PINTEC(PT) - 2019 Q4 - Annual Report

PART I Key Information This section presents selected financial data, highlighting a significant revenue decrease and net loss in 2019, and details extensive risk factors Selected Financial Data The company's 2019 financial performance shows a significant decline, with total revenues dropping to RMB 1,285.2 million and a net loss of RMB 906.5 million Selected Consolidated Financial Data (in thousands of RMB) | Financial Metric | 2017 (Restated) | 2018 (Restated) | 2019 | 2019 (US$) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | 763,014 | 1,603,631 | 1,285,236 | 184,612 | | Gross Profit | 196,307 | 518,901 | 515,548 | 74,054 | | Operating (Loss)/Income | (53,609) | 11,262 | (728,435) | (104,633) | | Net (Loss)/Income | (84,860) | 2,171 | (906,490) | (130,211) | | Total Assets | 2,450,799 | 2,368,026 | 1,560,599 | 224,165 | | Total Liabilities | 2,512,992 | 1,310,750 | 1,201,879 | 172,639 | | Total Shareholders' Equity | (62,195) | 1,057,276 | 358,720 | 51,526 | Risk Factors The company faces significant risks including regulatory uncertainties, substantial credit exposure, the impact of Jimu Group's insolvency, and identified material weaknesses in internal controls - The insolvency of Jimu Group, announced in February 2020, presents a significant risk as the company determined it was probable that amounts due from Jimu Group (RMB 866.0 million as of Dec 31, 2019) were not collectible, which could impair the company's ability to fund operations and continue as a going concern[65][68][397] - The company's business has been materially and adversely affected by the COVID-19 outbreak, leading to a dramatic decrease in loan volume in Q1 2020 compared to Q1 2019[46][47][48] - Three material weaknesses in internal control over financial reporting were identified as of December 31, 2019: 1) Lack of sufficient U.S. GAAP and SEC reporting expertise. 2) Lack of effective controls over cash advances to Jimu Group. 3) Lack of effective controls over the investment process[103][105][107] - The company believes it is likely that it was classified as a Passive Foreign Investment Company (PFIC) for the 2019 taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of its ADSs or ordinary shares[181][184][739] Information on the Company Pintec operates as an independent technology platform enabling financial services in China, utilizing a VIE structure, with its relationship with the now-insolvent Jimu Group fundamentally changed History and Development of the Company The company, incorporated in 2017 and IPO'd in 2018, expanded in 2019 through acquisitions to obtain a small loan license and enhance credit risk management systems - The company commenced trading on the Nasdaq Global Market under the symbol "PT" on October 24, 2018, raising approximately US$40.7 million in net proceeds[211] - In March 2019, the company acquired Ganzhou Aixin Network Micro Finance Co., Ltd. from Jimu Group for RMB 230 million to obtain a small loan business license[214] - In April 2019, the company acquired Infrarisk Pty Limited, an Australia-based SaaS company that provides systems for managing credit risk origination[215] Business Overview Pintec's technology platform connects business and financial partners, offering diverse loan, wealth management, and insurance solutions, with a key trend of diversifying funding sources away from Jimu Box Funding Sources by Outstanding Loans (in thousands of RMB) | Funding Source | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Online consumer finance platform (Jimu Box) | 4,742,261 | 3,593,302 | 801,676 | | Non-structured direct funding | 338,851 | 1,479,166 | 2,041,729 | | Trusts and other structured finance | 531,842 | 592,642 | 359,981 | | Public asset-backed securities | 256,643 | — | — | | Total | 5,887,707 | 5,803,034 | 3,301,897 | Loan Facilitation Metrics (2019) | Loan Type | Loans Facilitated (RMB million) | Outstanding Loans (RMB million) | Avg. Loan Size (RMB) | Weighted Avg. APR | | :--- | :--- | :--- | :--- | :--- | | Point-of-sale Installment | 2,448.4 | 850.0 | 706 | 12.0% | | Personal Installment | 7,784.0 | 2,199.3 | 7,454 | 22.2% | | Business Installment | 781.6 | 252.7 | 21,996 | 18.2% | Delinquency Rates for All Facilitated Loans | Delinquency Period | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2019 | | :--- | :--- | :--- | :--- | | 16 - 30 days | 1.11% | 1.27% | 1.72% | | 31 - 60 days | 1.02% | 2.35% | 2.98% | | 61 - 90 days | 0.74% | 2.33% | 2.86% | Organizational Structure The company operates via a VIE structure in China to comply with regulations, and its relationship with the now-insolvent Jimu Group has significantly diminished, leading to uncollectible receivables - The company utilizes a VIE structure to conduct operations in restricted industries in China, such as value-added telecommunications, insurance brokerage, and fund distribution[413][414] - Funding from Jimu Box, previously the largest source, decreased from 62% of outstanding loans at year-end 2018 to 24% at year-end 2019. Following Jimu Group's exit from the online lending business in February 2020, this funding source is expected to be minimal going forward[395] - As of December 31, 2019, the company had RMB 866.0 million in amounts due from Jimu Group. Due to Jimu's insolvency, the company determined these amounts were not probable to be collected or recovered[397] Operating and Financial Review and Prospects The company's 2019 financial performance deteriorated significantly, with revenues declining and a substantial net loss primarily due to increased bad debt expenses related to Jimu Group, impacting liquidity Operating Results In 2019, total revenues decreased by 19.9% to RMB 1,285.2 million due to lower loan volumes, leading to a net loss of RMB 906.5 million primarily from surging G&A expenses - Total revenue decreased by 19.9% from RMB 1,603.6 million in 2018 to RMB 1,285.2 million in 2019, primarily due to a decrease in total loan volume from RMB 14.7 billion to RMB 11.0 billion[475] - Gross margin increased from 32.3% in 2018 to 40.2% in 2019, as the percentage decline in cost of revenues was greater than the decline in total revenue[484] - General and administrative expenses increased by 250.0% in 2019, mainly due to an RMB 819.3 million increase in bad debt expenses, a significant portion of which was a provision for credit loss on amounts due from Jimu Group[471][486] - The company reported a net loss of RMB 906.5 million in 2019, a stark contrast to the net income of RMB 2.2 million in 2018[488] Liquidity and Capital Resources The company's liquidity significantly weakened in 2019, with cash and cash equivalents decreasing to RMB 102.8 million, largely impacted by unrecoverable receivables from the insolvent Jimu Group Summary Consolidated Cash Flows (in thousands of RMB) | Cash Flow Activity | 2017 (Restated) | 2018 (Restated) | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 164,852 | 231,908 | 175,079 | | Net cash (used in)/provided by investing activities | (1,407,861) | 280,595 | (538,702) | | Net cash provided by/(used in) financing activities | 1,565,921 | (200,085) | 224,372 | | Net increase/(decrease) in cash | 322,878 | 334,150 | (129,137) | - The company made significant provisions for credit losses related to loans and prepayments involving Jimu Group, which became insolvent. These amounts were deemed unrecoverable and are expected to have a significant impact on future operating cash flow[562] - As of December 31, 2019, the company had RMB 102.8 million in cash and cash equivalents, a sharp decrease from RMB 457.4 million at the end of 2018[558] Directors, Senior Management and Employees This section details the company's leadership, including the Acting CEO, and highlights its dual-class share structure which concentrates 75.6% of voting power with the three core founders - CEO Mr. Wei Wei has been on a medical leave of absence since September 2019. Mr. Jun Dong was elected Chairman of the Board and named Acting Chief Executive Officer[583][584] - The company has a dual-class share structure. As of February 25, 2020, the three core founders (Wei Wei, Jun Dong, Xiaomei Peng) beneficially owned all Class B ordinary shares, representing approximately 18.3% of total shares but 75.6% of the aggregate voting power[178][626] - As of December 31, 2019, the company had 256 employees, with 54% being technology-focused personnel (Research & development, Risk management, Products development & operations)[289][620][621] Major Shareholders and Related Party Transactions This section outlines major shareholders and extensive related party transactions, primarily with Jimu Group, including significant cash advances and a RMB 856.0 million provision due to its insolvency - The company made undocumented cash advances to Jimu Group totaling RMB 461.7 million as of Dec 31, 2018, and an additional RMB 697.8 million in 2019. These were later formalized into loan agreements[645] - A provision of RMB 856.0 million was made for amounts due from Jimu Group as of December 31, 2019, as collection was deemed improbable following Jimu Group's insolvency announcement[647][1101] - In March 2019, the company acquired 100% of Ganzhou Aixin Micro Finance from Jimu Group for RMB 230 million, with the purchase price netted against amounts due from Jimu Group[649] Financial Information This section confirms the inclusion of consolidated financial statements, notes no material legal proceedings, and states no plans for future dividend payments - The company is not currently a party to any material legal or administrative proceedings[660] - The company has no plan to declare or pay any dividends in the near future, intending to retain earnings to operate and expand the business[661] Additional Information This section details the company's corporate governance, including its dual-class share structure, and highlights the high likelihood of PFIC classification for U.S. tax purposes - The company's dual-class share structure grants holders of Class B ordinary shares fifteen votes per share, while Class A ordinary shares receive one vote per share[675][678] - The company is likely classified as a Passive Foreign Investment Company (PFIC) for its taxable year ending December 31, 2019, which could result in adverse U.S. federal income tax consequences for U.S. Holders[739] PART II Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2019, due to three identified material weaknesses in internal control over financial reporting - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were ineffective[775] - A material weakness was identified related to the lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements[780] - A second material weakness was identified related to ineffective management and controls over cash advances to Jimu Group, including lack of a formal approval process and insufficient assessment of recoverability[782] - A third material weakness was identified related to a lack of effective controls over the investment process, including insufficient due diligence and creditworthiness assessment of investment targets[784] Change in Registrant's Certifying Accountant PricewaterhouseCoopers Zhong Tian LLP was dismissed as the independent auditor on August 20, 2019, and Marcum Bernstein & Pinchuk LLP was engaged, following identified material weaknesses during PwC's tenure - The company dismissed PricewaterhouseCoopers Zhong Tian LLP (PwC) on August 20, 2019, and engaged Marcum Bernstein & Pinchuk LLP as its new independent registered public accounting firm on September 4, 2019[796] - PwC's audit reports for fiscal years 2017 and 2018 did not contain adverse opinions or disclaimers. However, three material weaknesses were reported in the 2018 Form 20-F[797] PART III Financial Statements This section contains the audited consolidated financial statements for 2017-2019, highlighting restatements for prior years, the adoption of ASC 606, and significant related party transactions - The financial statements for the years ended December 31, 2017 and 2018 have been restated to correct material misstatements, primarily related to the gross vs. net recognition of certain technical service fees[820][1110][1111] - The company adopted the new revenue recognition standard, ASC 606, effective January 1, 2019, using the modified retrospective method. This adoption increased reported revenue in 2019 by RMB 53.1 million[821][534] - Subsequent to year-end, the COVID-19 pandemic has materially and adversely affected business operations, and the full financial impact cannot be reasonably estimated at this time[1127][1128][1130]