Dada(US:DADA)2021-03-31 20:01PART I Item 3. Key Information The company faces significant risks related to its business, corporate structure, China operations, and ADSs Risks Relating to Our Business Business risks include dependency on the on-demand retail industry, a history of net losses, and reliance on major partners - The company's business and growth are highly dependent on the on-demand retail and delivery industries in China, which are new and rapidly evolving19 - The company has significant strategic and financial reliance on JD Group and Walmart Group, who held approximately 46.0% and 10.1% of the company's equity, respectively, as of February 28, 202125 History of Net Losses and Negative Operating Cash Flow (2018-2020) | Year | Net Loss (RMB million) | Net Cash Used in Operating Activities (RMB million) | | :--- | :--- | :--- | | 2018 | 1,878.4 | 1,819.4 | | 2019 | 1,669.8 | 1,297.8 | | 2020 | 1,705.2 | 1,108.2 | Revenue Concentration from Major Customers (2018-2020) | Customer | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | JD Group | 49.1% | 50.5% | 38.6% | | Walmart Group | 4.6% | 13.0% | 13.8% | - A material weakness in internal control over financial reporting was identified for the year ended 2020, relating to a lack of detailed accounting policies and procedures143144 Risks Related to Our Corporate Structure The company's VIE structure, used to comply with PRC law, poses significant legal and regulatory uncertainties - The company uses a VIE structure to operate its value-added telecommunication services in China, relying on contractual arrangements rather than direct ownership149150 - There are substantial uncertainties regarding PRC laws; if the government finds the VIE agreements non-compliant, the company could face severe penalties153 - The Foreign Investment Law does not explicitly classify VIE structures, creating uncertainty about future regulations that could deem them foreign investments in restricted industries166 Risks Related to Doing Business in China Operations are exposed to China's economic, political, and legal systems, including potential delisting under the HFCAA - Substantially all assets and operations are in China, making the business highly susceptible to changes in China's economic and political conditions175 - If classified as a PRC resident enterprise, the company could be subject to a 25% tax on its worldwide income, and non-PRC shareholders could face PRC withholding taxes187189 - The company's ADSs may be delisted under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB cannot inspect its China-based auditor for three consecutive years228229 - PRC regulations on foreign exchange may limit the ability of PRC subsidiaries to transfer funds to the parent company212226 Risks Related to Our ADSs Investment risks include ADS price volatility, limited voting rights, and potential adverse US tax consequences - The trading price of the ADSs has been volatile, ranging from US$14.75 to US$57.95 per ADS since the IPO241 - The company does not expect to pay dividends in the foreseeable future, so investors must rely on ADS price appreciation for returns250 - Holders of ADSs have limited voting rights and cannot directly attend or vote at shareholder meetings unless they withdraw the underlying ordinary shares254255 - As a foreign private issuer, the company is exempt from certain SEC reporting requirements applicable to U.S. domestic companies278 - There is a risk the company could be classified as a Passive Foreign Investment Company (PFIC), which would result in adverse U.S. federal income tax consequences for U.S. investors280281 Item 4. Information on the Company The company's history, dual-platform business model, VIE structure, and strategic partnerships are detailed A. History and Development of the Company Key milestones include the company's founding, acquisition of JDDJ, and a significant new investment from JD.com - The company was founded in July 2014 with the launch of the Dada Now app287 - In April 2016, the company acquired the JDDJ business from JD Group, which became a strategic investor288 - Walmart Group became a strategic investor in October 2016, following a business cooperation agreement established in June 2016289 - In March 2021, JD.com agreed to invest an additional US$800 million, expected to increase its ownership stake to approximately 51%291 B. Business Overview The company operates two complementary platforms, Dada Now and JDDJ, supported by key strategic partnerships - The company operates two main platforms: Dada Now for on-demand delivery and JDDJ for on-demand retail293 Dada Now Key Metrics (2020) | Metric | Value | | :--- | :--- | | Orders Delivered | 1,057.1 million | | Intra-city Coverage | ~1,400 cities/counties | | Last-mile Coverage | >2,700 cities/counties | JDDJ Key Metrics (2020) | Metric | Value | | :--- | :--- | | GMV | RMB 25,262 million | | Active Consumers | 41.3 million | | Coverage | ~1,400 cities/counties | - The company has deep strategic partnerships with JD Group and Walmart Group, who are both major investors and significant sources of revenue338339 - The business is subject to extensive PRC regulations, including those related to foreign investment, e-commerce, data privacy, and intellectual property367 C. Organizational Structure The company uses a VIE structure controlled via contractual arrangements to operate in restricted sectors in China - The company utilizes a VIE structure to operate businesses in China that are subject to foreign ownership restrictions464467 - Control over the VIE (Shanghai Qusheng) is established through contractual arrangements with its wholly-owned subsidiary, Dada Glory467 - Key contractual agreements include Powers of Attorney, Share Pledge Agreements, an Exclusive Business Cooperation Agreement, and Exclusive Option Agreements469470472474 D. Property, Plant and Equipment The company operates from leased office spaces across China and utilizes third-party data centers - As of December 31, 2020, the company leased approximately 43,100 square meters of office and other space across China477 - Servers are hosted in third-party data centers located in Beijing479 Item 5. Operating and Financial Review and Prospects The company shows strong revenue growth driven by order volume but remains unprofitable with negative operating cash flow A. Operating Results Net revenues grew significantly in 2020, though net loss widened slightly due to increased operating costs Consolidated Results of Operations (2018-2020) | Metric (RMB in millions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net Revenues | 1,922.0 | 3,100.0 | 5,740.0 | | Operations and support | (2,044.1) | (2,845.9) | (4,721.3) | | Selling and marketing | (1,223.3) | (1,414.5) | (1,848.7) | | Loss from operations | (1,976.5) | (1,749.7) | (1,764.1) | | Net Loss | (1,878.4) | (1,669.8) | (1,705.2) | - Net revenues in 2020 increased by 85.2% year-over-year, primarily due to substantial growth in delivery and marketplace services523 - JDDJ platform's GMV grew 107.0% in 2020, driven by a 69.5% increase in active consumers and a 49.1% increase in average order size483524 - Operations and support costs, the largest expense category, increased by 65.9% in 2020 to RMB 4.72 billion, mainly due to higher rider costs525 B. Liquidity and Capital Resources Liquidity is primarily sourced from financing activities as operations continue to generate negative cash flow Summary of Cash Flows (2018-2020) | Cash Flow (RMB in millions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (1,819.4) | (1,297.8) | (1,108.2) | | Net cash used in investing activities | (415.4) | (267.5) | (229.8) | | Net cash provided by financing activities | 3,048.1 | 0 | 5,891.6 | - As of December 31, 2020, the company had RMB 5.46 billion (US$837.0 million) in cash and cash equivalents581 - Liquidity is primarily sourced from financing activities; in 2020, the company raised a net total of RMB 5.89 billion from its IPO, follow-on offering, and borrowings599 - The company's ability to use cash generated in China is restricted by PRC laws, which limit dividend payments from PRC subsidiaries588602 Item 6. Directors, Senior Management and Employees The company's leadership, board composition, compensation plans, and employee base are described A. Directors and Senior Management The leadership team includes the company's founders and representatives from strategic partners JD.com and Walmart - The leadership team includes founder Philip Jiaqi Kuai (Chairman & CEO), co-founder Jun Yang (Director & CTO), and Beck Zhaoming Chen (CFO)609612613621 - The board of directors includes executives from strategic partners JD.com and Walmart, reflecting their significant ownership and strategic importance609614616 B. Compensation Compensation includes cash salaries and equity incentives under two share plans designed to attract and retain talent - Total cash compensation paid to executive officers in 2020 was RMB 6.7 million (US$1.0 million)622 - The company has a 2015 Equity Incentive Plan and a 2020 Share Incentive Plan for granting equity awards like options and RSUs628632 - As of February 28, 2021, there were options to purchase 41,391,852 ordinary shares and 19,374,513 outstanding RSUs under the 2015 Plan628 - As of February 28, 2021, there were options to purchase 1,738,000 ordinary shares and 2,684,800 outstanding RSUs under the 2020 Plan632 C. Board Practices The board has nine members and three committees, operating under Cayman Islands law with specific fiduciary duties - The board of directors consists of nine members and has three committees: Audit, Compensation, and Nominating and Corporate Governance640641 - The Audit Committee is composed of independent directors, with Ms. Bonnie Yi Zhang serving as chairperson and qualifying as an audit committee financial expert641 - Directors are elected by shareholder resolution and do not have a fixed term of office648 D. Employees The company employs over 2,400 staff, while its delivery riders are classified as independent contractors Employee Count by Function (as of Dec 31, 2020) | Function | Number of Employees | | :--- | :--- | | Business operations and sales & marketing | 1,466 | | Research and development | 681 | | Customer care | 115 | | General and administrative | 178 | | Total | 2,440 | - The company's riders are not considered employees; they are primarily part-time crowdsourced individuals or from outsourced delivery agencies652 E. Share Ownership Major shareholders include JD Group and Walmart, with JD.com's ownership expected to exceed 50% Principal Shareholders (as of Feb 28, 2021) | Shareholder | Beneficial Ownership % | | :--- | :--- | | JD Group Entities | 46.0% | | Walmart Entities | 10.1% | | Sequoia Capital China | 7.3% | | Pleasant Lake Limited | 7.2% | | Investment funds affiliated with DST | 5.4% | - CEO Philip Jiaqi Kuai and CTO Jun Yang beneficially owned 7.8% and 1.6% of ordinary shares, respectively, as of February 28, 2021658 - A March 2021 share purchase agreement is expected to increase JD.com's ownership to approximately 51% upon closing669 Item 7. Major Shareholders and Related Party Transactions The company has significant revenue-generating and operational transactions with major shareholders JD Group and Walmart - The company has significant related party transactions with its major shareholders, JD Group and Walmart Group672673 Revenues from Major Related Parties (2018-2020) | Related Party (RMB in millions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | JD Group | 943.1 | 1,564.4 | 2,214.3 | | Walmart Group | 89.4 | 403.3 | 794.7 | - The company incurred operational support service fees from JD Group amounting to RMB 79.0 million in 2020672 - Shareholders have been granted registration rights, including demand, piggyback, and Form F-3 registration rights676677678679 Item 8. Financial Information The company reports no material legal proceedings and does not plan to pay dividends, retaining earnings for growth - The company is not currently a party to any material legal or administrative proceedings681 - The company has no present plan to pay cash dividends and intends to retain earnings for business expansion683 - The ability to pay dividends is dependent on receiving distributions from PRC subsidiaries, which is subject to PRC regulations and profitability683 Item 9. The Offer and Listing The company's ADSs, each representing four ordinary shares, are listed on the Nasdaq under the ticker DADA - The company's ADSs are listed on the Nasdaq Global Select Market under the symbol "DADA" since June 5, 2020685 - Each ADS represents four ordinary shares685 Item 10. Additional Information This section details the company's articles of association, corporate law differences, and key tax considerations B. Memorandum and Articles of Association Governing documents under Cayman law define shareholder rights and include anti-takeover provisions - The company's corporate affairs are governed by its memorandum and articles of association and the Companies Act of the Cayman Islands688 - An ordinary resolution requires a simple majority vote, while a special resolution requires a two-thirds majority vote690 - The articles include anti-takeover provisions, such as authorizing the board to issue preference shares without further shareholder approval704 - Cayman Islands law provides for mergers and consolidations but offers more limited shareholder appraisal rights compared to Delaware law709712713 E. Taxation Key tax risks include potential PRC resident enterprise status and US PFIC classification for investors - The company is not subject to profits, income, or capital gains tax in the Cayman Islands737 - A significant PRC tax risk is the potential classification as a "resident enterprise," which would subject the company to a 25% tax on its worldwide income739742 - For U.S. investors, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), resulting in unfavorable tax treatment751761 Item 11. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign exchange rate fluctuations and, to a lesser extent, interest rates - The company's main market risk is foreign exchange risk, as its business is denominated in RMB while its ADSs are traded in U.S. dollars771 - Interest rate risk exposure is primarily related to short-term bank borrowings and is not considered material775 Item 12. Description of Securities Other than Equity Securities This section details the fees charged to ADS holders by the depositary bank, as no other securities are issued - ADS holders are subject to various fees charged by the depositary, including a fee of up to $5.00 per 100 ADSs for issuance or surrender777778 - Additional charges may include fees for cash distributions, ADR transfers, and reimbursement for taxes or other governmental charges778780 PART II Item 13. Defaults, Dividend Arrearages and Delinquencies The company reports no defaults, dividend arrearages, or delinquencies - None reported787 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds The use of proceeds from the 2020 IPO and follow-on offering is detailed, with no changes to security holder rights - There have been no material modifications to the rights of security holders787 - The company raised net proceeds of US$333.4 million from its June 2020 IPO, of which US$83.9 million had been used as of December 31, 2020787789 - The company raised net proceeds of US$431.3 million from its December 2020 follow-on offering, with none of these proceeds used as of year-end 2020790792 Item 15. Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2020795 - A material weakness in internal control over financial reporting remained as of December 31, 2020, related to a lack of detailed accounting policies797800 - The company has taken remedial actions and aims to fully remediate the material weakness by the end of 2021798800 - The annual report does not include a management assessment or auditor attestation on internal control over financial reporting, as permitted for newly public companies796 Item 16. Corporate Governance and Other Matters This section covers the audit committee financial expert, code of ethics, accountant fees, and auditor change - The board has identified Bonnie Yi Zhang as the audit committee financial expert803 - The company adopted a code of business conduct and ethics applicable to all directors, officers, and employees in May 2020804 Principal Accountant Fees (USD) | Fee Type | 2019 | 2020 | | :--- | :--- | :--- | | Audit fees | 830,000 | 1,800,000 | | All other fees | 123,000 | 21,000 | - In February 2019, the company changed its certifying accountant from PwC to Deloitte Touche Tohmatsu Certified Public Accountants LLP808 PART III Item 17 & 18. Financial Statements This section presents the company's audited consolidated financial statements for 2018-2020 with an unqualified opinion - The report includes audited consolidated financial statements for the years ended December 31, 2018, 2019, and 2020813 - The independent auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP, issued an unqualified opinion on the financial statements821 Consolidated Balance Sheet Highlights (as of Dec 31, 2020) | Metric (RMB in millions) | Amount | | :--- | :--- | | Total Assets | 9,547.0 | | Total Liabilities | 2,519.1 | | Total Shareholders' Equity | 7,028.0 | | Cash and cash equivalents | 5,461.3 | Item 19. Exhibits This section lists all filed exhibits, including governing documents, material contracts, and VIE agreements - Lists key corporate documents, including the Eighth Amended and Restated Memorandum and Articles of Association811 - Includes material contracts such as the 2015 and 2020 Share Incentive Plans, and business cooperation agreements with JD.com and Walmart811815 - Contains the contractual arrangements that form the basis of the company's VIE structure, including Share Pledge and Exclusive Option agreements811815