PART I ITEM 3. KEY INFORMATION Qutoutiao, a Cayman Islands holding company, operates in China through VIEs due to foreign ownership restrictions, detailing its structure, associated risks, and financial summaries - Qutoutiao Inc. is a Cayman Islands holding company controlling PRC operations and receiving economic benefits through VIEs due to foreign investment restrictions in telecommunication services242526 - The company faces delisting risks under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB cannot inspect its China-based auditor for two consecutive years28 Summary of Cash Transfers Between Subsidiaries and Group VIEs (RMB in thousands) | Description | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Cash paid by VIEs to subsidiaries (Service agreements) | (756,962) | (376,184) | (571,434) | | Cash received by VIEs from subsidiaries (Service agreements) | 188,798 | 236,903 | 637,646 | | Cash received by VIEs from subsidiaries (Intra-Group financing) | 137,515 | 606,146 | 66,034 | - No dividends were paid by subsidiaries or VIEs to the Cayman Islands holding company from 2021 to 2023, with earnings retained for business expansion33 Risk Factors This section details significant investment risks for Qutoutiao's ADSs, covering business, corporate structure, China operations, and ADS-specific risks including delisting and going concern issues - Substantial doubt exists about the company's ability to continue as a going concern due to recurring net losses, negative operating cash flow, a working capital deficit, and significant convertible loan obligations5269 - Reliance on VIE contractual arrangements poses risks of less effective control and potential PRC government scrutiny, leading to severe penalties or loss of operational control5355 - The company's ADSs were delisted from Nasdaq on April 12, 2023, now trading on the OTC market, potentially impacting liquidity and trading price252255 - The company's ADSs face delisting risk from US markets under the HFCAA if the PCAOB is unable to inspect its China-based auditors in the future55246 ITEM 4. INFORMATION ON THE COMPANY This section provides an overview of Qutoutiao's mobile content platforms, business model, complex VIE structure, and the extensive PRC regulatory environment governing its operations - The company operates AI-powered mobile content platforms, Qutoutiao and Midu, delivering personalized content primarily to users in lower-tier Chinese cities296298 - The business model is primarily monetized through advertising and marketing services, supported by an innovative user loyalty program for acquisition and engagement299302 - The company operates in China via a VIE structure to comply with PRC foreign investment restrictions in telecommunications and internet sectors, using contractual arrangements for control and economic benefits480482483 - The company is subject to a complex and evolving PRC regulatory landscape, requiring numerous licenses and posing significant compliance risks across various internet and data sectors333339 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial condition, detailing significant revenue decline, narrowed net loss due to cost optimization, and liquidity pressures, including a convertible loan and going concern doubts Consolidated Financial Performance (RMB in millions) | Metric | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net Revenues | 4,339.6 | 1,083.0 | 745.6 | | Gross Profit | 3,168.0 | 520.4 | 329.6 | | Loss from Operations | (1,193.2) | (318.5) | (1.9) | | Net Loss Attributable to Qutoutiao Inc. | (1,239.6) | (914.8) | (185.3) | - Net revenues significantly decreased from RMB 1,083.0 million in 2022 to RMB 745.6 million in 2023, primarily due to macroeconomic downturn and advertising budget constraints507560 - Total operating expenses were drastically reduced from RMB 4,467.3 million in 2021 to RMB 900.8 million in 2022, and further to RMB 351.1 million in 2023, driven by cost optimization and cessation of user base expansion562573 - The company's financial condition raises substantial doubt about its ability to continue as a going concern, citing recurring losses, negative operating cash flow, a working capital deficit, and a significant convertible loan of approximately RMB 1.94 billion due in April 2025586589591 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation, board structure with no independent directors or committees, and a significant reduction in employee headcount by 2023 - The board of directors comprises three executive officers: Eric Siliang Tan (Co-founder and Chairman), Bing Xu (CEO and CFO), and Jianfei Dong (Co-president)606 - In 2023, aggregate cash compensation for all directors and executive officers was approximately RMB 3.1 million (US$0.4 million)612 - The company has no independent directors, and all board committees were dissolved on May 12, 2023, with functions now performed by the full board631 Employee Headcount by Year | As of December 31 | Total Employees | | :--- | :--- | | 2021 | 1,110 | | 2022 | 427 | | 2023 | 370 | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details major shareholders, highlighting Co-founder Eric Siliang Tan's significant control and related party transactions, including advertising services and procurement with his affiliated entities - Co-founder and Chairman, Mr. Eric Siliang Tan, holds effective control with 72.1% of aggregate voting power through 27,123,442 Class B ordinary shares639 - The Group provided advertising and marketing services to Mr. Eric Siliang Tan's controlled companies, with fees of RMB 40.3 million in 2021, RMB 2.5 million in 2022, and nil in 2023649 - The Group procured advertisement placement services from Mr. Eric Siliang Tan's controlled media platforms, with fees of RMB 103.3 million in 2021, RMB 16.7 million in 2022, and RMB 0.3 million in 2023650 ITEM 8. FINANCIAL INFORMATION This section details ongoing legal proceedings, including a shareholder class action and a significant fine for fraudulent advertisements, and states the company's policy of not paying dividends - The company is defending a shareholder class action lawsuit alleging Securities Act and Exchange Act violations related to its 2018 IPO and 2019 secondary offering, with an appeal pending after a dismissal motion was granted657658 - In October 2022, the company was ordered to pay fines of approximately RMB 82.8 million (US$12.0 million) for fraudulent advertisements, which have since been paid659 - The company has never declared or paid dividends and plans to retain all earnings for business operation and expansion662 ITEM 9. THE OFFER AND LISTING This section details the trading history of the company's ADSs, noting their listing on NASDAQ from 2018 until their delisting in April 2023 - The company's ADSs were delisted from the NASDAQ Global Select Market, with the delisting becoming effective in April 2023 after a Form 25 filing666 ITEM 10. ADDITIONAL INFORMATION This section provides supplementary corporate information, including material contracts, exchange controls, and detailed tax implications across the Cayman Islands, PRC, and US, highlighting potential PFIC classification risks - The company, an exempted entity in the Cayman Islands, is currently not subject to profits, income, gains, or capital gains tax in that jurisdiction676 - There is a risk that PRC tax authorities could deem the company a PRC resident enterprise, subjecting it to a 25% enterprise income tax on worldwide income and potential withholding taxes on foreign dividends679 - The company believes it was not a Passive Foreign Investment Company (PFIC) for the most recent taxable year, but its status is annually determined and could change, leading to adverse U.S. federal income tax consequences for U.S. Holders if classified as such283693694 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's primary market risk as foreign exchange fluctuations between RMB and USD, while noting no material exposure to interest rate risk or significant impact from inflation - The company's primary market risk is foreign exchange risk due to RMB-denominated revenues and expenses versus USD-traded ADSs, impacting investment value718719 - The company has not been materially exposed to interest rate risk and does not use derivative financial instruments to manage interest rate or foreign exchange risk719723 - Inflation in China has not materially affected operations, with the consumer price index increasing by 0.9%, 2.0%, and 0.2% in 2021, 2022, and 2023 respectively725 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section outlines the various fees and charges associated with the company's American Depositary Shares (ADSs) payable to the depositary, The Bank of New York Mellon ADS Depositary Fees and Charges | Fee | For | Amount | | :--- | :--- | :--- | | Issuance/Cancellation Fee | Issuance or cancellation of ADSs | US$5.00 (or less) per 100 ADSs | | Cash Distribution Fee | Any cash distribution to ADS holders | US$0.05 (or less) per ADS | | Depositary Services Fee | Annual fee for 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 2023733 PART II ITEM 15. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal controls over financial reporting were ineffective as of December 31, 2023, due to a persistent material weakness in financial reporting personnel - Management concluded that the company's disclosure controls and procedures were ineffective as of December 31, 2023741 - A material weakness in internal control over financial reporting, first identified in 2017, persists due to insufficient financial reporting and accounting personnel with U.S. GAAP and SEC reporting knowledge743744 ITEM 16. [RESERVED] This section covers corporate governance, including the absence of an audit committee financial expert, a change in certifying accountant, and the company's cybersecurity risk management strategy - The company's board dissolved the audit committee on May 12, 2023, resulting in no audit committee financial expert747 - On January 3, 2023, the company dismissed PricewaterhouseCoopers Zhong Tian LLP and appointed Shandong Haoxin Certified Public Accountants Co., Ltd. as its new independent registered public accounting firm755 - The company established a Cybersecurity and Information Security Committee, chaired by Mr. Jianfei Dong, to oversee cybersecurity risk management, with overall board oversight767768 PART III ITEM 18. FINANCIAL STATEMENTS This section presents the audited consolidated financial statements for 2021-2023, with the auditor expressing substantial doubt about the company's going concern ability due to declining assets, significant liabilities, and persistent net losses - The independent auditor's report expresses substantial doubt about the Company's ability to continue as a going concern, citing recurring losses, negative operating cash flow, negative working capital, and convertible loan repayment uncertainties786795 Consolidated Balance Sheet Summary (RMB in thousands) | Account | Dec 31, 2022 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | 481,825 | 348,996 | | Total Assets | 581,536 | 413,411 | | Total Current Liabilities | 990,034 | 807,853 | | Convertible Loan (Non-current) | 1,746,188 | 1,944,834 | | Total Liabilities | 2,757,840 | 2,767,669 | | Total Shareholders' Deficit | (3,590,739) | (3,937,388) | Consolidated Statement of Comprehensive Loss Summary (RMB in thousands) | Account | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net Revenues | 4,339,603 | 1,083,045 | 745,557 | | Gross Profit | 3,167,977 | 520,438 | 329,644 | | Loss from Operations | (1,193,223) | (318,498) | (1,894) | | Net Loss | (1,240,176) | (914,767) | (185,313) | Consolidated Statement of Cash Flows Summary (RMB in thousands) | Account | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (279,122) | (443,797) | (65,698) | | Net cash provided by investing activities | 75,521 | 267,555 | 26,483 | | Net cash used in financing activities | (66,094) | (20,000) | — | | Cash at end of year | 315,833 | 130,401 | 91,706 |
Qutoutiao(QTTOY) - 2023 Q4 - Annual Report