of the Company and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion (the Documents ).
In our examination of the Documents and for the purpose of rendering this opinion, we have assumed without further inquiry:
(A) |
the genuineness of all signatures, seals and chops, and the authenticity of all documents submitted to us as originals and the conformity with authentic original documents submitted to us as copies; |
(B) |
the Documents as submitted to us remain in full force and effect up to the date of this Opinion, and have not been revoked, amended, revised, modified or supplemented except as otherwise indicated in such Documents; |
(C) |
the truthfulness, accuracy, fairness and completeness of Documents as well as all factual statements in the Documents; |
(D) |
that all information provided to us by the Company in response to our inquiries for the purpose of this Opinion is true, accurate, complete and not misleading and that the Company has not withheld anything that, if disclosed to us, would reasonably cause us to alter this Opinion in whole or in part; |
(E) |
that all parties other than the PRC Entities have the requisite power, authority, and, in the case of the PRC Individuals, capacity for civil conduct, to enter into, execute, deliver and perform the Documents to which they are parties; |
(F) |
that all parties other than the PRC Entities have duly executed, delivered, performed, and will duly perform their obligations under the Documents to which they are parties; |
(G) |
that Governmental Authorizations (as defined below) and other official statement or documentation provided to us are obtained from the competent Government Agencies by lawful means in due course; |
(H) |
that all Documents are legal, valid, binding and enforceable under all such laws as govern or relate to them other than PRC Laws (as defined below); and |
(I) |
all required consents, licenses, permits, approvals, exemptions or authorizations required of or by, and any required registrations or filings with, any governmental authority or regulatory body of any jurisdiction other than of the PRC in connection with the transactions contemplated under the Prospectus (as defined below) have been obtained or made, or where such required consents, licenses, permits, approvals, exemptions or authorizations have not been obtained or made as of the date hereof, no circumstance will cause or result in any failure for the same to be obtained or made. |
Where important facts were not independently established to us, we have relied upon representations made by the relevant officers of the Company. This Opinion is confined to and rendered on the basis of the PRC laws and regulations currently effective and we express no opinion on the laws of any jurisdiction other than the PRC.
In addition to the terms defined in the context of this opinion, the following capitalized terms used in this opinion shall have the meanings ascribed to them as follows:
SAMR | means the State Administration for Market Regulation or its local counterpart in the PRC, which is the successor of the State Administration for Industry and Commerce | |
CSRC | means the China Securities Regulatory Commission | |
Government Agency or Government Agencies | means any competent government authorities, agencies, courts, arbitration commissions, or regulatory bodies of the PRC or any province, autonomous region, city or other administrative division of the PRC. | |
Governmental Authorization | means any approval, consent, permit, authorization, filing, registration, exemption, waiver, endorsement, annual inspection, qualification and license required by the PRC Laws to be obtained from any Government Agency. |
M&A Rules | means the Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which were jointly promulgated on August 8, 2006 by the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and the State Administration of Foreign Exchange, became effective on September 8, 2006 and was amended on June 22, 2009. | |
PRC Subsidiaries | means the PRC Subsidiaries as listed in Schedule I , each of which is a company incorporated under the PRC laws | |
PRC Entities | means the PRC Subsidiaries, the VIE (as defined below) and its subsidiaries, collectively as listed in Schedule I | |
PRC Laws | means any and all laws, regulations, statues, rules, decrees, notices, and supreme courts judicial interpretations currently in force and publicly available in the PRC as of the date hereof. | |
Prospectus | means the prospectus, including all amendments or supplements thereto, that forms part of the Registration Statement. | |
Variable Interest Entity or VIE | means Shanghai Jifen Culture Communication Co., Ltd. ( 上海基分文化传播有限公司 , Shanghai Jifen ) | |
VIE Contracts | means the agreements listed in Schedule II hereto. | |
WFOE | means Shanghai Quyun Network Technology Co., Ltd. ( 上海趣蕴网络科技有限公司 , Shanghai Quyun ) |
Based on the foregoing, the Documents, and the statements and confirmations made by the Company and the PRC Entities, and after our inquiry against the Company and the PRC Entities, we are of the opinion that:
1. |
Schedule II hereto sets forth a true and correct list of the VIE Contracts among the WFOE, the VIE and/or all shareholders of the VIE. Based on our understanding of the current PRC Laws, (A) the ownership structure of the WFOE, the VIE and its subsidiaries set forth in Schedule I , both currently and immediately after giving effect to the Offering, does not violate and will not violate applicable PRC Laws currently in effect; (B) each of the VIE Contracts is valid, binding and enforceable against each of the parties thereto in accordance with its terms and conditions and applicable PRC Laws currently in effect, and, both currently and immediately after giving effect to the Offering, does not and will not violate any PRC Laws currently in effect, and further (i) the effectiveness of the equity pledge under the Equity Interest Pledge Agreement is subject to the registration with SAMR; and (ii) the exercise of the call options under the Exclusive Option Agreement shall be approved, registered and/or filed by/with relevant Government Agencies, subject to any adjustment made to the PRC Law up to the date of such exercise; and (C) the description of the summary of the VIE Contracts under the heading Contractual Arrangements among Shanghai Quyun and Shanghai Jifen and its Shareholders set forth in the Our History and Corporate Structure section of the Prospectus, to the extent that it constitutes matters of PRC Laws, are true and accurate and nothing has been omitted from such description which would make the same misleading in any material respects. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC Laws governing the validity of the contractual arrangements mentioned herein, and there can be no assurance that the Government Agencies will take a view that is not contrary to or otherwise different from our opinion stated above. |
2. |
The M&A Rules require, among other things, that offshore special purpose vehicles, or SPVs, that are controlled by PRC Entities or individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic interest held by such PRC Entities or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. We are of the opinion that the Offering is not subject to the M&A Rules since (A) the WFOE was incorporated as a foreign-invested enterprise by means of foreign direct investments at the time of its incorporation rather than by merger with or acquisition of any PRC domestic companies as defined under the M&A Rules; and (B) there is no statutory provision that clearly classifies the contractual arrangement among the WFOE, the VIE and its shareholders as transactions regulated by the M&A Rules. However, there are substantial uncertainties regarding the interpretation and application of PRC Laws and future PRC laws and regulations, and there can be no assurance that the Government Agencies will take a view that is not contrary to or otherwise different from our opinion stated above. |
3. |
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. Under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between China and the United States governing the recognition and enforcement of judgments as of the date hereof, including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts. |
4. |
As of the date hereof, the discussions of PRC taxation in the Prospectus are true and accurate based on the PRC Laws, and the statements of law and legal conclusions in the Registration Statement under the caption Taxation Peoples Republic of China Taxation constitute our opinion as to the material tax consequences of an investment in the ADSs under the PRC Laws. |
5. |
The statements in the Prospectus under the captions Prospectus Summary, Risk Factors, Enforceability of Civil Liabilities, Dividend Policy, Our History and Corporate Structure, Business, Regulations, Related Party Transactions, Taxation, and Legal Matters and elsewhere insofar as such statements describe or summarize PRC legal or regulatory matters, or documents, agreements or proceedings governed by PRC Laws, are true, accurate and correct in all material respects, and fairly present or fairly summarize in all material respects the PRC legal and regulatory matters, documents, agreements or proceedings referred to therein; and such statements do not contain an untrue statement of a material fact, and do not omit to state any material fact necessary to make the statements, in light of the circumstances under which they were made, not misleading. |
This Opinion is subject to the following qualifications:
(a) |
This Opinion is subject to (A) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws affecting creditors rights generally, (B) possible judicial or administrative actions or any PRC Law affecting creditors rights. In particular, the term enforceable used in this Opinion does not mean the relevant agreement, contract, or other legal instrument will be necessarily enforced. Whether such documents can be actually enforced is contingent upon various factors. While a court or arbitral body may find that a person is obligated to perform its obligations under a contract binding on such person, a claim from the non-defaulting party will not be necessarily be upheld and enforced, if, for example, (i) performance of the contractual obligation is legally or factually impossible, (ii) forcible performance is unsuitable for the subject matter, or the cost to enforce performance is unduly high, or (iii) the creditor fails to demand the performance within a reasonable period (Article 110, PRC Contract Law). Enforcement of creditors rights may also be limited by bankruptcy, insolvency, liquidation, reorganization, force majeure event, readjustment of debts or moratorium or other laws of general application relating to or affecting the rights of creditors. Some claims may become barred under the statute of limitation or may be or become subject to defenses of set-off, counterclaim, and similar defenses. An application requesting a court to enforce a ruling or arbitral award in effect may be also be halted if a third party disputes the enforcement based on its own rights on reasonable ground, and in other circumstances provided in the PRC Law on Civil Procedure and other applicable PRC Laws. |
(b) |
This Opinion is subject to (A) certain equitable, legal or statutory principles in affecting the enforceability of contractual rights generally under concepts of public interest, interests of the state, national security, reasonableness, good faith and fair dealing, and applicable statutes of limitation; (B) any circumstances in connection with formulation, execution or implementation of any legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent, or coercionary at the conclusions thereof; (C) judicial discretion with respect to the availability of indemnifications, remedies or defenses, the calculation of damages, the entitlement to attorney fees and other costs, the waiver of immunity from jurisdiction of any court or from legal process; and (D) the legally vested discretion of any competent PRC legislative, administrative or judicial bodies in exercising their authority in the PRC. |
(c) |
This Opinion relates only to PRC Laws and we express no opinion as to any laws other than PRC Laws. There is no guarantee that any of such PRC Laws will not be changed, amended, replaced or revoked in the immediate future or in the longer term with or without retroactive effect. |
(d) |
Under relevant PRC laws and regulations, foreign investment is restricted in certain businesses. The interpretation and implementation of these laws and regulations, and their application to and effect on the legality, binding effect and enforceability of contracts and transactions are subject to the discretion of competent PRC legislative, administrative and judicial authorities. |
(e) |
This Opinion is limited to paragraph 1 to 5 above only. |
This Opinion is intended to be used in the context which is specifically referred to herein and each paragraph should be looked at as a whole and no part should be extracted and referred to independently.
This Opinion is provided to the Company for the Offering by us in our capacity as the Company PRC legal adviser and may not be relied upon by any other persons or corporate entities or used for any other purpose without our prior written consent.
We hereby consent to the use of this opinion in, and the filing hereof as an exhibit to, the Registration Statement, and to the use of our firms name under the captions Risk Factors, Enforceability of Civil Liabilities, Our History and Corporate Structure, Taxation and Legal Matters in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the U.S. Securities Act of 1933, as amended, or the regulations promulgated thereunder.
/s/ King & Wood Mallesons
King & Wood Mallesons
Schedule I
List of PRC Entities and Shareholding Information
Full Name | Shareholder(s) |
Percentage(s) of Equity
Interests Owned |
||||
PRC Subsidiaries | ||||||
1. |
Shanghai Quyun Network Technology Co.,
Ltd.
( 上海趣蕴网络科技有限公司 , Shanghai Quyun or the WFOE ) |
InfoUniversal Limited | 100% | |||
2. |
Shanghai Dianguan Internet Technology Co.,
Ltd.
( 上海点冠网络科技有限公司 , Shanghai Dianguan ) |
Shanghai Quyun | 100% | |||
VIE and its subsidiaries | ||||||
3. |
Shanghai Ji Fen Culture Communication Co.,
Ltd.
( 上海基分文化传播有限公司 , Shanghai Jifen or the VIE ) 1 |
Mr. Eric Siliang TAN ( 谭思亮 ) |
45% | |||
Mr. Lei LI ( 李磊 ) |
15% |
|||||
Tianjin Shanshi Technology Partnership (Limited Partnership) ( 天津珊石科技合伙企业(有限合伙) , Tianjin Shanshi ) |
20% |
|||||
Shanghai Xihu Culture Communication Co., Ltd ( 上海喜狐文化传播有限公司 , Shanghai Xihu ) |
20% |
|||||
4. |
Beijing Qukandian Internet Technology Co.,
Ltd.
( 北京趣看点网络科技有限公司 , Beijing Qukandian ) |
Shanghai Jifen | 100% | |||
5. |
Anhui Zhangduan Internet Technology Co.,
Ltd.
( 安徽掌端网络科技有限公司 , Anhui Zhangduan ) |
Shanghai Jifen | 100% | |||
6. | Shanghai Xike Information Technology Service Co., Ltd. ( 上海溪客信息技术服务有限公司 , Shanghai Xike ) | Shanghai Jifen | 100% | |||
7. | Shanghai Tuile Information Technology Service Co., Ltd. ( 上海推乐信息技术服务有限公司 , Shanghai Tuile ) | Shanghai Jifen | 100% | |||
8. |
Tianjin Quwen Internet Technology Co., Ltd. ( 天津趣闻网络科技有限公司 , Tianjin Quwen ) |
Shanghai Jifen | 100% |
1 |
Upon the completion of the subscription of Shanghai Dongfang Newspaper Co., Ltd. of the newly issued equity interests in Shanghai Jifen, Mr. Eric Siliang Tan, Mr. Lei Li, Tianjin Shanshi Technology L.P. and Shanghai Xihu Cultural Transmission Co., Ltd. will hold 44.55%, 14.85%, 19.80% and 19.80% equity interest in Shanghai Jifen, respectively. |
Schedule II
List of VIE Contracts
1. |
Exclusive Technology and Consulting Service Agreement entered into by the WFOE and the VIE on October 13 th , 2017; |
2. |
Exclusive Option Agreement entered into by the WFOE, the VIE and all shareholders of the VIE on October 13 th , 2017; |
3. |
Voting Rights Proxy Agreement entered into by the WFOE, the VIE and all shareholders of the VIE on October 13 th , 2017; |
4. |
Loan Agreement entered into by the WFOE and all shareholders of the VIE on October 13 th , 2017; |
5. |
Equity Interest Pledge Agreement entered into by the WFOE, the VIE and all shareholders of the VIE on October 13 th , 2017; and |
6. |
Supplemental Agreement entered into by the WFOE, the VIE and all shareholders of the VIE on August 27 th , 2018. |