PART I ITEM 3. KEY INFORMATION This section details Qutoutiao's Cayman Islands holding company structure, its VIE operations in China, associated PRC regulatory and HFCAA risks, and condensed financial data showing persistent losses and going concern doubts - Qutoutiao Inc. operates as a Cayman Islands holding company, conducting primary operations in China through contractual Variable Interest Entities (VIEs) due to PRC foreign ownership restrictions, meaning investors hold equity in the holding company, not the Chinese operating entities26 - The company faces delisting risk under the Holding Foreign Companies Accountable Act (HFCAA) as its China-based auditor is not inspectable by the PCAOB, potentially prohibiting ADS trading on U.S. exchanges from 2024 if inspections remain unfeasible for three consecutive years30 Consolidated Financial Highlights (2019-2021) | Financial Metric | 2019 (RMB thousands) | 2020 (RMB thousands) | 2021 (RMB thousands) | | :--- | :--- | :--- | :--- | | Total Revenues | 5,570,081 | 5,285,195 | 4,339,603 | | Gross Profit | 3,929,449 | 3,610,779 | 3,167,977 | | Loss from Operations | (2,723,232) | (1,032,169) | (1,193,223) | | Net Loss | (2,689,268) | (1,105,166) | (1,240,176) | | Net Loss Attributable to Qutoutiao Inc. | (2,688,681) | (1,104,439) | (1,239,617) | Consolidated Cash Flow Summary (2019-2021) | Cash Flow Item | 2019 (RMB thousands) | 2020 (RMB thousands) | 2021 (RMB thousands) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (2,367,295) | (863,774) | (279,122) | | Net cash provided by/(used in) investing activities | (1,224,152) | 782,545 | 75,521 | | Net cash provided by financing activities | 1,768,001 | 307,746 | (66,094) | Risk Factors The company faces multiple risks in supply chain, regulations, and international trade - The company's limited operating history, recurring net losses, negative operating cash flow, and negative working capital raise substantial doubt about its ability to continue as a going concern596975 - The business heavily relies on VIE contractual arrangements, which may be less effective than direct ownership and risk severe penalties or relinquishment of interests if deemed non-compliant with PRC foreign investment restrictions54190198 - Operations are subject to significant PRC government oversight, where policy changes, law enforcement uncertainties, and potential interventions could materially affect business, limit offshore capital access, and cause ADS value decline or worthlessness56216221 - The company's ADSs face delisting risk under the HFCAA if the PCAOB cannot inspect its China-based auditor for three consecutive years, posing significant investor risks alongside volatile trading prices and a dual-class share structure58259268 ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Qutoutiao's business, including its history, operational model, and corporate structure, detailing its mobile content platforms, AI-driven monetization, and the complex VIE structure navigating extensive PRC internet and foreign investment regulations History and Development of the Company This section outlines the chronological development of the company, including key product launches and its NASDAQ listing history - The company launched its flagship mobile application, Qutoutiao, in June 2016, followed by Midu Novels in May 2018, and Midu Lite in May 2019307 - The company's ADSs commenced trading on the NASDAQ Global Select Market under the symbol "QTT" on September 14, 2018309 - On December 10, 2021, the ADS to Class A ordinary share ratio was changed from 4 ADSs representing 1 share to 2 ADSs representing 5 shares310 Business Overview This section describes the company's mobile content platforms, target audience, business model, and primary revenue sources - Qutoutiao operates mobile content platforms, including its flagship app "Qutoutiao" and free online literature app "Midu," targeting lower-tier Chinese cities with light entertainment content, utilizing AI algorithms for personalized feeds and a gamified user loyalty program312314316 Key Operating Metrics (Q4 2021) | Metric | Value (Q4 2021) | | :--- | :--- | | Combined Average MAUs | 97.6 million | | Combined Average DAUs | 25.0 million | | Average daily time spent per DAU | 43.2 minutes | - The company's primary revenue source is advertising and marketing services delivered through its in-house programmatic advertising platform, with diversification into online games and live-streaming monetization channels320 Financial Performance (2019-2021) | Metric | 2019 (RMB) | 2020 (RMB) | 2021 (RMB) | | :--- | :--- | :--- | :--- | | Net Revenues | 5,570.1 million | 5,285.2 million | 4,339.6 million | | Net Loss Attributable to Qutoutiao Inc. | 2,688.7 million | 1,104.4 million | 1,239.6 million | Regulations This section details the extensive regulatory environment in China affecting the company's operations, including licensing, foreign investment restrictions, and content oversight - The company has obtained material licenses for its main operations in China, including Value-added Telecommunications Service Licenses (ICP Licenses) and Internet Cultural Business Licenses for key VIEs like Shanghai Jifen and Big Rhinoceros Horn356357 - Due to PRC restrictions on foreign investment in value-added telecommunications services, foreign equity ownership is capped at 50%, necessitating the use of a VIE structure for business operations368371 - The business is subject to extensive PRC regulations covering internet content, online advertising, cybersecurity, and data privacy, including requirements for content monitoring, real-name user registration, and potential cybersecurity reviews for national security or overseas listings375409427 - Recent draft regulations on overseas listings by domestic companies, if enacted, may require the company to complete CSRC filing procedures for future offerings and comply with stringent national security reviews, adding regulatory uncertainty483484 Organizational Structure This section describes the company's complex Variable Interest Entity (VIE) structure used to comply with PRC foreign ownership restrictions and the contractual arrangements that provide control over its key operating entities - The company operates through a VIE structure to comply with PRC laws restricting foreign ownership in the internet sector, controlling key operating entities like Shanghai Jifen and Big Rhinoceros Horn via contractual arrangements rather than direct equity ownership491 - Key contractual agreements providing control include Equity Interest Pledge, Voting Rights Proxy, Exclusive Technology and Consulting Service, and Exclusive Option Agreements, enabling effective control, economic benefits, and the option to purchase VIE equity494498500 Intra-Group Cash Transfers (2019-2021) | Description | 2019 (RMB thousands) | 2020 (RMB thousands) | 2021 (RMB thousands) | | :--- | :--- | :--- | :--- | | Cash paid by VIEs to subsidiaries (service agreements) | — | (297,510) | (756,962) | | Cash received by VIEs from subsidiaries (service agreements) | 67,419 | — | 188,798 | | Cash received by VIEs from subsidiaries (financing) | 2,859,506 | 462,233 | 137,515 | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance, noting a decline in net revenues to RMB 4.34 billion in 2021 due to reduced advertising, persistent net losses of RMB 1.24 billion, declining user metrics, and significant liquidity challenges including a maturing convertible loan that raises going concern doubts Operating Results This section provides a detailed analysis of the company's financial performance, including revenue trends, cost structures, and profitability over recent fiscal years Key Financial Results (2019-2021) | Metric | 2019 (RMB millions) | 2020 (RMB millions) | 2021 (RMB millions) | | :--- | :--- | :--- | :--- | | Net Revenues | 5,570.1 | 5,285.2 | 4,339.6 | | Gross Profit | 3,929.4 | 3,610.8 | 3,168.0 | | Loss from Operations | (2,723.2) | (1,032.2) | (1,193.2) | | Net Loss Attributable to Qutoutiao Inc. | (2,688.7) | (1,104.4) | (1,239.6) | - Net revenues decreased in 2021 primarily due to a decline in advertising and marketing revenues, attributed to a tightening regulatory environment in the internet and technology sector constraining advertiser budgets568 - Sales and marketing expenses increased in 2021 to RMB 3.48 billion from RMB 3.38 billion in 2020, primarily driven by higher user acquisition costs for expanding the Midu platform's user base, though user engagement expenses decreased significantly due to improved content algorithms572571 - Research and development expenses decreased in 2021 to RMB 551.6 million from RMB 947.9 million in 2020, primarily due to a reduction in R&D headcount and related salary and share-based compensation expenses572 Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, highlighting its going concern status and efforts to manage cash flow and debt - The company's financial condition raises substantial doubt about its ability to continue as a going concern due to recurring net losses, negative operating cash flow, negative working capital, and uncertainties regarding the repayment of a convertible loan597602 - As of December 31, 2021, the company had a convertible loan from Alibaba of approximately RMB 1.18 billion (US$185.6 million) expected to mature within one year, with its maturity date subsequently extended to May 28, 2022, at an increased interest rate604595 - Management is exploring measures to improve liquidity, including reducing operating costs, obtaining additional financing, and potentially selling assets, with the company's cash flow forecast assuming the successful extension of the Alibaba convertible loan599600 Cash Flow Summary (2020 vs 2021) | Cash Flow Item | 2020 (RMB thousands) | 2021 (RMB thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | (863,774) | (279,122) | | Net cash provided by investing activities | 782,545 | 75,521 | | Net cash provided by/(used in) financing activities | 307,746 | (66,094) | Research and Development This section details the company's investment in research and development, focusing on technological advancements and their impact on product offerings and operational efficiency - The company's R&D efforts focus on enhancing its content recommendation engine, optimizing advertising solutions, and improving content management and delivery capabilities through AI and automation618 Research and Development Expenses (2019-2021) | Year | R&D Expenses (RMB millions) | | :--- | :--- | | 2019 | 926.2 | | 2020 | 947.9 | | 2021 | 551.6 | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, governance, and workforce, including directors and executive officers led by Eric Siliang Tan, their RMB 5.1 million aggregate cash compensation in 2021, the reduced workforce of 1,110 employees, and the dual-class share structure granting Mr. Tan 72.7% voting power, making it a controlled company under NASDAQ rules - The company is led by co-founder, chairman, and CEO Mr. Eric Siliang Tan, with a board consisting of five directors622651 - In 2021, the aggregate cash compensation paid to directors and executive officers was approximately RMB 5.1 million (US$0.8 million)631 - As of December 31, 2021, the company had 1,110 employees, a significant decrease from 2,932 in 2019, with Technology and product development accounting for 47.8% of the workforce662 - The company has a dual-class share structure, with co-founder Eric Siliang Tan beneficially owning shares constituting approximately 35.3% of total share capital but 72.7% of the aggregate voting power, making the company a "controlled company" under NASDAQ rules157158671 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's major shareholders and significant related party transactions, highlighting concentrated ownership by Eric Siliang Tan, RMB 40.3 million in 2021 revenue from advertising services to his controlled companies, and RMB 259.9 million due from these related parties at year-end 2021 - The company provided advertising and marketing services to several companies controlled by co-founder Mr. Eric Siliang Tan680 Revenue from and Receivables due from Companies Controlled by Mr. Tan | Metric | 2019 (RMB) | 2020 (RMB) | 2021 (RMB) | | :--- | :--- | :--- | :--- | | Service Fees Charged | 473.2 million | 250.9 million | 40.3 million | | Amount Due at Year-End | - | 383.6 million | 259.9 million | - As of December 31, 2021, RMB 204.4 million of the RMB 259.9 million due from related parties was overdue, though a majority of the overdue balance was collected after the year-end1058680 ITEM 8. FINANCIAL INFORMATION This section covers legal proceedings, including a U.S. shareholder class action lawsuit and a RMB 55.0 million contractual dispute settlement in China, alongside the company's dividend policy of retaining earnings for business growth without present plans for distributions - The company is a defendant in a shareholder class action lawsuit in the U.S. District Court for the Southern District of New York, alleging violations of the Securities Act and Exchange Act related to its IPO and secondary offering documents690 - A contractual dispute with Shanghai Wenji Culture Communications Co., Ltd. was settled on March 31, 2021, with a settlement amount of RMB 55.0 million688 - The company has never declared or paid dividends and does not intend to in the foreseeable future, planning to retain earnings to fund business growth, with dividend payments also restricted by PRC regulations requiring subsidiaries to set aside statutory reserves692694 ITEM 9. THE OFFER AND LISTING This section details the trading of Qutoutiao's American Depositary Shares (ADSs), listed on the NASDAQ Global Select Market under "QTT" since September 14, 2018, and the December 10, 2021, change in ADS ratio from 4:1 to 2:5 Class A ordinary shares - The company's ADSs are listed on the NASDAQ Global Select Market under the symbol "QTT" since September 14, 2018696 - On December 10, 2021, the ADS to Class A ordinary share ratio was changed from 4:1 to 2:5696698 ITEM 10. ADDITIONAL INFORMATION This section covers supplementary details on the company's securities, material contracts, and taxation, including no material contracts outside ordinary business, Cayman Islands tax implications, potential 25% PRC enterprise income tax, and the risk of being classified as a Passive Foreign Investment Company (PFIC) for U.S. investors - The company is incorporated in the Cayman Islands and is not subject to profits, income, gains, or appreciation taxes there706 - Under PRC law, the company could be considered a "resident enterprise" if its "de facto management body" is in China, subjecting it to a 25% enterprise income tax on worldwide income and potentially a 10% withholding tax on dividends paid to non-PRC enterprise shareholders708 - For U.S. federal income tax purposes, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), potentially leading to adverse U.S. tax consequences for investors, including increased tax liabilities and burdensome reporting requirements299723725 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section addresses the company's exposure to market risks, primarily foreign exchange risk due to RMB-denominated revenues and USD-traded ADSs, noting no derivative hedging, and concluding that interest rate and inflation risks have not materially affected operations to date - The company's primary market risk is foreign exchange risk, as revenues are denominated in RMB while ADSs are traded in U.S. dollars, making investment value sensitive to RMB/USD exchange rate fluctuations748749 - The company has not been materially exposed to risks from changes in market interest rates and has not used derivative financial instruments to manage this risk752 - Inflation in China has not materially affected the company's results of operations754 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section details the fees and charges associated with the company's American Depositary Shares (ADSs), requiring holders to pay various service fees to The Bank of New York Mellon for issuance, cancellation, and distributions, noting no payments received by the company from the depositary in 2021 ADS Depositary Fees and Charges | Service | Fee | | :--- | :--- | | Issuance/Cancellation of ADSs | US$5.00 (or less) per 100 ADSs | | Cash distribution | US$0.05 (or less) per ADS | | Depositary services | US$0.05 (or less) per ADS per calendar year | - The company did not receive any payments from its depositary bank, The Bank of New York Mellon, in 2021760 PART II ITEM 15. CONTROLS AND PROCEDURES This section reports on the ineffectiveness of the company's disclosure controls and procedures as of December 31, 2021, due to a material weakness in internal control over financial reporting, specifically a lack of sufficient U.S. GAAP and SEC reporting personnel, with ongoing but incomplete remediation efforts - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were ineffective766 - A material weakness was identified in internal control over financial reporting, relating to a lack of sufficient personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize key controls and prepare financial statements768 - Remediation efforts are underway, including hiring more qualified financial staff, implementing training programs, and enhancing the internal audit function, though these measures were not fully implemented as of December 31, 2021770 Other Information (Items 16A-16I) This section covers corporate governance and compliance, including Mr. Feng Li's designation as an audit committee financial expert, the company's code of ethics, US$1.177 million in 2021 audit fees, and the company's adherence to Cayman Islands corporate governance practices as a foreign private issuer, exempting it from certain NASDAQ requirements - The Board of Directors has determined that Mr. Feng Li, an independent director, qualifies as an audit committee financial expert773 Principal Accountant Fees (PricewaterhouseCoopers Zhong Tian LLP) | Fee Type | 2020 (US$ thousands) | 2021 (US$ thousands) | | :--- | :--- | :--- | | Audit Fees | 1,073 | 1,177 | | Tax Fees | — | — | | All Other Fees | — | — | | Total | 1,073 | 1,177 | - As a foreign private issuer, the company follows Cayman Islands corporate governance practices, which exempts it from certain NASDAQ listing standards, such as the requirement for a majority of the board to be independent783 PART III ITEM 18. FINANCIAL STATEMENTS This section contains the company's audited consolidated financial statements for fiscal years 2019-2021, with the auditor's report highlighting substantial doubt about going concern due to recurring losses, negative cash flows, and convertible loan uncertainties, detailing financial position, comprehensive loss, shareholders' deficit, and cash flows under U.S. GAAP - The independent auditor's report expresses substantial doubt about the company's ability to continue as a going concern, based on accumulated losses, net cash used in operations, negative working capital, and uncertainty regarding the repayment of a convertible loan805 Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2020 (RMB thousands) | 2021 (RMB thousands) | | :--- | :--- | :--- | | Total Assets | 2,915,858 | 2,080,475 | | Total Liabilities | 3,107,695 | 3,297,813 | | Total Shareholders' Deficit | (1,285,363) | (2,389,556) | - The company's operations are primarily conducted through VIEs, which as of December 31, 2021, held total assets of RMB 2.29 billion and total liabilities of RMB 7.42 billion862 - The company's convertible loan from Alibaba had its maturity extended to May 28, 2022, with an increased interest rate, resulting in a total principal and accumulated interest due at maturity of approximately US$240.4 million1075 ITEM 19. EXHIBITS This section lists all exhibits filed with the annual report, including the company's Amended and Restated Memorandum and Articles of Association, American Depositary Receipt and Deposit Agreement forms, various contractual arrangements governing the VIE structure, the Equity Incentive Plan, and the Convertible Loan Agreement with Alibaba Investment Limited - The exhibits include the company's Sixth Amended and Restated Memorandum and Articles of Association789 - Key operational and structural agreements are filed as exhibits, including the series of contractual arrangements (Equity Pledge, Voting Rights Proxy, Service, and Option agreements) that establish control over the VIEs789791 - Financing agreements, such as the Convertible Loan Agreement with Alibaba Investment Limited and its supplemental agreements, are included as exhibits792
Qutoutiao(QTTOY) - 2021 Q4 - Annual Report