Dingdong(DDL) - 2022 Q4 - Annual Report

Introduction This section defines key terms, specifies the reporting currency as Renminbi, and outlines the nature of forward-looking statements and non-GAAP financial measures Introduction and Definitions This section defines key terms used throughout the annual report, such as American Depositary Shares (ADSs), Gross Merchandise Value (GMV), and transacting user, and specifies the reporting currency and exchange rate - The company defines Gross Merchandise Value (GMV) as the total value of all orders placed based on listed discounted prices, excluding coupons, shipping fees, and returned or undelivered orders[6] - The reporting currency is Renminbi (RMB) All translations to U.S. dollars are for convenience and use an exchange rate of RMB6.8972 to US$1.00 as of December 30, 2022[7] Forward-Looking Information This section outlines that the report contains forward-looking statements regarding the company's goals, future business development, financial conditions, and market outlook, cautioning against undue reliance - Forward-looking statements cover areas such as goals and strategies, future financial performance, market outlook for fresh grocery e-commerce in China, and expectations regarding user and partner relationships[9] - The company warns that actual results could differ materially from expectations due to various risks and uncertainties and that it does not undertake any obligation to update these statements unless required by law[10][12] Non-U.S. GAAP Financial Information The report discloses non-GAAP financial measures, specifically non-GAAP net loss and non-GAAP net loss margin, which exclude share-based compensation expenses, with reconciliations to U.S. GAAP - The company uses non-GAAP financial measures like non-GAAP net loss, which excludes share-based compensation expenses, for internal evaluation and decision-making[14] - These non-GAAP measures are not defined under U.S. GAAP and have limitations The company provides reconciliations to the most comparable U.S. GAAP measures to mitigate these limitations[15][16] PART I This part covers key company information, including corporate structure, risk factors, business operations, financial performance, management, and shareholder details Key Information This section details the company's corporate structure as a Cayman Islands holding company with primary operations in China, highlighting significant risks including regulatory oversight and potential delisting - The company is a Cayman Islands holding company, and its business operations are conducted through subsidiaries in the PRC Investors hold equity in the Cayman entity, not the PRC operating companies[19] - The company was identified as a "Commission-Identified Issuer" by the SEC on May 9, 2022, under the HFCA Act Although the PCAOB vacated its determination preventing inspections in December 2022, the risk of future identification and potential delisting remains if inspections are hindered again[21][22] - The company faces significant oversight from the PRC government, including new rules effective March 31, 2023, requiring CSRC filings for overseas securities offerings, which could impact future financing and operations[24] - The ability of the Cayman holding company to pay dividends depends on distributions from its PRC subsidiaries, which are subject to PRC laws restricting the distribution of retained earnings and requiring appropriations to statutory reserve funds[25][26] Risk Factors This subsection provides a detailed analysis of the principal risks associated with an investment in the company, categorized into business, China-specific, and ADS-related risks - The company has a limited operating history since 2017 and has incurred significant net losses, recording a net loss of RMB 806.9 million in 2022, though it achieved its first quarterly GAAP net profit in Q4 2022[32][33] - The company faces intense competition from other fresh grocery e-commerce players, traditional e-commerce giants, and major retailers moving into the space[36] - The business is subject to complex and evolving PRC laws regarding data privacy and cybersecurity, such as the Cybersecurity Law, Data Security Law, and Personal Information Protection Law, which could increase operational costs and risks[78][79] - The PCAOB's historical inability to inspect the company's auditor in China poses a risk under the HFCA Act If the PCAOB is unable to conduct inspections for two consecutive years in the future, the company's ADSs could be prohibited from trading in the U.S[137][138] - The dual-class voting structure concentrates 81.2% of the aggregate voting power in the founder and CEO, Mr. Changlin Liang, limiting the influence of other shareholders on corporate matters[204][206] Information on the Company This section provides a comprehensive overview of Dingdong's business, including its history, operational model, corporate structure, product strategy, supply chain, and regulatory framework - The company was founded in May 2017 and listed its ADSs on the NYSE in June 2021 under the symbol "DDL"[247][248] Key Business Metrics (2020-2022) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | GMV (RMB million) | 13,032.2 | 22,704.1 | 26,247.9 | | Revenues (RMB million) | 11,335.8 | 20,121.1 | 24,221.2 | | Average Order Value (RMB) | 65.7 | - | 74.5 | - The company operates an extensive fulfillment network with approximately 60 regional processing centers and 1,100 frontline fulfillment stations across around 30 cities as of December 31, 2022[276] - Private label products are a key strategic focus, contributing over 16% of total GMV in 2022 The company has launched over 20 private labels with around 2,200 SKUs[257] - The business is subject to extensive PRC regulations covering foreign investment, food safety, e-commerce, data privacy, and intellectual property[320][324][331] Operating and Financial Review and Prospects This section analyzes the company's financial performance and condition, highlighting a strategic shift towards efficiency, improved operational efficiency, and narrowed net losses Consolidated Results of Operations (2020-2022, in RMB thousands) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Total revenues | 11,335,787 | 20,121,126 | 24,221,233 | | Cost of goods sold | (9,105,294) | (16,076,178) | (16,735,643) | | Fulfilment expenses | (4,044,230) | (7,272,535) | (6,114,851) | | Loss from operations | (3,159,487) | (6,346,841) | (762,789) | | Net loss | (3,176,914) | (6,429,059) | (806,883) | - Revenues grew 20.4% in 2022 to RMB 24.2 billion, driven by a 27.0% increase in average order value to RMB 74.5[457] - Operating efficiency improved significantly in 2022, with fulfillment expenses decreasing to 25.2% of revenues from 36.1% in 2021, and sales and marketing expenses decreasing to 2.2% from 7.5%[459][460] - As of December 31, 2022, the company had cash, cash equivalents, restricted cash, and short-term investments totaling RMB 6.50 billion (US$941.8 million)[490] Cash Flow Summary (2020-2022, in RMB thousands) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net cash (used in)/generated from operating activities | (2,055,697) | (5,666,538) | 87,366 | | Net cash used in investing activities | (1,021,219) | (4,065,340) | (47,127) | | Net cash generated from financing activities | 3,656,665 | 9,042,640 | 1,112,383 | Directors, Senior Management and Employees This section provides information about the company's leadership, compensation practices, board structure, employee base, and major shareholders, including executive officers and share incentive plans - The board consists of six directors, including founder and CEO Changlin Liang The company has established Audit, Compensation, and Nominating and Corporate Governance committees[514][542] - For the fiscal year ended December 31, 2022, the aggregate cash compensation paid to executive officers was RMB 14.2 million (US$2.1 million), and non-executive directors received approximately US$152,000[526] - The company utilizes a Second Amended and Restated 2020 Share Incentive Plan, with a maximum of 40,544,715 ordinary shares available for issuance As of December 31, 2022, options for 4,796,090 shares were granted to all directors and executive officers as a group[533][538] Employee Breakdown by Function (as of Dec 31, 2022) | Function | Number of Employees | Percentage | | :--- | :--- | :--- | | Product development | 1,400 | 41.6% | | Fulfillment | 1,294 | 38.5% | | General and administrative | 390 | 11.6% | | Sales and marketing | 279 | 8.3% | | Total | 3,363 | 100% | - As of December 31, 2022, founder and CEO Changlin Liang beneficially owned 26.1% of the company's total share capital, representing 81.2% of the aggregate voting power due to the dual-class structure[206][556][557] Major Shareholders and Related Party Transactions This section refers to other parts of the report for details on major shareholders and related party transactions, specifically Item 6.E. and Item 6.B - Information regarding major shareholders is detailed in Item 6.E[563] - Details on related party transactions, including employment agreements and share incentive plans, are provided in Item 6.B[563][564] Financial Information This section confirms the consolidated financial statements are appended, discloses an ongoing securities class action lawsuit, and outlines the company's dividend policy - The company is a defendant in a securities class action lawsuit filed on August 25, 2022, in the U.S. District Court for the Southern District of New York, alleging material omissions in its IPO offering documents The company believes the claim is without merit[567] - The company has no present plan to pay any cash dividends and intends to retain future earnings to operate and expand its business[572] - The ability to pay dividends is dependent on receiving distributions from PRC subsidiaries, which is restricted by PRC laws requiring appropriations to statutory reserve funds[572] The Offer and Listing This section provides the listing details for the company's American Depositary Shares (ADSs), including their listing on the NYSE and conversion ratio - The company's ADSs have been listed on the NYSE under the symbol "DDL" since June 29, 2021[574][575] - The conversion ratio is two ADSs representing three Class A ordinary shares[574] Additional Information This section details the company's corporate governance framework as a Cayman Islands entity, summarizing its dual-class share structure, dividend rights, and material tax considerations - The company has a dual-class share structure Class A ordinary shares have one vote per share, while Class B ordinary shares have 20 votes per share and are convertible into Class A shares[577][580] - The company is an exempted company incorporated in the Cayman Islands, and its corporate governance is subject to the Companies Act of the Cayman Islands, which differs significantly from U.S. corporate law in areas like shareholder rights and merger procedures[600][602] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2022 taxable year, but notes that PFIC status is an annual determination and subject to uncertainty, which could have adverse U.S. federal income tax consequences for U.S. Holders[242][649][651] - Under PRC tax law, if the company is deemed a "PRC resident enterprise," non-resident shareholders could be subject to a 10% withholding tax on dividends and a 10% tax on gains from the sale of shares[636] Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to various market risks, primarily credit risk, currency convertibility risk, and foreign exchange risk, and how they are managed - The company is exposed to credit risk from its cash, cash equivalents, and short-term investments, which are primarily held in financial institutions in the PRC[669] - Currency convertibility risk exists as the company's operations are in Renminbi (RMB), which is not freely convertible into foreign currencies, and foreign exchange transactions are regulated by the PRC government[671] - The company faces foreign exchange risk due to fluctuations between its functional currency (USD) and reporting currency (RMB) The appreciation of the USD against the RMB was approximately 9.2% in 2022, resulting in a foreign currency translation income of RMB 172.4 million for the year[672][673] Description of Securities Other than Equity Securities This section primarily addresses the terms of the company's American Depositary Shares (ADSs), including the depositary, conversion ratio, and fee schedule for ADS holders - Deutsche Bank Trust Company Americas acts as the depositary for the ADSs, with each two ADSs representing three Class A ordinary shares[675] ADS Holder Service Fees | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to US$0.05 per ADS issued | | Cancellation of ADSs | Up to US$0.05 per ADS cancelled | | Distribution of cash dividends | Up to US$0.05 per ADS held | | Depositary services | Up to US$0.05 per ADS held on the applicable record date | - ADS holders are responsible for paying all applicable taxes and governmental charges on their ADSs or the underlying deposited securities[684] PART II This part covers the use of IPO proceeds, internal controls, corporate governance, and disclosures related to the Holding Foreign Companies Accountable Act Material Modifications to the Rights of Security Holders and Use of Proceeds This section reports on the use of proceeds from the company's initial public offering (IPO) in July 2021, confirming most proceeds were used for business operations consistent with stated intentions - The company raised US$91.6 million in net proceeds from its initial public offering, which closed in July 2021[688] - As of December 31, 2022, most of the net proceeds have been utilized for business operations and development, with no material change from the use of proceeds described in the registration statement[689] Controls and Procedures This section covers the company's evaluation of its disclosure controls and internal control over financial reporting, concluding on their effectiveness as of December 31, 2022 - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were not effective[690] - Management assessed the internal control over financial reporting and concluded that it was effective as of December 31, 2022[693] - The independent registered public accounting firm, Ernst & Young Hua Ming LLP, issued an unqualified attestation report on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[694] Corporate Governance and Other Disclosures This section covers various corporate governance and disclosure matters, including the audit committee financial expert, Code of Conduct, principal accountant fees, and share repurchase program - The board has determined that Mr. Philip Wai Lap Leung qualifies as an "audit committee financial expert"[696] Principal Accountant Fees (in US$ thousands) | Fee Type | 2021 | 2022 | | :--- | :--- | :--- | | Audit fees | 769 | 942 | | Audit-related fees | 392 | 1,261 | | Tax fees | 23 | 17 | | All other fees | — | 315 | - Under its share repurchase program announced in December 2021, the company repurchased a total of 344,441 ADSs for approximately US$3.2 million[703][704] - As a foreign private issuer, the company follows Cayman Islands home country practices, exempting it from certain NYSE corporate governance requirements, such as having a majority of independent directors on the board[705] - The company discloses that for the preceding annual financial statement period, its auditor, Ernst & Young Hua Ming LLP, was a registered public accounting firm that the PCAOB was unable to inspect or investigate completely[707] PART III This part contains the company's audited consolidated financial statements, prepared in accordance with U.S. GAAP, along with the independent auditor's report and a list of exhibits Financial Statements This section contains the company's audited consolidated financial statements for 2020-2022, prepared in accordance with U.S. GAAP, including the independent auditor's unqualified opinion - The independent auditor, Ernst & Young Hua Ming LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2022[721][733] Consolidated Balance Sheet Highlights (as of Dec 31, in RMB thousands) | Metric | 2021 | 2022 | | :--- | :--- | :--- | | Total Current Assets | 6,516,323 | 7,496,247 | | Total Assets | 9,420,058 | 9,381,907 | | Total Current Liabilities | 7,348,520 | 8,211,240 | | Total Liabilities | 8,661,989 | 8,964,240 | | Total Shareholders' Equity | 728,069 | 310,177 | Consolidated Statement of Comprehensive Loss Highlights (in RMB thousands) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Total revenues | 11,335,787 | 20,121,126 | 24,221,233 | | Loss from operations | (3,159,487) | (6,346,841) | (762,789) | | Net loss | (3,176,914) | (6,429,059) | (806,883) | | Net loss per share (Basic & Diluted) | (54.91) | (34.50) | (2.51) | - The auditor's report identifies the impairment assessment of long-lived assets as a critical audit matter due to the subjective judgment required to assess future cash flows and fair value[727][728] Exhibits This section lists all the exhibits filed as part of the annual report, including corporate documents, share incentive plans, and various certifications - Exhibit 1.1 is the Ninth Amended and Restated Memorandum and Articles of Association[710] - Exhibit 4.1 is the Second Amended and Restated 2020 Share Incentive Plan[710] - Exhibits 12.1, 12.2, 13.1, and 13.2 are certifications by the Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[711][712][713]