Fangdd(DUO) - 2022 Q4 - Annual Report

PART I Introduction and Special Notes The company operates through a PRC Variable Interest Entity (VIE) due to foreign ownership restrictions, facing risks from this structure, PRC regulations, and the HFCA Act, despite engaging a PCAOB-inspectable auditor for 2022 - Fangdd Network Group Ltd. is a Cayman Islands holding company, not an operating company, with primary operations conducted through its PRC subsidiaries and a Variable Interest Entity (VIE), Shenzhen Fangdd Network Technology Co., Ltd., due to PRC restrictions on foreign ownership in value-added telecommunications services[24] - The company was conclusively identified by the SEC under the Holding Foreign Companies Accountable Act (HFCA Act) in May 2022 but the PCAOB vacated this determination on December 15, 2022, after gaining inspection access[28][29] - For the fiscal year ending December 31, 2022, the company engaged a Singapore-based accounting firm registered with the PCAOB, which can be inspected, to mitigate risks associated with the HFCA Act[30][249] - The company faces significant regulatory uncertainty from PRC authorities, with new regulations effective March 31, 2023, requiring CSRC filings for overseas offerings and cybersecurity reviews for foreign listings by platform operators with over one million users' personal data[33][38][42] - Cash transfers from PRC entities to the holding company are restricted, with dividends from PRC subsidiaries subject to PRC laws and potential withholding taxes; the VIE has historically incurred losses and has not paid service fees to the WFOE, limiting cash flow to the parent company[41][68][73] ITEM 3. KEY INFORMATION This section details the company's VIE corporate structure, presents condensed consolidating financial statements, and outlines extensive risk factors across business, corporate structure, China operations, and ADSs Corporate Structure and Financial Information The company operates via a VIE structure, presenting condensed consolidating financial statements for 2020-2022, detailing financial performance, position, and cash flows, while outlining cash transfer limitations due to the VIE's historical losses - The company utilizes a VIE structure, where Shenzhen Fangdd Network Technology Co., Ltd. (the VIE) holds essential operating licenses, with control maintained through a series of contractual agreements, including Business Operation, Powers of Attorney, Equity Pledge, and Option Agreements[45][49][50] Condensed Consolidated Results of Operations (For the Year Ended Dec 31, 2022) | (in RMB thousands) | Parent | Other Subsidiaries | VIE and Its Subsidiaries | Consolidated Totals | | :--- | :--- | :--- | :--- | :--- | | Revenue | — | 6,906 | 239,879 | 245,948 | | Gross profit | — | (679) | 26,251 | 24,735 | | Loss from operations | (167,076) | (64,266) | (32,000) | (249,393) | | Net loss | (268,216) | (53,686) | (43,722) | (239,588) | Condensed Consolidated Financial Position (As of Dec 31, 2022) | (in RMB thousands) | Parent | Other Subsidiaries | VIE and Its Subsidiaries | Consolidated Totals | | :--- | :--- | :--- | :--- | :--- | | Total assets | 1,689,340 | 2,140,292 | 1,579,706 | 1,076,679 | | Total liabilities | 27,224 | 2,394,654 | 2,453,490 | 981,285 | | Total equity (deficit) | 1,662,116 | (254,362) | (873,784) | 95,394 | Condensed Consolidated Cash Flows (For the Year Ended Dec 31, 2022) | (in RMB thousands) | Parent | Other Subsidiaries | VIE and Its Subsidiaries | Consolidated Totals | | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (5,064) | (24,555) | (77,162) | (126,983) | | Net cash used in investing activities | (149,372) | (2,838) | (8,355) | (159,268) | | Net cash (used in) provided by financing activities | 3,136 | (10,000) | (70,695) | (58,654) | | Cash, cash equivalents and restricted cash at end of year | 22,710 | 64,374 | 95,661 | 182,745 | - Cash is primarily transferred from the parent company to the VIE through bank-entrusted loans from the WFOE, with US$5.7 million transferred in 2022; due to the VIE's accumulated losses, no service fees have been paid from the VIE to the WFOE[66][68] D. Risk Factors This subsection details principal risks, including business challenges like net losses and real estate market volatility, corporate structure risks from the VIE arrangement, significant operational risks in China, and ADS-related risks such as market volatility and concentrated voting power History of Net Losses and Negative Operating Cash Flow | Year | Net Loss (RMB million) | Negative Cash Flow from Operations (RMB million) | | :--- | :--- | :--- | | 2020 | 221.4 | 325.0 | | 2021 | 1,200.0 | 60.6 | | 2022 | 239.6 | 127.0 | - The company's business is highly susceptible to fluctuations in China's real estate market, which is subject to government regulations intended to control prices, such as tightened mortgage lending and restricted debt financing for developers[91][93] - The VIE contractual arrangements may be not as effective as direct ownership, and their enforcement is subject to substantial uncertainties within the PRC legal system; if deemed non-compliant, the company could face severe penalties, including relinquishing interests in the VIE's operations[177][184] - The company's ADSs may be prohibited from trading in the U.S. under the HFCA Act if the PCAOB is unable to inspect auditors in China in the future, though it has since engaged a Singapore-based auditor that is subject to PCAOB inspection[247][249] - The company has a triple-class voting structure (Class A: 1 vote, Class B: 10 votes, Class C: 10,000 votes per share), which concentrates significant voting power with Class B and Class C shareholders, limiting ADS holders' influence on corporate matters[262][264] - The company has previously failed to comply with Nasdaq's minimum bid price and minimum market value of publicly held shares requirements, receiving notices in January 2022 and October 2022, but has since regained compliance for both matters[259][260] ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of the company's history, PropTech marketplace business model, organizational structure, and property, detailing its evolution, IPO, Class C share creation, SaaS offerings, and pertinent PRC regulations - The company is a customer-oriented PropTech company in China operating an online marketplace for real estate transactions, focusing on providing real estate transaction digitalization services through SaaS solutions and intelligent matching algorithms[308][409] Key Operating Metrics (2022) | Metric | Value | | :--- | :--- | | Closed-loop GMV | RMB 22.5 billion (US$3.3 billion) | | Active Agents | Over 143.7 thousand | | New Property Projects | 1,613 | - Primary revenue sources are property transaction services (base commissions) and innovation initiatives/other value-added services (including SaaS solutions and financial services)[324][410] - The company's technology infrastructure is built on a database covering 157 million properties in China as of December 31, 2022, utilizing AI and big data for matching and verification[326] - The company's VIE structure is maintained through a series of contractual arrangements, including a Business Operation Agreement, Powers of Attorney, Equity Interest Pledge Agreements, and Option Agreements, which collectively give the WFOE effective control over the VIE[396][398][399][400] - The business is subject to extensive PRC regulations, including those on foreign investment (Negative List), value-added telecommunications services (requiring licenses held by the VIE), data security (Cyber Security Law, Data Security Law), and real estate brokerage[349][351][361] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance, noting a 73.9% revenue decrease in 2022 to RMB 245.9 million and a net loss of RMB 239.6 million, while highlighting liquidity stress and going concern doubts due to recurring losses and negative operating cash flow Consolidated Results of Operations (in RMB thousands) | | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Revenue | 2,451,287 | 942,380 | 245,948 | | Gross profit | 414,466 | 106,507 | 24,735 | | Loss from operations | (226,020) | (957,295) | (249,393) | | Net loss | (221,375) | (1,202,997) | (239,588) | - Revenue decreased by 73.9% in 2022, from RMB 942.4 million in 2021 to RMB 245.9 million, primarily due to a 72.6% decrease in total closed-loop GMV resulting from the property market downturn, COVID-19 outbreaks, and a strategic reduction in business scale[434] - General and administrative expenses decreased significantly to RMB 195.0 million in 2022 from RMB 831.4 million in 2021, mainly due to a decrease in the provision for impairment of assets like accounts receivable[440] - The company has experienced recurring losses and negative operating cash flows, and as of December 31, 2022, had an accumulated deficit of RMB 4.6 billion, raising substantial doubt about its ability to continue as a going concern[458][811] Cash Flow Summary (in RMB thousands) | | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (324,995) | (60,618) | (126,983) | | Net cash (used in) provided by investing activities | 5,848 | (43,725) | (159,268) | | Net cash used in financing activities | (46,557) | (307,129) | (58,654) | | Cash, cash equivalents and restricted cash at end of year | 936,030 | 516,238 | 182,745 | - Critical accounting estimates include the allowance for doubtful accounts, which was RMB 557.1 million as of Dec 31, 2022, and impairment of goodwill, which was fully impaired in 2021[485][487][490] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation, board practices, and employee base, noting RMB 2.9 million in executive compensation for 2022, a significant employee reduction to 212, and highly concentrated share ownership with directors and executive officers controlling 74.9% of voting rights - For the year ended December 31, 2022, the aggregate cash and benefits paid to executive officers was approximately RMB 2.9 million (US$426.0 thousand)[504] - Under the 2018 Share Incentive Plan, the maximum number of shares issuable is 356,514,660, with awards to purchase 69,094,125 ordinary shares granted and outstanding as of March 31, 2023[510] - The company's employee count has decreased dramatically, from 1,725 at the end of 2020 to 212 as of December 31, 2022[532] - As of March 31, 2023, directors and executive officers as a group beneficially own approximately 2.6% of total outstanding ordinary shares, but control 74.9% of the total voting rights due to the triple-class share structure[275][540] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details transactions with major shareholders and related parties, including fundamental VIE contractual arrangements, registration rights, recent issuance of high-vote Class C shares to CEO-controlled entities, and ongoing business relationships with limited partnerships involving shared commissions - The company has granted demand and piggyback registration rights to its shareholders under an amended and restated shareholders' agreement from June 2015, though preferential rights terminated upon the IPO[551][552] - In November 2022 and March 2023, the company issued newly created Class C ordinary shares, which carry 10,000 votes per share, to ZX INTERNATIONAL LTD, a company controlled by Chairman and CEO Mr. Xi Zeng[559][560] - The company is a limited partner in numerous investment partnerships that also act as funding partners for its exclusive property selling arrangements, and shares commission and sales incentive income with these entities[563] - In 2021 and 2022, related parties, including an equity method investee and a company owned by the CEO's spouse, pledged real estate properties as collateral for the company's bank borrowings[567] ITEM 8. FINANCIAL INFORMATION This section refers to consolidated financial statements in Item 18, discloses increased legal proceedings due to the market downturn, and states no current plans to pay dividends, intending to retain earnings for business operations - The company has initiated an increased number of lawsuits against real estate developers to protect its accounts receivable and has also seen more lawsuits from real estate agencies against it due to the downturn in China's real estate market[572] - The company has no current plans to pay cash dividends and intends to retain future earnings to operate and expand the business; dividend payments are also restricted by PRC regulations on its subsidiaries[574][575] ITEM 10. ADDITIONAL INFORMATION This section details the company's corporate governance and legal framework, summarizing its Cayman Islands memorandum and articles of association, focusing on the three classes of ordinary shares with differing voting powers and conversion rights, and covering material tax considerations for investors - The company's share capital consists of three classes: Class A (1 vote/share), Class B (10 votes/share), and Class C (10,000 votes/share); Class B and C shares are convertible into Class A shares, but not vice-versa[585][593] - Class B shares automatically convert to Class A shares upon transfer to a non-founder, while Class C shares automatically convert to Class A shares upon certain transfer events or if CEO Mr. Xi Zeng's beneficial ownership or capacity to manage the business falls below certain thresholds[587][588] - The company is an exempted company under Cayman Islands law, which provides certain privileges such as not having to hold an annual general meeting, though it will hold one as required by Nasdaq rules[583][594] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for 2022, but its status is a factual determination made annually and could change, which would have adverse tax consequences for U.S. Holders[276][660] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's market risk exposure, primarily foreign exchange risk due to RMB-denominated operations and USD-traded ADSs, and notes that interest rate risk is not material, with no derivative instruments used - The company's primary market risk is foreign exchange risk, as its business is denominated in RMB while its ADSs are traded in U.S. dollars; fluctuations in the RMB/USD exchange rate will affect the value of the investment in ADSs[679] - The company has not been exposed to material risks from changes in market interest rates and has not used any derivative financial instruments to manage this exposure[682] PART II ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS This section confirms no material modifications to security holder rights and details the use of US$71.6 million net IPO proceeds, with US$66.0 million allocated to R&D, sales & marketing, and general corporate purposes by December 31, 2022 - From the November 2019 IPO, the company received net proceeds of approximately US$71.6 million; as of December 31, 2022, US$66.0 million had been used for R&D, sales & marketing, and general corporate purposes[695] ITEM 15. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were ineffective as of December 31, 2022, due to a material weakness in internal control over financial reporting, with remediation measures underway - Management concluded that internal control over financial reporting was ineffective as of December 31, 2022[699] - A material weakness was identified: a lack of sufficient financial reporting and accounting personnel with appropriate U.S. GAAP knowledge to handle complex accounting issues and prepare SEC-compliant financial statements[701][166] - Remediation measures are underway, including hiring more qualified personnel, adopting new accounting guidance, upgrading financial systems, and establishing better oversight for complex transactions[702] ITEM 16. Corporate Governance and Other Matters This section covers corporate governance, including a change in auditor to Audit Alliance LLP in July 2022, adherence to Cayman Islands governance practices as a foreign private issuer, and engagement of a PCAOB-inspectable auditor for 2022 to address HFCA Act concerns - On July 25, 2022, the company dismissed KPMG Huazhen LLP and engaged Audit Alliance LLP as its principal accountant on July 29, 2022[712] - As a foreign private issuer, the company follows its home country (Cayman Islands practices) in lieu of certain Nasdaq corporate governance standards, such as the requirement for a majority-independent board and for certain committees to be comprised solely of independent directors[718][273] - Regarding the HFCA Act, the company was identified as a Commission-Identified Issuer in May 2022; for the fiscal year 2022, it engaged a Singapore-based auditor that can be inspected by the PCAOB[721][722] PART III ITEM 18. FINANCIAL STATEMENTS This section presents the company's audited consolidated financial statements for 2020-2022, prepared under U.S. GAAP, with the auditor's report for 2022 including a "Going Concern" paragraph due to recurring losses and significant revenue decline - The independent auditor's report for the 2022 financial statements contains a paragraph expressing substantial doubt about the company's ability to continue as a going concern, citing recurring losses from operations and a significant decline in revenue[740][748] Consolidated Balance Sheet Highlights (in RMB thousands) | | Dec 31, 2021 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | 1,912,983 | 1,076,679 | | Cash and cash equivalents | 492,107 | 143,934 | | Accounts receivable, net | 884,740 | 470,997 | | Total Liabilities | 1,609,306 | 981,285 | | Short-term bank borrowings | 134,780 | 72,500 | | Accounts payable | 1,175,943 | 659,215 | | Total Equity | 303,677 | 95,394 | - The company's VIE and its subsidiaries held total assets of RMB 1.58 billion and total liabilities of RMB 2.45 billion as of December 31, 2022[793] - The company recognized an impairment loss of RMB 62.6 million for equity method investments in 2022, following an impairment of RMB 187.3 million in 2021, due to current real estate market conditions[492][930] ITEM 19. EXHIBITS This section lists all exhibits filed with the annual report, including the company's memorandum and articles, securities agreements, the 2018 Share Incentive Plan, English translations of VIE contractual agreements, and CEO/CFO certifications - The report includes as exhibits the English translations of the key contractual agreements that form the basis of the company's VIE structure, such as the Business Operation Agreement, Powers of Attorney, and Equity Interest Pledge Agreements[730] - A letter from the former auditor, KPMG Huazhen LLP, to the SEC regarding its dismissal is filed as Exhibit 16.1[731]