424(B)(4)
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-238941

 

3,300,000 American Depositary Shares

 

LOGO

Quhuo Limited

Representing 3,300,000 Class A Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of Quhuo Limited. We are offering 3,300,000 ADSs, each representing one Class A ordinary share, par value US$0.0001 per share, in this offering. The initial public offering price per ADS is US$10.00.

Prior to this offering, there has been no public market currently exists for our ADSs or shares. Our ADSs have been approved for listing on the Nasdaq Global Market, or NASDAQ, under the symbol “QH.”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

Upon the completion of this offering, 45,609,780 Class A ordinary shares and 6,296,630 Class B ordinary shares will be issued and outstanding, assuming the underwriters do not exercise their option to purchase additional ADSs. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 15 votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

SBCVC Fund IV, L.P., an existing shareholder, has subscribed for and been allocated 160,000 ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered.

We will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Leslie Yu, our chairman and chief executive officer, will hold a majority of the aggregate voting power of our company upon the completion of this offering.

 

 

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 16.

PRICE US$10.00 PER ADS

 

 

 

     Public offering
price
     Underwriting
discounts and
commissions(2)
     Proceeds,
before expenses,
to us
 

Per ADS to public

   US$ 10.00      US$ 0.70      US$ 9.30  

Per ADS to SBCVC Fund IV, L.P.(1)

   US$ 10.00      US$ 0.00      US$ 10.00  

Total

   US$ 33,000,000      US$ 2,198,000      US$ 30,802,000  

 

(1)

Reflects the allocation to SBCVC Fund IV, L.P., an existing shareholder, of an aggregate of 160,000 ADSs in this offering, for which the underwriters will not receive any underwriting discounts or commissions.

(2)

For additional disclosure on compensation payable to the underwriters, see “Underwriting.”

We have granted the underwriters the right to purchase up to 488,100 additional ADSs from us at the initial public offering price less the underwriting discounts and commissions to cover over-allotments within 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about July 14, 2020.

 

 

 

Roth Capital Partners       

Valuable Capital Limited

     Tiger Brokers  

Prospectus dated July 9, 2020.


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LOGO

 

Note: (1) In terms of the number of average monthly active workers in 2019. (2) In terms of both the number of delivery orders and revenue in 2019. (3) As of December 31, 2019. (4) For the year ended December 31, 2019, derived from our audited consolidated financial statements included elsewhere in this prospectus.


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LOGO


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

The Offering

     11  

Summary Consolidated Financial and Operating Data

     14  

Risk Factors

     16  

Special Note Regarding Forward-Looking Statements

     57  

Use of Proceeds

     59  

Dividend Policy

     61  

Capitalization

     62  

Dilution

     65  

Enforceability of Civil Liabilities

     67  

Corporate History and Structure

     69  

Selected Consolidated Financial and Operating Data

     74  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     76  
     Page  

Market Opportunities

     100  

Business

     107  

Regulation

     128  

Management

     142  

Principal Shareholders

     151  

Related Party Transactions

     155  

Description of Share Capital

     157  

Description of American Depositary Shares

     169  

Shares Eligible for Future Sales

     179  

Taxation

     181  

Underwriting

     188  

Expenses Related to This Offering

     198  

Legal Matters

     199  

Experts

     200  

Where You Can Find More Information

     201  

Index to Consolidated Financial Statements

     F-1  
 

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until August 3, 2020 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 

 

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PROSPECTUS SUMMARY

This summary highlights information contained in greater detail elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in the ADSs, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, an independent market research firm, to provide information regarding our industry and our market position in China. We refer to this report as the F&S report.

Our Mission

Our mission is to enable on-demand consumer service companies to do better business and individuals on our platform to create better lives.

Our Business

We were the largest workforce operational solution platform in China as measured by the number of average monthly active workers in 2019, according to the F&S report. We provide tech-enabled, end-to-end operational solutions to blue-chip on-demand consumer service businesses in industries with significant e-commerce exposure, including food delivery, ride-hailing, housekeeping and bike-sharing. In 2019, we ranked No.1 in the on-demand food delivery solution market in terms of both the number of delivery orders and revenue, with a market share exceeding that of the next top four market players combined in terms of both the number of delivery orders and revenue, according to the F&S report. Within the on-demand consumer service ecosystem, we play a unique and indispensable role as the link between consumer service businesses and the end consumers to enable the delivery of goods, services and experiences to consumers.

Our story began in 2012 when a trio of ex-DHL entrepreneurs founded our company to partner with the rapidly growing on-demand food delivery businesses in China and provide a platform of large, flexible and standardized workforce focused on the last-mile delivery of prepared food. In the years that followed, the on-demand consumer service industry has flourished with the increasing society-wide consumer embracement of the on-demand economy, driven by rapid urbanization, consumption upgrade and democratization of mobile internet. According to the F&S report, China’s on-demand consumer service market, in terms of gross transaction value, increased from RMB1,296.4 billion in 2015 to RMB4,641.4 billion in 2019 at a CAGR of 37.6%, and is expected to reach RMB9,482.2 billion by 2024 at a CAGR of 15.4% from 2019 to 2024. The proliferation of on-demand consumer service industry has created a new and expansive demand for flexible, stable and trained workforce to deliver standardized, high-quality services to consumers. However, China’s labor market is experiencing significant challenges, including a continuous decline in skilled working-age labor force and persistently increasing labor costs. The on-demand consumer service companies also generally lack in-house resources or capability to deliver standardized and high-quality services to end consumers. This mismatch among demand, supply and capability creates an enormous and sustainable business opportunity for us. As a clear leader in the workforce operational solution market, we believe we are well positioned to capture the enormous opportunity in this highly fragmented market with a number of small-scale, single-industry players incapable of delivering standardized solutions.

To the on-demand consumer service companies that we serve, our solutions have become critical to their business strategy, operational focus and financial performance. We have established deep-rooted, long-standing partnerships with blue-chip industry customers in an increasing number of on-demand consumer service industries in China. Our platform helps industry customers mobilize a large team of workers and utilize a



 

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combination of training, performance monitoring and refinement, and incentives to transform them into skilled workers who can follow industry-specific, standardized and highly efficient service procedures. In the on-demand food delivery market alone, we have been able to achieve an average of approximately 40% cost saving for industry customers in terms of operational cost per order, according to the F&S report. Leveraging our technology capabilities, we conduct data-driven operational analysis to assist our industry customers in improving their service quality and consumer satisfaction. For example, we have been able to work with our largest industry customer and limit our delivery time for prepared food generally within 30 minutes. As of December 31, 2019, we had partnered with industry customers mostly comprising top market players in their respective industries, such as Meituan, Ele.me and KFC in the on-demand food delivery industry, Mobike in the bike-sharing industry, Didi in the ride-hailing industry and Anxin Home in the housing rental industry. Our geographic footprint reached 73 cities across 26 provinces, municipalities and autonomous regions in China as of December 31, 2019.

To the workers on our platform, we believe we have become a “go-to” one-stop platform that provides them with diversified, flexible earning opportunities. Workers are also attracted to our platform for career advancement prospects and various work-life support and services. We empower workers with minimal work experience to begin their career and progress with us and promoted over 330 workers on our platform to team leaders and other management roles in 2019. In the three months ended December 31, 2019, we had approximately 40,800 average monthly active workers on our platform. We believe that the size of our workforce allows us to further cement our relationship with industry customers and become their partner of choice when they enter new geographical markets or new on-demand consumer service industries. Workers on our platform are also encouraged to bring in their friends, relatives and acquaintances to continually and organically expand our workforce network. Over 74% of those who joined our platform in 2019 were referred by existing workers. We believe that the bonds among workers on our platform can be forged by such social relations, minimizing worker turnovers and making our platform more stable.

Our ability to quickly scale up our business and effectively manage our workers rests on Quhuo+, a proprietary technology infrastructure that centralizes our operational management and streamlines our solution process. For workers in a management position, such as team leaders for our on-demand food delivery solutions, Quhuo+ allows them to pinpoint workers on our platform to monitor their workload and performance, and dynamically manage staffing and maintain solution quality. With Quhuo+, team leaders are able to transcribe industry-specific KPIs obtained from industry customers into executable guidance for workers on our platform, and benchmark workforce performance across all workers and teams based on data-driven analytics to refine our solutions and optimize our operational efficiency. For rank-and-file workers, Quhuo+ allows them to review their workload, access on-the-job training and review their performance. As a result, we are able to cultivate a specialized yet flexible workforce and deploy the same workers across different industry settings based on their work schedules by, for example, allowing delivery riders on our platform to take part in our shared-bike maintenance solutions during their off-peak hours, which serves to optimize our operational cost and also diversify their earning opportunities. We have developed Quhuo+ into a scalable modular system with customizable parameters and settings to smoothly manage and transfer massive workers across different regions and industries we serve, which forms the bedrock of our highly scalable and replicable business model. As a result, we are able to scale our operations and replicate our success into greenfield regions or industries quickly and cost-effectively with minimal incremental costs on infrastructure. For example, we became No.1 in the shared-bike maintenance solution market in terms of revenue in 2018, according to the F&S report, within a span of 12 months.

We have grown rapidly in recent years to achieve greater economies of scale, which, coupled with our technology capabilities, increases our industry customers’ dependency on our platform. As our platform continues to grow, we are attracting customers from more industries as well as a greater number of workers. This powerful network effect has created strong entry barriers and underpins our long-term growth. Our revenues were RMB654.8 million, RMB1,474.5 million and RMB2,055.8 million (US$295.3 million) in 2017, 2018 and 2019, respectively.



 

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We recorded net loss of RMB14.0 million, RMB44.3 million and RMB13.4 million (US$1.9 million) in 2017, 2018 and 2019, respectively. Excluding the effect of share-based compensation expenses, we recorded adjusted net loss of RMB10.7 million, adjusted net income of RMB45.3 million and adjusted net income of RMB51.4 million (US$7.4 million) in 2017, 2018 and 2019, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measure” for a reconciliation of our net loss to adjusted net income (loss).

We operate in a vibrant ecosystem consisting of workforce operational solution platforms, including us, on-demand consumer service companies and end consumers. The following diagram is a simplified presentation of our role in this ecosystem:

 

LOGO

Our Strengths

We believe our success to date is primarily attributable to the following key competitive strengths:

 

   

leading tech-enabled workforce operational solution platform capturing market opportunity;

 

   

end-to-end operational solutions driving customer satisfaction and business growth;

 

   

proprietary technology infrastructure boosting operational efficiency and expansion;

 

   

deep-rooted, long-standing partnerships with blue-chip industry customers;

 

   

compelling value proposition to workers solidifying our platform;

 

   

powerful network effect creating strong competitive edge; and

 

   

visionary and seasoned management team with proven track record.

Our Strategies

We intend to leverage our existing strengths and pursue the following strategies to achieve our growth targets:

 

   

strengthen our market leading position;



 

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increase market penetration and expansion;

 

   

invest in technology and enhance data insights;

 

   

enhance worker loyalty to our platform; and

 

   

pursue strategic alliances, investments and acquisitions.

Our Challenges

Our ability to accomplish our mission and execute our strategies is subject to risks and uncertainties, including the following:

 

   

our limited operating history and evolving business portfolio make it difficult to evaluate our business and prospects;

 

   

if we fail to remain our competitive position in the on-demand food delivery market or further diversify our solution offerings, our business, financial condition, results of operations and prospects could be materially and adversely affected;

 

   

our high customer concentration exposes us to all of the risks faced by our major customers and may subject us to significant fluctuations or declines in revenues;

 

   

if we fail to maintain relationships with existing industry customers or attract new customers, our business, financial condition, results of operations and prospects may be materially and adversely affected;

 

   

if we fail to attract, retain and manage workers on our platform, our business, financial condition, results of operations and prospects could be materially and adversely affected;

 

   

there could be adverse legal, tax, and other consequences if workers on our platform were to be classified as our employees or dispatched employees instead of independent contractors;

 

   

we may be held liable for breach of contract under our agreements with industry customers;

 

   

we may not compete effectively. If we lose our market shares to competitors in existing markets, or if our expansion into new markets is not successful, our business and prospects may be materially and adversely affected;

 

   

we have incurred net losses in the past, and we may not achieve or sustain profitability; and

 

   

as we incur significant costs in connection with certain business lines, our business, financial condition and results of operations may be materially and adversely affected if demand for our solutions under these business lines does not increase as quickly as we anticipate.

See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for detailed discussions of these and other risks and uncertainties associated with our business and investing in our ADSs.

Recent Developments

The following sets forth our selected unaudited financial data for the three months ended or as of March 31, 2020. The unaudited financial data included in this prospectus has been prepared by, and is the responsibility of, our management. We cannot assure you that our financial results for the three months ended March 31, 2020 will be indicative of our financial results for the fiscal year ending December 31, 2020 or any future periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors”



 

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included elsewhere in this prospectus for information regarding trends and other factors that may affect our results of operations and financial condition.

 

   

Revenues. Our revenues increased by 12.6% from RMB348.7 million in the three months ended March 31, 2019 to RMB392.6 million (US$56.4 million) in the three months ended March 31, 2020, primarily due to the increase in revenues generated from our on-demand food delivery solutions as a result of our continued market penetration and expansion, partially offset by the impact of the recent COVID-19 pandemic.

 

   

Revenues from on-demand food delivery solutions increased by 13.4% from RMB343.2 million in the three months ended March 31, 2019 to RMB389.3 million (US$55.9 million) in the three months ended March 31, 2020. The increase was primarily driven by the increase in the average monthly delivery orders fulfilled by delivery riders on our platform from approximately 13.9 million in the three months ended March 31, 2019 to approximately 16.9 million in the three months ended March 31, 2020, partially offset by the impact of COVID-19 pandemic on the growth rate of our delivery orders.

 

   

Revenues from shared-bike maintenance solutions decreased by 48.9% from RMB4.3 million in the three months ended March 31, 2019 to RMB2.2 million (US$0.3 million) in the three months ended March 31, 2020, primarily due to (1) the decrease in the geographical coverage of our solutions as we strategically withdrew our operations from a few cities where we underperformed, and (2) the recent global outbreak of COVID-19 and the corresponding government-mandated quarantine measures.

 

   

Revenues from ride-hailing solutions decreased by 26.5% from RMB1.2 million in the three months ended March 31, 2019 to RMB0.9 million (US$0.1 million) in the three months ended March 31, 2020, primarily due to (1) the decrease in the number of vehicles we leased to ride-hailing drivers on our platform as a result of the recent global outbreak of COVID-19 and the corresponding government-mandated quarantine measures, and (2) a conditional rent-free period we granted to ride-hailing drivers on our platform in late January and February, following the industry-wide relief measures.

 

   

Revenues from housekeeping solutions and other services were nil and RMB0.2 million (US$36,000) in the three months ended March 31, 2019 and 2020, respectively.

 

   

Cost of revenues. Our cost of revenues increased by 17.2% from RMB325.4 million in the three months ended March 31, 2019 to RMB381.5 million (US$54.8 million) in the three months ended March 31, 2020, primarily due to the increase in the cost related to our on-demand food delivery solutions as a result of our business growth.

 

   

Cost of revenues related to our on-demand food delivery solutions increased by 17.7% from RMB319.8 million in the three months ended March 31, 2019 to RMB376.4 million (US$54.1 million) in the three months ended March 31, 2020, primarily due to the increases in (1) service fees paid to our delivery riders and team leaders in line with the increase in the orders fulfilled by our delivery riders, (2) insurance expenses for delivery riders, (3) hiring expenses for delivery riders, including service fees paid to third-party labor service companies and referral fees paid to existing delivery riders on our platform, and (4) rental fees paid to lease the workspace for additional service stations to accommodate the increase in delivery rider headcount.

 

   

Cost of revenues related to our shared-bike maintenance solutions decreased by 54.7% from RMB4.2 million in the three months ended March 31, 2019 to RMB1.9 million (US$0.3 million) in the three months ended March 31, 2020, which was generally in line with the decline of the business volume of our shared-bike maintenance solutions.



 

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Cost of revenues related to our ride-hailing solutions increased significantly from RMB1.3 million in the three months ended March 31, 2019 to RMB2.7 million (US$0.4 million) in the three months ended March 31, 2020, primarily due to the increase in the number of vehicles we rented or purchased.

 

   

Cost of revenues related to our housekeeping solutions and other services was nil and RMB0.5 million (US$65,000) in the three months ended March 31, 2019 and 2020, respectively.

 

   

Gross profit. As a result of the foregoing, our gross profit decreased by 52.4% from RMB23.3 million in the three months ended March 31, 2019 to RMB11.1 million (US$1.6 million) in the three months ended March 31, 2020. Our gross profit margin decreased from 6.7% in the three months ended March 31, 2019 to 2.8% in the three months ended March 31, 2020.

 

   

General and administrative expenses. Our general and administrative expenses decreased by 61.6% from RMB71.7 million in the three months ended March 31, 2019 to RMB27.5 million (US$4.0 million) in the three months ended March 31, 2020, primarily due to the decrease in share-based compensation expenses from RMB54.0 million in the three months ended March 31, 2019 to RMB1.3 million in the three months ended March 31, 2020, as the vesting terms of the options were modified in August 2019 such that substantially all of the outstanding options will not be exercisable until the completion of this offering, which resulted in a deferral of related share-based expenses for new grants after August 2019. Excluding the effect of share-based compensation, our general and administrative expenses would have increased by 48.4% from RMB17.7 million in the three months ended March 31, 2019 to RMB26.2 million (US$3.8 million) in the three months ended March 31, 2020, primarily due to the increases in (1) salaries and benefits for our operational staff, and (2) office expenses.

 

   

Research and development expenses. Our research and development expenses increased by 55.5% from RMB1.7 million in the three months ended March 31, 2019 to RMB2.6 million (US$0.4 million) in the three months ended March 31, 2020, primarily due to the increases in salaries and benefits for our research and development personnel, and rental expenses related to servers utilized by us.

 

   

Operating loss. Our operating loss decreased by 61.0% from RMB49.0 million in the three months ended March 31, 2019 to RMB19.1 million (US$2.7 million) in the three months ended March 31, 2020.

 

   

Net loss. Our net loss decreased by 53.5% from RMB46.4 million in the three months ended March 31, 2019 to RMB21.6 million (US$3.1 million) in the three months ended March 31, 2020.

We have not experienced material adverse impact to our liquidity and cash flows since the COVID-19 outbreak. As of March 31, 2020, we had cash of RMB130.5 million (US$18.7 million), representing an increase of 2.9% from RMB126.8 million as of December 31, 2019.

For details of the impact of and the risks and challenges associated with COVID-19 on our business, results of operations and financial condition, see “Risk Factors—Risks Related to Our Business and Industry—Any health pandemics, including the recent global outbreak of COVID-19, and other natural disasters and calamities, could have a material adverse effect on our business operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Specific Factors Affecting Our Results of Operations—COVID-19 outbreak.”

Our Corporate History and Structure

We are an exempted company with limited liability incorporated under the laws of the Cayman Islands. We commenced operations through Beijing Quhuo Technology Co., Ltd., or Beijing Quhuo, in 2012. Over a span of seven-year development, we have expanded our business from initially the on-demand food delivery industry



 

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into various industries and have become a leading tech-enabled workforce operational solution platform in China.

Beginning in 2019, we underwent a series of restructuring in anticipation of this offering, which was completed in March 2020. In June 2019, our founders, through their respective controlled entities, incorporated Quhuo Limited in the Cayman Islands as our proposed listing entity and holding company with no material operations of its own. From June 2019 to July 2019, we incorporated various subsidiaries, including Quhuo Investment Limited, Quhuo Technology Investment (Hong Kong) Limited and Beijing Quhuo Information Technology Co., Ltd., or WFOE, all of which are investment holding companies. In August 2019, we gained control and became the sole beneficiary of Beijing Quhuo, or the VIE, through a series of contractual arrangements between WFOE, the VIE and the VIE’s registered shareholders. We conduct our workforce operational solution business primarily through the VIE and its subsidiaries in China. In August 2019, Quhuo Limited issued preferred shares to the VIE’s existing investors to reflect their respective equity interests in the VIE prior to the restructuring. However, the shareholders of the VIE may have actual or potential conflicts of interest with us. They may breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIE, which would have a material adverse effect on our ability to effectively control our affiliated entities and receive economic benefits from them. See “Risk Factors—Risks Related to Our Corporate Structure—The shareholders of the VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business, financial condition and results of operations.”



 

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The following diagram illustrates our simplified corporate structure, including our principal subsidiaries, our VIE and its subsidiaries, as of the date of this prospectus:

 

LOGO

 

(1)

The shareholders of Beijing Quhuo Technology Co., Ltd., or Beijing Quhuo, include Lili Sun, spouse of Mr. Leslie Yu, Mr. Shuyi Yang, Mr. Zhen Ba, Ningbo Maiken Investment Management LLP and Mr. Tongtong Li, holding 25.7264%, 24.9784%, 9.6547%, 38.8250% and 0.8154% of the equity interests of Beijing Quhuo, respectively.

(2)

The remaining 30% of the equity interests of Nantong Runda Marketing Planning Co., Ltd. is owned by two independent individuals.

(3)

The remaining 49% of the equity interests of Jiangxi Youke Automobile Rental Service Co., Ltd. is owned by an independent individual.

Our Corporate Information

Our principal executive offices are located at 3rd Floor, Block D, Tonghui Building, No. 1132 Huihe South Street, Chaoyang District, Beijing, People’s Republic of China. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. The telephone number of our principal executive office is (+86-10) 5338 4963.



 

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Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our main website is www.quhuo.cn. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, New York 10168.

Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of internal control over financial reporting of an emerging growth company. Under the JOBS Act, an emerging growth company does not need to comply with any new or revised financial accounting standards until the date that private companies are required to do so. We have elected to take advantage of such exemption, and as a result, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies.

We will remain an emerging growth company until the earliest of (1) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (2) the last day of our fiscal year following the fifth anniversary of completion of this offering; (3) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible debt; or (4) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if we have been a public company for at least 12 months and the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Conventions that Apply to this Prospectus

Except where the context otherwise indicates and for the purpose of this prospectus only:

 

   

“active workers” refers to the number of workers that established business outsourcing relationship with us, joined our insurance programs, and completed at least one transaction on our platform in a given period;

 

   

“ADRs” refers to the American depositary receipts which, if issued, evidence our ADSs;

 

   

“ADSs” refers to American depositary shares, each of which represents one Class A ordinary share;

 

   

“CAGR” refers to compound annual growth rate;

 

   

“Class A ordinary shares” refers to our Class A ordinary shares of par value US$0.0001 per share;

 

   

“Class B ordinary shares” refers to our Class B ordinary shares of par value US$0.0001 per share;

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

   

“delivery time” refers to the amount of time that it takes for prepared foods to be delivered door-to-door to the ordering end consumer through our on-demand food delivery solutions; “average delivery time” is calculated by dividing the total amount of delivery time of all completed delivery orders by the number of total completed delivery orders in a given period;



 

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“industry customer(s)” refers to business customer(s) to which we offer services, primarily including on-demand consumer service companies in the food delivery, ride-hailing, housekeeping and bike-sharing industries;

 

   

“KPI(s)” refers to key performance indicator(s);

 

   

“on-time delivery rate” refers to the ratio of the number of delivery orders completed within the time as required by our industry customers divided by the number of total delivery orders completed in a given period; “average on-time delivery rate” is calculated by dividing the number of total orders that have been delivered on time by the number of total completed delivery orders in a given period;

 

   

“ordinary shares” prior to the completion of this offering, refers to our ordinary shares, par value US$0.0001 per share, and upon and after completion of this offering, refers to our ordinary shares comprising Class A ordinary shares, par value US$0.0001 per share and/or Class B ordinary shares, par value US$0.0001 per share;

 

   

“registered workers” refers to the accumulative number of workers that have established business outsourcing relationship with us, joined our insurance programs, and completed at least one transaction on our platform since our inception;

 

   

“RMB” or “Renminbi” refers to the legal currency of China;

 

   

“US$,” “U.S. dollars,” “$” or “dollars” refers to the legal currency of the United States of America;

 

   

“VIE” refers to Beijing Quhuo Technology Co., Ltd.; “affiliated entities” refers to, collectively, the VIE and its subsidiaries; and

 

   

“we,” “us,” “our,” or “our company” refers to Quhuo Limited, its subsidiaries, its VIE and subsidiaries of its VIE.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their option to purchase additional ADSs and automatic conversation of all outstanding convertible redeemable preferred shares into Class A ordinary shares after this offering.

Our reporting and functional currency is Renminbi. This prospectus contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.9618 to US$1.00, the noon buying rate on December 31, 2019, as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.



 

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THE OFFERING

 

Offering price

US$10.00 per ADS.

 

ADSs offered by us

3,300,000 ADSs (or 3,788,100 ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

ADSs outstanding immediately after this offering

3,300,000 ADSs (or 3,788,100 ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

Ordinary shares outstanding immediately after this offering

45,609,780 Class A ordinary shares and 6,296,630 Class B ordinary shares (or 46,097,880 Class A ordinary shares and 6,296,630 Class B ordinary shares if the underwriters exercise their option to purchase additional ADSs in full).

 

The ADSs

Each ADS represents one Class A ordinary share.

 

  The depositary will be the holder of the Class A ordinary shares represented by your ADSs and you will have rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  Subject to the terms of the deposit agreement relating to the ADSs, you may surrender your ADSs to the depositary in exchange for Class A ordinary shares represented by your ADSs. The depositary will charge you fees for such exchanges.

 

  We may amend or terminate the deposit agreement without your consent. If an amendment becomes effective and you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  You should read carefully the section in this prospectus entitled “Description of American Depositary Shares” to better understand the terms of the ADSs. You should also read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

 

Ordinary shares

Following the completion of this offering, our issued and outstanding share capital will consist of Class A ordinary shares and Class B



 

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ordinary shares. In respect of all matters subject to a shareholder vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 15 votes, voting together as one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person other than Mr. Leslie Yu or any entity which is not ultimately controlled by Mr. Leslie Yu, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares. See “Description of Share Capital” for more information.

 

Option to purchase additional ADSs

We have granted the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 488,100 additional ADSs from us at the initial public offering price, less underwriting discount and commissions.

 

Use of proceeds

We estimate that we will receive net proceeds of approximately US$28.0 million (or US$32.5 million if the underwriters exercise their option to purchase additional ADSs in full) from this offering, after deducting underwriting discounts, commissions and estimated offering expenses payable by us.

 

  We intend to use our net proceeds from this offering primarily for (1) expanding our business in multiple industry settings, including ride-hailing, housekeeping and other services, (2) upgrading our technology infrastructure, (3) marketing and brand promotions, (4) funding potential strategic acquisitions, investments and alliances, although we do not presently have specific plans and are not currently engaged in any discussions or negotiations with respect to any such transaction, and (5) working capital and other general corporate purpose.

 

  See “Use of Proceeds” for more information.

 

Lock-up

We, our directors, executive officers and existing shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus, subject to certain exceptions. In addition, we have agreed to instruct Deutsche Bank Trust Company Americas, as depositary, not to accept any deposit of any ordinary shares or issue any ADSs for 180 days after the date of this prospectus (other than in connection with this offering), unless we instruct the depositary otherwise with the prior written consent of the representatives of the underwriters. See “Shares Eligible for Future Sale” and “Underwriting.”

 

Indication of Interest

SBCVC Fund IV, L.P., an existing shareholder, has subscribed for and been allocated 160,000 ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered.


 

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Listing

Our ADSs have been approved for listing on NASDAQ. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

NASDAQ Symbol

“QH.”

 

Depositary

Deutsche Bank Trust Company Americas.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on July 14, 2020.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should consider carefully before deciding to invest in our ADSs.


 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of operations for the years ended December 31, 2017, 2018 and 2019, the summary consolidated statements of cash flows data for the years ended December 31, 2017, 2018 and 2019 and the summary consolidated balance sheets data as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read the following information in conjunction with those financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Historical results for any prior period are not necessarily indicative of results to be expected for any future period.

Summary Consolidated Statements of Operations

 

     For the Year Ended December 31,  
     2017     2018     2019  
     RMB     RMB     RMB     US$  
     (in thousands)  

Revenues

     654,802       1,474,475       2,055,789       295,296  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

     (626,193     (1,357,837     (1,893,513     (271,986
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     28,609       116,638       162,276       23,310  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (50,038     (168,541     (174,730     (25,099
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (21,429     (51,903     (12,454     (1,789
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income tax

     (13,564     (40,316     8,131       1,168  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (405     (3,979     (21,580     (3,100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (13,969     (44,295     (13,449     (1,932
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Data(1)

        

Adjusted net (loss)/income

     (10,670     45,327       51,350       7,376  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Non-GAAP Financial Measure.”

Summary Consolidated Balance Sheets Data

 

     As of December 31,  
     2018      2019  
     RMB      RMB     US$  
     (in thousands)  

Cash

     17,343        126,779       18,211  

Short-term investments

     74,165        56,275       8,083  

Accounts receivable, net

     156,368        276,966       39,784  

Prepayments and other current assets

     17,487        43,058       6,185  

Amounts due from related parties

     25,748        18,392       2,642  

Total current assets

     291,111        521,470       74,905  

Total assets

     469,616        743,896       106,854  

Total current liabilities

     240,449        452,080       64,939  

Total liabilities

     265,183        489,344       70,291  

Total mezzanine equity

     1,031,001        1,031,001       148,094  

Total shareholders’ deficit

     (826,568)        (776,449     (111,531

Total liabilities, mezzanine equity, non-controlling interests and shareholders’ deficit

     469,616        743,896       106,854  

 

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Summary Consolidated Statements of Cash Flows Data

 

     For the Year Ended December 31,  
     2017      2018      2019  
     RMB      RMB      RMB      US$  
     (in thousands)  

Net cash (used in)/generated from operating activities

     (28,615      19,807        17,624        2,533  

Net cash (used in)/generated from investing activities

     (65,102      (94,281      12,483        1,792  

Net cash generated from financing activities

     71,350        82,495        80,550        11,570  

Effect of exchange rate changes on cash

     (80      179        (1,221      (175

Net (decrease)/increase in cash

     (22,447      8,200        109,436        15,720  

Cash at the beginning of the period

     31,590        9,143        17,343        2,491  

Cash at the end of the period

     9,143        17,343        126,779        18,211  

Key Operating Metrics

The following table sets forth certain key operating metrics relating to our business.

 

    For the Three Months Ended  
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
 
    (in thousands)  

Number of average monthly active workers

    18       24       25       23       23       26       41       41  

Number of average monthly delivery orders

    11,135       14,696       16,884       15,574       13,856       16,616       28,666       29,221  

 

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RISK FACTORS

Investing in our ADSs entails a significant level of risk. Before investing in our ADSs, you should carefully consider all of the risks and uncertainties mentioned in this section, in addition to all of the other information in this prospectus, including the financial statements and related notes. We may face additional risks and uncertainties aside from the ones mentioned below. There may be risks and uncertainties that we are unaware of, or that we currently do not consider material but may become important factors that adversely affect our business in the future. Any of the following risks and uncertainties could have a material adverse effect on our business, results of operations, financial condition and prospects. In such case, the market prices of our ADSs could decline and you may lose part or all of your investment.

Risks Related to Our Business and Industry

Our limited operating history and evolving business portfolio make it difficult to evaluate our business and prospects.

We launched on-demand food delivery solutions in February 2013 and expanded our solutions to certain other industries in recent years, such as shared-bike maintenance, ride-hailing and housekeeping solutions. Our platform and business model in these new industries have not been fully proven given our limited operating history, which may subject us to a number of uncertainties and additional costs and expenses, and adversely impact our ability to project and plan for future growth. For example, as we lease vehicles to ride-hailing drivers on our platform, our ride-hailing solutions operate under a relatively capital intensive model, which is different from our other solutions and may have an adverse impact on our cash flow. In addition, we may be required to comply with new laws and regulations applicable to these industries. We may also compete with one or more existing market leaders in such industries we expand into who may have gained competitive edge with their experience and existing brand recognition among customers.

Our limited operating history and evolving business portfolio make it difficult to draw an exact period-over-period comparison on our business, financial condition and results of operations as a whole. The historical revenue contribution from each of our business lines may not be indicative of their future performance.

As the industries in which our industry customers operate and our business further develop, we may modify our business model or continue to change our business portfolio. We may launch new solution offerings or discontinue any existing ones for strategic purposes. Any of such modifications or changes may have a material adverse effect on our business, financial condition, results of operations and prospects.

Assessing our business and prospects is difficult in light of the risks and challenges we may encounter. These risks and challenges include our ability to:

 

   

accurately forecast our revenue and plan our operating expenses;

 

   

attract and retain industry customers;

 

   

attract, train and retain workers on our platform;

 

   

provide diversified and distinguishable solutions and achieve market acceptance of our solutions;

 

   

increase our market share in existing industries and expand into new industries;

 

   

comply with existing and new laws and regulations applicable to our business;

 

   

anticipate and adapt to evolving market conditions, including technological developments and changes in the competitive landscape;

 

   

maintain reliable, secure, high-performance and scalable technology infrastructure;

 

   

attract, retain and motivate talented employees; and

 

   

improve our operational efficiency.

 

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If we fail to address any or all of these risks and challenges, our business, financial condition, results of operations and prospects may be materially and adversely affected.

If we fail to remain our competitive position in the on-demand food delivery market or further diversify our solution offerings, our business, financial condition, results of operations and prospects could be materially and adversely affected.

We have derived, and expect to continue to derive in the near future, a substantial majority of our revenue from our on-demand food delivery solutions. Therefore, it is critical for us to remain competitive in the market. Our competitiveness may be affected by a number of factors beyond our control, including new services developed by our competitors, changes in technology, and the overall contraction in economy and the on-demand food delivery market. While we continually seek to diversify our solution offerings by expanding into other industries, we cannot assure you that we will succeed in a timely manner or at all. If we fail to capture the growth in the demand for our on-demand food delivery solutions, or if we fail to diversify our solution offerings, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our high customer concentration exposes us to all of the risks faced by our major customers and may subject us to significant fluctuations or declines in revenues.

A limited number of industry customers have contributed a significant portion of our revenues in the past. In 2019, we generated approximately 96% of our total revenues from three major industry customers, including Meituan and Ele.me. Although we continually seek to diversify our customer base, we cannot assure you that the proportion of the revenue contribution from these industry customers to our total revenues will decrease in the near future, as the on-demand food delivery market is highly concentrated, with Meituan and Ele.me accounting for more than 95% of the market share in terms of the number of delivery orders and revenue in 2019, according to the F&S report. Other on-demand consumer service markets that we serve are also relatively concentrated with a limited number of market players.

Dependence on a limited number of major industry customers will expose us to the risks of substantial losses if any of them reduces or even ceases business collaborations with us. Specifically, any one of the following events, among others, may cause material fluctuations or declines in our revenues and have a material and adverse effect on our business, financial condition, results of operations and prospects:

 

   

an overall decline in the business of one or more of our major industry customers;

 

   

the decision by one or more of our major industry customers to switch to our competitors;

 

   

the reduction in the service fees of our solutions agreed by one or more of our major industry customers;

 

   

the failure or inability of any of our major industry customers to make timely payment for our services;

 

   

non-compliance with law on the part of any major industry customers or breach of contract by any major industry customers vis-à-vis their business partners; or

 

   

unlawful, improper or otherwise inappropriate activities by any major industry customers that could harm their business, brand and reputation, or subject them to government investigations.

If we fail to maintain relationships with these major customers, and if we are unable to find replacement customers on commercially desirable terms or in a timely manner or at all, our business, financial condition, results of operations and prospects may be materially and adversely affected.

If we fail to maintain relationships with existing industry customers or attract new customers, our business, financial condition, results of operations and prospects may be materially and adversely affected.

Our relationship with industry customers is crucial to our success. If we fail to maintain the quality of our solutions on par with industry customers’ operational needs or respond promptly and effectively to their evolving

 

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service requirements, we may lose our existing and potential industry customers and experience a loss of market share. We typically renew our agreements with industry customers on an annual or semi-annual basis. Although we generally managed to renew agreements with our major customers in the past, we cannot assure you that we can maintain relationships with existing industry customers on commercially desirable terms, or at all.

Industry customers may also terminate business relationships with us due to contractual disputes. For example, we had a dispute with a major industry customer as we extracted and downloaded operating data from its system by using certain technical means not permitted by such customer. We also acquired customer relationships from other service providers of certain major industry customers without seeking their prior written consent. We rectified these issues, settled the disputes privately and maintained our business relationship with these industry customers. We have since enhanced our internal control measures and improved our communication with industry customers to avoid any inadvertent misunderstandings or disputes with our industry customers in the future. We cannot assure you, however, that these industry customers will not sue us for past disputes or that we will not be perceived to breach our contractual obligations, should similar incidents occur in the future. As our industry customers typically have strong bargaining power in imposing or interpreting the terms of our business relationships, we also cannot assure you that our current business practice would not expose us or our business partners to risks of contractual disputes. Should any new disputes arise in the future, we could be subject to penalties imposed by our industry customers, which may include monetary compensation, modification of delivery areas and up to termination of business relationships with us.

Furthermore, as some of our industry customers are competitors to each other in their respective markets, we may be forced to provide services exclusively to certain industry customers and terminate business relationships with the others for commercial consideration if market competition intensifies or if an industry customer so demands specifically by enforcing contractual covenants. We may also fail to develop new relationships with additional industry customers. In that case, our platform may become less appealing to workers as a result of a decline in earning opportunities, and our business, financial condition, results of operations and prospects will be materially and adversely affected.

If we fail to attract, retain and manage workers on our platform, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our continued growth depends in part on our ability to cost-effectively attract, retain and manage workers on our platform. To do so, we have, among other things, offered them referral bonuses, on-the-job training, career advancement opportunities and other value-added work-life support and services. We compete with our competitors and other labor-intensive companies for a massive workforce. If we do not continue to provide workers with compelling earning opportunities and other support and services that are comparable or superior to those of our competitors, or if workers are dissatisfied with the opportunities, support and services we provide, we may be unable to continually attract new workers or retain the existing ones.

We have established business outsourcing relationships with workers on our platform through third-party labor service companies. We engage these service companies to attract workers and settle monthly payment of service fees to workers. Our business depends, to certain extent, on the stability of our contractual relationships with these labor service companies and their continued performance to our satisfaction. The source of workers on our platform could be materially and adversely affected by any disruption to their operations or any termination or suspension of our contractual arrangements with these labor service companies, and we may fail to find a replacement on commercially reasonable terms or in a timely manner or at all. If we fail to attract, retain and manage a sufficient number of workers on our platform or lose a substantial number of workers, we may no longer be able to meet the demands of our customers, and our business, financial condition, results of operations and prospects may be materially and adversely affected.

Moreover, our ability to attract, retain and manage workers on our platform may be adversely affected by an overall decline of labor force due to macroeconomic, social, legal and political reasons that may affect labor

 

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migration, which are beyond our control. Any labor unrest or strikes directed against us could also directly or indirectly affect our ability to serve customers. Furthermore, labor unrest may affect general labor market conditions or result in changes to labor laws. Any of the foregoing could materially and adversely affect our business, financial condition, results of operations and prospects.

There could be adverse legal, tax, and other consequences if workers on our platform were to be classified as our employees or dispatched employees instead of independent contractors.

We have established business outsourcing relationships with workers on our platform, pursuant to which we pay service fees to workers engaged in our solutions as independent contractors through third-party labor service companies. We believe that our workforce model is consistent with the prevailing practice in the workforce operational solution industry and recent policies of the State Council of the People’s Republic of China, or the State Council, that promote on-demand consumer service businesses and the associated workforce model through flexible regulatory measures. Furthermore, we believe the workers on our platform are independent contractors because, among other things, they provide services for orders obtained through our industry customers and get paid primarily based on the number of completed orders. As such, we do not believe that workers on our platform should be deemed as our employees or dispatched employees under the relevant PRC laws and regulations. As of the date of this prospectus, our workforce model has not been investigated or challenged by any government authorities, nor are we aware of any government action contemplated or threatened. However, we have been previously involved in individual lawsuits brought by third parties to seek compensation from us for injuries caused by workers on our platform during their course of services. Some of these lawsuits ruled in favor of the claimants based on the unfavorable determination that the workers should be deemed as our employees or dispatched employees under the facts of each particular case.

We cannot assure you that we will not be involved in lawsuits or arbitration cases in which the judge or arbitrator may side with the claimant in determining the relationship with workers on our platform in the future. We also cannot assure you that we will not be subject to government investigations on or challenges to the legality of our workforce model in the future. If, as a result of legislation or judicial decisions, we are required to classify workers on our platform as our employees or dispatched employees, we would incur significant additional expenses for compensating workers on our platform, potentially including expenses associated with various employee benefits pursuant to relevant PRC laws and regulations. In addition, we may be required to fundamentally change our operation model to comply with the relevant PRC laws and regulations, including the requirement that the total number of dispatched employees may not exceed 10% of the total number of employees. We would also be subject to claims for vicarious liability in relation to torts committed by workers during their course of services, or other claims under the relevant PRC laws and regulations. Any of the foregoing could significantly increase our costs to serve customers, harm our reputation and brand, subject us to rectification orders and fines, and cause us to significantly alter our existing business model and operations. As a result, our business, financial condition, results of operations and prospects will be materially and adversely affected.

We may be held liable for breach of contract under our agreements with industry customers.

Our industry customers typically require their third-party service partners, including us, to adhere to their standard form contracts, and there is little room to negotiate terms and conditions that deviate from such standard form contracts. The standard form contracts from such industry customers typically contain certain restrictive terms for third-party service partners, such as certain non-compete provisions, prohibitions on outsourcing to third-party companies, and prohibitions on acquiring other service providers and their customer relationships without seeking prior written consent from such industry customers. Our industry customers also generally require us to enter into labor relationship with workers on our platform, such as delivery riders, in compliance with applicable PRC laws. We cannot assure you that we will be deemed as having strictly adhered to the restrictive terms in the standard form contracts by such industry customers during the course of business. For example, we, through our various subsidiaries, have established business relationships with a number of industry

 

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customers, some of whom may regard themselves as competitors with each other. We have also collaborated with third-party labor service companies to attract and manage workers on our platform, and have not entered into employment contracts with workers as we deem them as independent contractors under our business outsourcing arrangements.

We communicated with our major industry customers with respect to their awareness of these facts and obtained affirmation that they had not initiated any legal, arbitral or other proceedings against us for failure to strictly adhere to the above-mentioned restrictive terms as of the date of this prospectus. However, if these customers subsequently change their view and lodge claims against us, we cannot assure you that these communications and affirmations will have the force of estoppel or will prompt the court or arbitrator to rule in our favor. We may be held liable for damages and suffer reputational damage if a dispute arises and we fail to contest the allegations successfully. Any disputes between our industry customers and us, regardless of the outcome, may disrupt our existing business relationships or cause them to terminate our business collaboration. We have removed some of these restrictive terms from our renewed contracts with certain industry customers. We intend to continue to re-negotiate the removal of these restrictive terms when renewing our contracts with other industry customers, but we cannot assure you that we will succeed. In addition, our industry customers may amend their standard form contracts to include more stringent terms and conditions. Any of the foregoing could materially and adversely affect our business, financial condition, results of operations and prospects.

We may not compete effectively. If we lose our market shares to competitors in existing markets, or if our expansion into new markets is not successful, our business and prospects may be materially and adversely affected.

While we have not identified any other platform in China with a similar business model and operational scale comparable to us, we may compete with labor outsourcing companies or service suppliers that are independent from or affiliated with industry customers, as well as online or offline workforce marketplaces in each industry setting we serve. The market for workforce operational solutions within a single industry is highly fragmented, consisting of a large number of small-scale, single-industry service suppliers with limited operational experience or geographical coverage. Our competitors may operate with business models and cost structures different from ours. They may ultimately prove to be more successful or more adaptable to new regulatory, technological and other developments than we are. Some of our current and potential competitors may be able to devote greater financial, technical, marketing and other resources to facilitating their business growth, and may also have longer operating histories, greater brand recognition and stronger customer loyalty than we do. Merges or strategic alliances among our current or potential competitors may present additional challenges.

Our industry customers are not obligated to use our solutions on an exclusive basis. For example, on-demand food delivery platforms may engage multiple service suppliers to fulfill their services to consumers in a single city. As the market competition intensifies, our competitors may offer industry customers lower service fee quotes, which could put us under great financial pressure as we may be required by industry customers to match the lower fee quotes. In response to such competition, we may have to further optimize our solutions or otherwise lower our service fees. If we fail to compete effectively, or if our industry customers become dissatisfied with the service quality of our solutions, they may reduce or even discontinue business collaborations with us and switch to our competitors. As a result, our business, financial condition, results of operations and prospects will be materially and adversely affected.

We have incurred net losses in the past, and we may not achieve or sustain profitability.

We have grown rapidly over the past several years. Our revenues increased from RMB654.8 million in 2017 to RMB2,055.8 million (US$295.3 million) in 2019. Our gross profit increased from RMB28.6 million in 2017 to RMB162.3 million (US$23.3 million) in 2019. However, you should not rely on our revenue from any previous period as an indication of our revenue or revenue growth in future periods. Our revenue growth rate may slow

 

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down for a number of reasons, including declined demand for our solution offerings, increasing competition, emergence of alternative business models, changes in regulations and government policies, changes in general economic conditions, as well as other risks described in this prospectus.

We incurred net loss of RMB14.0 million, RMB44.3 million and RMB13.4 million (US$1.9 million) in 2017, 2018 and 2019, respectively. We recorded net cash used in operating activities of RMB28.6 million, net cash generated from operating activities of RMB19.8 million and net cash generated from operating activities of RMB17.6 million (US$2.5 million) in 2017, 2018 and 2019, respectively. We cannot assure you that we will be able to generate net profit or positive cash flow from operating activities in the future. Our ability to achieve profitability will depend in large part on our ability to control expenses and manage our growth effectively. We expect to continue to make investments in the development and expansion of our business, which will place significant demands on our management and our operational and financial resources. Continuous expansion may increase the complexity of our business, and we may encounter various difficulties. We may fail to develop and improve our operational, financial and management controls, enhance our financial reporting systems and procedures, recruit, train and retain highly skilled personnel, or maintain customer satisfaction to effectively support and manage our growth. If we invest substantial time and resources to expand our operations but fail to manage the growth of our business and capitalize on our growth opportunities effectively, we may not be able to achieve profitability, and our business, financial condition, results of operations and prospects would be materially and adversely affected.

As we incur significant costs in connection with certain business lines, our business, financial condition and results of operations may be materially and adversely affected if demand for our solutions under these business lines does not increase as quickly as we anticipate.

We have incurred, and may continue to incur, significant costs in connection with certain business lines. For example, industry customers in the on-demand food delivery market typically divide their intra-city food delivery network into a number of delivery areas. To expand the geographical coverage of our on-demand food delivery business, we have incurred and may continue to incur costs in a lump sum to acquire the rights to render on-demand food delivery services in additional delivery areas. In addition, we have made significant investments to rent from third parties a number of vehicles to commence our ride-hailing solutions. Such acquisitions and the build-up of our fleet in advance of actual reservations of our vehicles by ride-hailing drivers could expose us to significant costs in advance. If market demand for our on-demand food delivery and ride-hailing solutions does not increase as quickly as we anticipate or at all, our business, financial condition and results of operations may be materially and adversely affected as a result of underutilization of capacity and depreciation of these assets.

Our quarterly results may fluctuate and may not fully reflect the underlying performance of our business due to seasonality.

We experience seasonality in our business, primarily attributable to the seasonality of our industry customers’ businesses. For example, we generally experience an increase in demand for our on-demand food delivery solutions during inclement weather conditions and holidays, and suffer a shortage of workforce during Chinese New Year holidays which may fall between late January and late February. See “Summary Consolidated Financial and Operating Data—Key Operating Metrics” for details. Other seasonal trends may develop or these current seasonal trends may become more extreme, which would contribute to fluctuations in our results of operations. Our quarterly results of operations, including the levels of our revenues, expenses, net loss or income and other key metrics, may fluctuate due to a variety of factors, some of which are beyond our control, such as consumption patterns of end consumers of our industry customers. As a result, period-to-period comparisons of our results of operations may not be meaningful, especially given our limited operating history.

 

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If the industries our solutions serve or the business of industry customers develop more slowly than we expect, or stagnate or shrink, our growth may slow or even stall, and our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our future success will largely depend on the continued growth of the industries for which we provide our solutions and our industry customers, especially the relatively new and rapidly evolving ones such as the on-demand food delivery industry and the ride-hailing industry, which could be affected by levels of discretionary consumer spending. Factors that may harm discretionary consumer spending include general economic conditions, unemployment, consumer debts, reduction in net worth, residential real estate and mortgage markets, taxation, energy prices, interest rates, consumer confidence, and other macroeconomic factors, all of which are beyond our control. Consumers tend to shift to alternatives with lower costs during periods in which disposable income is adversely affected. Under such circumstances, consumers may choose to dine at home instead of ordering takeout from restaurants, take public transportation instead of using ride-hailing services, or reduce spending on other consumer services, such as online accommodation sharing for which we provide housekeeping solutions. Such shifts in consumer behaviors will adversely impact the business of our industry customers, which may in turn materially and adversely affect our business, financial condition, results of operations and prospects.

If we fail to obtain requisite approvals, licenses or permits applicable to our business or to comply with applicable laws and regulations, our business, financial condition, results of operations and prospects may be materially and adversely affected.

Our business is subject to governmental supervision and regulation by the relevant PRC government authorities. Government authorities are likely to continue to issue new laws, rules and regulations governing these industries, enhance enforcement of existing laws, rules and regulations, and require us to obtain new and additional approvals, licenses or permits.

We may fail to obtain all requisite approvals, licenses or permits applicable to our business or renew them upon expiration in a timely manner. For example, failure to pass the annual inspection of our ICP license for the operation of our website and the provision of payday loan services through Quhuo+ could subject us to fines, sanctions, or injunction orders. In addition, we may be required to obtain additional licenses or permits as a result of our business expansion, change in our operations or change in laws and regulations applicable to us. For example, as we recently launched payday loan services to workers on our platform in collaboration with a third-party credit information company, an asset management company and a lending company, we may be deemed as an online lending information intermediary and may be required to complete the registration with local financial supervisory departments.

There are also ambiguities and uncertainties with regard to whether certain approvals, licenses or permits apply to our business. For example, it is uncertain whether we are required to obtain an express delivery business permit for our on-demand food delivery solutions or a human resource service license for the training and management that we provide to the workers on our platform, although we believe that not obtaining such permit or license is consistent with the current market practice and regulatory regime. However, if PRC government authorities determine otherwise, and if we fail to obtain such permits as required, we could be subject to fines, sanctions or injunction orders, and we may be forced to alter our business model.

We have limited insurance coverage which could expose us to significant costs and business disruption.

We maintain various insurance policies to safeguard against risks and unexpected events. For example, we purchase personal accident insurance for workers engaged in our on-demand food delivery and shared-bike maintenance solutions, as well as automobile insurance for drivers engaged in our ride-hailing solutions. We purchase commercial liability insurance to protect our business against claims of property damage and bodily injury. We also provide our employees with social security insurance, including pension insurance, unemployment insurance, work-related injury insurance and medical insurance. However, we do not maintain

 

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property insurance policies covering our equipment and facilities for losses due to fire, earthquake, flood or any other disaster, except for certain service stations for our on-demand food delivery solutions. Consistent with customary industry practice in China, we do not maintain business interruption insurance or key-employee insurance for our executive officers. We cannot assure you that our insurance coverage is sufficient to indemnify us against any loss or that we will be able to successfully claim our losses under our current insurance policies on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the insurance compensation amount is significantly less than our actual loss, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Unlawful, improper or otherwise inappropriate activities by workers on our platform while delivering our solutions could expose us to liability and harm our business, brand, reputation, financial condition, results of operations and prospects.

Unlawful, improper or otherwise inappropriate activities by workers on our platform have occurred and could occur again, which could seriously harm our business. These activities include assault, battery, traffic offenses, disputes with consumers, food contamination, theft, unauthorized use of bank cards or bank accounts, sharing of customer account information and other misconduct. The inappropriate activities by workers could expose us to potential liabilities and harm our reputation.

We have implemented policies and measures to detect, identify and address these types of workers’ unlawful or inappropriate activities. However, we may fail to implement these measures effectively. We cannot assure you that these measures could adequately or fully address or prevent all unlawful, improper or otherwise inappropriate activities by workers on our platform from occurring. Any negative publicity related to workers’ unlawful or inappropriate activities could adversely affect our reputation and brand or public perception of our platform, which could negatively affect the demand for our solutions, and potentially increase our exposure to regulatory and litigation risks. Any of the foregoing risks could harm our business, brand, financial condition and results of operations.

We face potential liabilities, expenses of resolving claims and disputes and harm to our business due to the nature of our business.

We face potential liabilities, expenses of resolving claims and disputes and harm to our business due to the nature of our businesses. For example, for our on-demand food delivery solutions, third parties could assert tort claims against us in connection with personal injuries resulting from food poisoning, tampering or accidents caused by delivery riders on our platform during the course of their deliveries.

We have been, and from time to time may continue to be, involved in disputes, claims or proceedings arising from our operations. For example, we are currently involved in several ongoing civil actions. We do not believe that any of them is likely to have a material adverse effect on our business, financial condition or results of operations, considering the consequences and financial exposures of the claims as well as our assessment of the reasonably possible loss. We cannot guarantee, however, that the claimants will not prevail in the ongoing legal actions or that the claimants will not be awarded significant damages should they prevail. The frequency of such claims and disputes could increase as our business continues to grow. These claims and disputes could divert our management’s time and attention away from our business and result in significant expenses to investigate and defend, regardless of the merits of the claims and disputes. If we are unsuccessful in our efforts to defend against or resolve these claims and disputes, we may elect or be compelled to change our business practices or may be forced to pay substantial damages, settlement costs, fines and penalties. Furthermore, under certain circumstances, we have contractual and other legal obligations to indemnify and incur legal expenses on behalf of our industry customers and current and former directors and officers. For example, as for our on-demand food delivery solutions, we are obligated to indemnify industry customers for personal injury and property loss or damage sustained by any third party caused by us or from the rendering of our delivery services. Any of these consequences could seriously harm our business.

 

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Moreover, as our business engages a large number of workers on our platform, we have been, and may continue to be, involved in various labor disputes from time to time in the ordinary course of business, although none of them, individually or in the aggregate, has had a material adverse impact on us. As our business continues to grow, we expect to continue to be involved in legal or administrative proceedings related to labor disputes.

Our strategic investments or acquisitions may turn out to be unsuccessful and materially and adversely affect our financial condition and results of operations.

We have acquired, and may continue to acquire other assets, technologies, products and businesses that are complementary to our existing business or otherwise. We may also enter into strategic partnerships or cooperation agreements with other businesses to expand our platform. Negotiating these transactions can be time-consuming, challenging and expensive, and our ability to close these transactions may often be subject to regulatory approvals that are beyond our control. In addition, investments and acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, significant amortization expenses related to intangible assets, significant diversion of management attention and exposure to potential unknown liabilities of the acquired business. Moreover, the cost of identifying and consummating investments and acquisitions and integrating the acquired businesses into ours may be significant, and the integration of acquired businesses may be disruptive to our existing business operations. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may issue additional equity securities that would dilute our shareholders’ ownership interest, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur expenses or substantial liabilities, encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures, encounter difficulties in assimilating acquired operations, encounter diversion of management’s attention to other business concerns, and become subject to adverse tax consequences, substantial depreciation, impairment losses, or deferred compensation charges. If our investments and acquisitions are not successful, our business, financial condition, results of operations and prospects may be materially and adversely affected.

If we fail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be materially and adversely affected.

We believe that the strong recognition of our brand has reduced our costs of attracting workers to collaborate with us through word-of-mouth marketing and contributed significantly to the growth and success of our business. Accordingly, maintaining, protecting and enhancing the recognition of our brand image is critical to our business and market position. Many factors, some of which are beyond our control, are important to maintaining, protecting and enhancing our brand. These factors include our ability to:

 

   

maintain the quality and attractiveness of the solutions we offer;

 

   

maintain or improve the satisfaction of industry customers and their end consumers;

 

   

maintain or improve the quality of our training and management of workers on our platform;

 

   

compete effectively against our existing and future competitors; and

 

   

defend our reputation and brand image generally and in the event of any negative publicity relating to our solutions, workers’ safety, internet security, or other issues affecting us or the entire workforce operational solution platform market in China.

A public perception of misconduct by us, workers on our platform or our industry customers, even if factually incorrect or based on isolated incidents, could damage our reputation and harm our brand, and our business, financial condition, results of operations and prospects may be materially and adversely affected.

 

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Any significant disruption to or failures of our technology infrastructure could materially and adversely affect our business, financial condition, results of operations and prospects.

Quhuo+, our proprietary technology infrastructure, is important to help us scale up our business and effectively manage tens of thousands of workers. We utilize Quhuo+ to monitor the workload and performance of the workers on our platform, which allows us to dynamically manage staffing and maintain solution quality. In addition, utilizing Quhuo+, we provide workers with training, onboarding logistics, management support and other value-added services. Therefore, the performance and reliability of Quhuo+ is critical to our operations and reputation. As we are continually developing and optimizing functions of Quhuo+, we may encounter errors, defects, disruptions, or other performance or stability problems with Quhuo+, such as computer malware, viruses, spamming and phishing attacks, any of which could result in our inability to manage workers and deliver our solutions. As a result, we may lose our competitive position and market share, and our business, financial condition, results of operations and prospects will be materially and adversely affect.

Our business processes a large amount of data, which subjects us to governmental regulations and other legal obligations related to privacy, information security and data protection. Any improper use or disclosure of such data by us, our employees or our business partners could subject us to significant reputational, financial, legal and operational consequences.

Our business processes a large quantity of personal data of workers on our platform. We also have access to operating data regarding our performance and certain confidential information provided by industry customers. We face risks inherent in handling and protecting such large volumes of data. In particular, we face a number of challenges relating to data protection in our system, including:

 

   

protecting the data in and hosted on our system, including against attacks by third parties or fraudulent behaviors by our employees;

 

   

addressing concerns related to privacy and sharing, safety, security and other factors; and

 

   

complying with applicable laws, rules and regulations relating to the collection, use, disclosure or security of personal information, including any requests from regulatory and government authorities relating to such data.

Any systems failure or security breach or lapse that results in the release of personal data of workers on our platform could harm our reputation and brand and, consequently, our business, in addition to exposing us to potential legal liability. In addition, our industry customers and business partners as well as their employees may improperly use or disclose the data we disclose to them for our operation, and we have limited control over such actions. Any failure, or perceived failure, by us, our employees, our industry customers and business partners, or their employees to comply with privacy policies or with any regulatory requirements or privacy protection-related laws, rules and regulations could result in proceedings or actions against us by governmental entities or others. These proceedings or actions may subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and severely disrupt our business.

Our practices regarding the use, retention, transfer, disclosure and security of such confidential data could become the subject of enhanced regulations and increased public scrutiny in the future. The regulatory frameworks regarding privacy issues in many jurisdictions are constantly evolving and can be subject to significant changes from time to time. For instance, a growing number of legislative and regulatory bodies have adopted user notification requirements in the event of unauthorized access to or acquisition of certain types of data. In China, the PRC Cybersecurity Law, which became effective in June 2017, leaves substantial uncertainty as to the circumstances and standards under which the law would apply and violations would be found. See “Regulation—Regulations Relating to Internet Information Security and Privacy Protection.” Complying with these obligations could cause us to incur substantial costs. Any failure to comply with applicable regulations, whether by other third parties or us, or as a result of employee error or negligence or otherwise, could result in regulatory enforcement actions against us and have a material adverse impact on our business operations.

 

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Increases in labor, energy and other costs in China could materially and adversely affect our business and profitability.

China’s economy has experienced significant growth, which has resulted in and may further lead to inflation and increased labor costs, energy costs, and vehicle purchase, rental and maintenance costs. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index, which is the broadest measure of inflation, for December 2017, 2018 and 2019 were increases of 1.8%, 1.9% and 4.5%, respectively. Consequently, the costs incurred by workers when providing services on our platform have increased, which in turn has increased our cost of revenue. Our costs and operating expenses associated with energy consumption or vehicle leasing may also increase, which would materially and adversely affect our profit margin. If inflation in China continue to increase and we are unable to pass on these increased costs and expenses to our industry customers by increasing our service fees, our cost of revenue and operating expenses will continue to grow, and our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our business operations have been and may continue to be materially and adversely affected by the COVID-19 pandemic.

Since December 2019, a novel strain of coronavirus, later named COVID-19, has severely impacted China and major countries globally. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Many businesses and social activities in China and other countries and regions have been severely disrupted, including those of our industry customers. The global outbreak has also caused market panics, which materially and negatively affected the global financial markets, such as the plunge of global stocks on major stock exchanges in the middle of March 2020. Such disruption and the potential slowdown of the global economy in 2020 and beyond have had and could continue to have a material adverse effect on our results of operations and financial condition. For example, the average monthly number of delivery orders fulfilled through our on-demand food delivery solutions was approximately 16.9 million in the first quarter of 2020, representing a decrease by approximately 42% compared to approximately 29.2 million in the previous quarter, albeit an increase by approximately 22% compared to approximately 13.9 million in the first quarter of the previous year. For details of the impact of COVID-19 on our business and results of operations, see “Prospectus Summary—Recent Developments” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Specific Factors Affecting Our Results of Operations—COVID-19 outbreak.” We have conducted, and will continue to conduct, measures to control the risk of virus spread in our business operations, including strict temperature monitoring of, and provision of face masks and sanitizer to, active workers on our platform, as well as daily sanitization and disinfection of takeaway incubators and other working gear. However, if any of our employees or workers on our platform has contracted or is suspected of having contracted any contagious disease or condition, local governments may require our employees and workers to be quarantined or our offices to be closed down and disinfected and, as a result, our business operation could be disrupted or materially and adversely affected. We will pay close attention to the development of the outbreak of COVID-19 and continuously evaluate its impact on our business, results of operations and financial condition, which we believe will depend on the duration of the pandemic and the government’s responsive measures. If the outbreak persists or escalates, we may be subject to further negative impact on our business operations, financial condition and results of operations. The global spread of COVID-19 pandemic in major countries may result in further global economic distress and recession, and the extent to which it may affect us will depend on future developments, which are highly uncertain and cannot be predicted. The COVID-19 pandemic has also resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility could materially and adversely affect our access capital, business, financial condition and results of operations and the market price of our ADSs.

A severe or prolonged downturn in the global or Chinese economy and political tensions between the United States and China could materially and adversely affect our business, financial condition, results of operations and prospects.

The global macroeconomic environment is facing challenges, including the end of quantitative easing by the U.S. Federal Reserve, the economic slowdown in the Eurozone since 2014 and uncertainties over the impact of

 

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Brexit. The Chinese economy has shown slower growth compared to the previous decade since 2012 and the trend may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in market volatility. There have also been concerns over the relationship between China and other countries, including the surrounding Asian countries and the United States. In March 2018, U.S. President Donald J. Trump announced the imposition of tariffs on steel and aluminum entering the United States and in June 2018 announced further tariffs targeting goods imported from China. Subsequently both China and the U.S. have each imposed tariffs that have adversely affected trade between the two countries. In October 2019, U.S. President Donald J. Trump announced that China and the United States had reached a tentative agreement for the first phase of a trade deal, under which China has agreed to buy up to US$50.0 billion of American products and services, while the United States has agreed to suspend new tariffs. Such agreement was signed in January 2020. It is not yet clear what impact these tariff negotiations may have or what further actions the governments may take. Political tensions between the United States and China have escalated since the COVID-19 outbreak and the PRC National People’s Congress’ decision on Hong Kong national security legislation. Rising political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have a material and adverse impact on the stock performance of China-based issuers listed in the United States. It is unclear if this proposed legislation would be enacted. In addition, the recent market panics over the global outbreak of COVID-19 and the drop in oil prices materially and negatively affected the global financial markets in March 2020, which may cause potential slowdown of the global economy. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, financial condition, results of operations and prospects.

Our business depends on the continued services of our key employees, including our senior management and other qualified employees.

Our business depends on the continued services of our senior management and other qualified managerial, financial, technical and operations personnel. Competition for well-qualified employees is intense in China. We must offer competitive compensation and opportunities for career growth in order to retain our key employees and attract and retain qualified personnel in the future, which may result in significant costs. If we do not succeed in attracting well-qualified employees or retaining and motivating existing senior management and key employees, our business, results of operations, financial condition and prospects may be materially and adversely affected.

In addition, although we have entered into confidentiality and non-compete agreements with our senior management, we cannot assure you that any of them will not join our competitors or form a competing business. If any dispute arises between our current or former senior management and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may not be able to enforce them at all.

We have incurred and may continue to incur substantial share-based compensation expenses.

We have adopted an equity incentive plan that permits the grant of share options, restricted shares and restricted share units as equity-based awards, to our directors, officers, employees and consultants. We are required to recognize share-based compensation expenses based on the fair value of such share options granted to employees, officers, directors and consultants. We believe the granting of share-based compensation is important

 

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to our ability to attract, retain and motivate our management team and qualified employees, and we will continue to grant share-based compensation to employees in the future. We recorded share-based compensation expenses of RMB3.3 million, RMB89.6 million and RMB64.8 million (US$9.3 million) in 2017, 2018 and 2019, for options granted under a previous share incentive plan, respectively. As of the date of this prospectus, we have granted options to purchase 8,792,312 ordinary shares under our 2019 Share Incentive Plan, substantially all of which either are not exercisable or will not vest until completion of this offering. See “Management—Share Incentive Plan” for details. As a result, upon the completion of this offering, we expect to further recognize a substantial amount of share-based compensation expenses, which we expect to have a significant impact on our results of operations going forward. Moreover, if additional share options or other equity incentives are granted to our employees, directors or consultants in the future, our expenses associated with share-based compensation may increase significantly, which may have a material and adverse effect on our business, financial condition, results of operations and prospects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Share-based compensation.”

We will require additional capital to support the growth of our business, and this capital might not be available on reasonable terms or at all.

We intend to continue to make investments to support our business growth and may require additional funds to continue to operate our business and respond to business challenges or opportunities, including the need to develop new solution offerings or enhance our existing solution offerings, improve our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may hinder our ability to obtain additional capital or pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired, and our business, financial condition, results of operations and prospects may be materially and adversely affected.

We currently rely on a small number of third-party cloud computing service providers to host a significant portion of our platform, and any interruptions or delays in services from these third parties could impair the delivery of our offerings and harm our business.

We use third-party cloud computing services. We do not control the operations of our third-party cloud computing service providers. The operations of these third-party cloud computing service providers may experience break-ins, computer viruses, denial-of-service attacks, sabotage, acts of vandalism, and other misconduct. The facilities of these third-party cloud computing service providers may also be vulnerable to damage or interruption from power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes, and similar events. The occurrence of any such event or other unanticipated problems may result in our inability to serve data reliably or require us to migrate our data to a new cloud computing service provider. This could be time-consuming and costly and may result in the loss of data, any of which could significantly interrupt the operation of our platform and harm our reputation and brand. We may not be able to easily switch to another cloud provider in the event of any disruptions or interference to the services we use, and even if we do, other cloud providers are subject to the same risks. Additionally, if we are unable to renew our agreements with these third-party cloud computing service providers on commercially reasonable terms, we may experience delays and interruptions in the provision of our solutions, which may in turn reduce our revenue and cause industry customers to stop working with us. As a result, our business, financial condition, results of operations and prospects could be adversely affected.

 

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We may not timely and effectively scale and adapt our existing technology and network infrastructure in line with our business growth, which would materially and adversely affect our business, financial condition, results of operations and prospects.

It is critical to our success that we are able to scale and adapt our existing technology and network infrastructure to accommodate rapidly increasing workers on our platform in line with our business growth. We may experience service disruptions, outages or other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of workers accessing our platform simultaneously, and denial of service or fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve the availability of our platform to workers, especially as we expand our operations into more industries.

We expect to continue to make significant investments to maintain and improve the availability of our platform and to enable rapid releases of new features and products. To the extent that we do not effectively address capacity constraints, respond adequately to service disruptions, upgrade our systems as needed or continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, financial condition, results of operations and prospects would be materially and adversely affected.

Our operations depend on the performance of the internet infrastructure and telecommunications networks in China.

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology. We primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage. In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our financial condition may be adversely affected.

We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.

We regard our intellectual property as critical to our success. Such intellectual property includes trademarks, domain names, copyrights, know-how and proprietary technologies. We currently rely on trademarks, software copyrights, trade secret law, and confidentiality and non-compete agreements with our employees and others to protect our proprietary rights. However, we cannot assure you that any of our intellectual property rights will not be challenged, invalidated or circumvented, or that such intellectual property will be sufficient to provide us with competitive advantages.

Because of the rapid pace of technological change, we cannot assure you that all of our proprietary technologies and similar intellectual property can be patented in a timely or cost-effective manner, or at all. We have not completed the trademark registration for some of our logos. As such, these logos may be squatted by our competitors, in which case we may be forced to adopt a new brand name and deploy additional financial resources to market the new brand name, which may materially and adversely affect our business, financial condition, results of operations and prospects.

 

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It is often difficult to maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We cannot assure you that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

We cannot assure you that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. From time to time, we may be subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business, financial condition, results of operations and prospects may be materially and adversely affected.

If we fail to implement and maintain an effective system of internal controls to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.

Prior to this offering, we have been a private company with limited accounting and financial reporting personnel and other resources with which we address our internal control over financial reporting. In connection with the audits of our consolidated financial statements as of December 31, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified is the Company’s lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and the Securities and

 

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Exchange Commission, or the SEC, rules. We are in the process of implementing a number of measures to address the material weakness and deficiencies that have been identified. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, we cannot assure you that these measures may fully address the material weakness and deficiencies in our internal control over financial reporting or that we may conclude that they have been fully remediated.

We are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report in our second annual report on Form 20-F after becoming a public company. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we are now a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally speaking, if we fail to achieve and maintain an effective internal control environment, it could result in material misstatements in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our businesses, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board, and, as such, you are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit report included in our prospectus filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.

Because we have substantial operations within the PRC and the PCAOB is currently unable to conduct inspections of the work of our independent registered public accounting firm as it relates to those operations without the approval of the Chinese authorities, our independent registered public accounting firm is not currently inspected thoroughly by the PCAOB. This lack of PCAOB inspections in the PRC prevents the PCAOB from regularly evaluating our independent registered public accounting firm’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

On May 24, 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the Ministry of

 

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Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. On inspection, it appears that the PCAOB continues to be in discussions with the Mainland China regulators to permit inspections of audit firms that are registered with the PCAOB in relation to the audit of Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. In a statement issued on December 9, 2019, the SEC reiterated concerns over the inability of the PCAOB to conduct inspections of the audit firm work papers with respect to U.S.-listed companies that have operations in China, and emphasized the importance of audit quality in emerging markets, such as China. On April 21, 2020, the Chairman of the SEC, Chairman of the PCAOB and certain other SEC divisional heads jointly issued a public statement, reminding the investors that in investing in companies that are based in or have substantial operations in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading, and there is also a greater risk of fraud. In the event of investor harm, there is substantially less ability to bring and enforce SEC, the U.S. Department of Justice and other U.S. regulatory actions, in comparison to U.S. domestic companies, and the joint statement reinforced past SEC and PCAOB statements on matters including the difficulty to inspect audit work papers in China and its potential harm to investors. The 2018 joint statement and the 2020 public statement reflect a heightened interest in this issue. However, it remains unclear what further actions the SEC and the PCAOB will take to address the concerns and the impact on Chinese companies in the U.S.

Inspections of other firms that the PCAOB has conducted outside the PRC have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors in the PRC makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of the PRC that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, and passed requiring the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges, such as the NASDAQ, of issuers included on the SEC’s list for three consecutive years. On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, or the Kennedy Bill, which includes requirements similar to those in the EQUITABLE Act for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate because of restrictions imposed by non-U.S. authorities. The Kennedy Bill would also require public companies on this SEC list to certify that they are not owned or controlled by a foreign government and make certain additional disclosures on foreign ownership and control of such issuers in their SEC filings. If passed by the U.S. House of Representatives and signed by the U.S. President, the Kennedy Bill would amend the Sarbanes-Oxley Act of 2002 to require the SEC to prohibit securities of any U.S.-listed companies from being listed on any of the U.S. securities exchanges such as the NASDAQ or traded “over-the-counter” if registrant’s financial statements have, for a period of three years after the law becomes effective, been audited by an accounting firm branch or office that is not subject to PCAOB inspection. Enactment of any of such legislations or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the stock price could be adversely affected. In addition, enactment of these legislations may result in prohibitions on the trading of our ADSs on the NASDAQ, if our auditors fail to meet the PCAOB inspection requirement in time. There is uncertainty as to whether and when these bills or legislations will be enacted in the proposed form, or at all.

 

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Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In late 2012, the SEC commenced administrative proceedings against the mainland Chinese affiliates of the “big four” accounting firms (including our independent registered public accounting firm) under Rule 102(e) of its Rules of Practice and the Sarbanes-Oxley Act of 2002. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the Chinese accounting firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioners had taken place, the Chinese accounting firms reached a settlement with the SEC whereby the proceedings were stayed. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents would normally be made to the CSRC. The Chinese accounting firms would receive requests matching those under Section 106 of the Sarbanes-Oxley Act of 2002 and would be required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. The CSRC for its part initiated a procedure whereby, under its supervision and subject to its approval, requested classes of documents held by the accounting firms could be sanitized of problematic and sensitive content so as to render them capable of being made available by the CSRC to U.S. regulators.

Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the settlement date, which was on February 6, 2019. We cannot predict whether, in cases where the CSRC does not authorize the production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. laws. If additional challenges are imposed on the Chinese affiliates of the “big four” accounting firms, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

In the event that the SEC restarts the administrative proceedings, depending upon the outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act and ultimately possible delisting. Moreover, any negative news about any such future proceedings against these accounting firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

If the Chinese affiliate of our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs from NASDAQ or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Lawsuits or allegations of impropriety against us or our management could have a material adverse effect on our reputation, business, financial condition and results of operations.

We have become, and may continue to become, subject to lawsuits or allegations of impropriety brought by industry customers and their consumers, our competitors, or other individuals or entities, including breach of contract, claims of torts, or unfair competition. Any lawsuits or allegations of impropriety, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived malfeasance by our management could harm our reputation. In addition to the related financial costs, managing and defending such lawsuits and allegations can significantly divert management’s attention from our business operations. We may also need to pay liquidated damages or settle such lawsuits or allegations with a substantial amount of cash.

 

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Any of the circumstances could have a material adverse effect on our reputation, business, financial condition and results of operations.

None of the lease agreements of our leased properties has been registered with the relevant PRC government authorities as required by PRC law, which may expose us to potential fines.

Under PRC law, all property lease agreements are required to be registered with the local land and real estate administration bureau. Although failure to do so does not in itself invalidate the leases, the lessees may not be able to defend these leases against bona fide third parties and may also be exposed to potential fines if they fail to rectify such non-compliance within the prescribed time frame after receiving notice from the relevant PRC government authorities. The penalty ranges from RMB1,000 to RMB10,000 for each unregistered lease, at the discretion of the relevant authority. As of the date of this prospectus, none of the lease agreements for our leased properties in China has been registered with the relevant PRC government authorities. As of the date of this prospectus, we have not been subject to administrative fines and sanctions in this regard. In the event that any fine is imposed on us for our failure to register our lease agreements, we may not be able to recover such losses from the lessors.

Our rights to use our leased properties could be challenged by property owners or other third parties, which may disrupt our operations and cause us to incur relocation costs.

As of the date of this prospectus, the lessors of certain of our leased properties in China failed to provide us with valid property ownership certificates or authorizations from the property owners for the lessors to sublease the properties. There is a risk that such lessors may not have the relevant property ownership certificates or the right to lease or sublease such properties to us, in which case the relevant lease agreements may be deemed invalid and we may be forced to vacate these properties, which could interrupt our business operations and cause us to incur relocation costs. Moreover, if third parties challenge our lease agreements, it could result in a diversion of management attention and cause us to incur costs associated with defending such actions, even if such challenges are ultimately determined in our favor.

Failure to make adequate contributions to social insurance and housing fund as required by PRC regulations may subject us to penalties.

In accordance with the PRC Social Insurance Law and the Regulations on the Administration of Housing Fund and other relevant laws and regulations, China establishes a social insurance system and other employee benefits including basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance, maternity insurance, housing fund, and a handicapped employment security fund, or collectively the Employee Benefits. An employer is required to pay the Employee Benefits for its employees in accordance with the rates provided under relevant regulations and withhold the Employee Benefits that should be assumed by the employees.

Our VIE and its subsidiaries have not made sufficient contribution of the Employee Benefits for some employees. We have recorded accruals for the estimated underpayment of Employee Benefits, including late fees and fines, in our financial statements. As advised by our PRC counsel, we may be subject to late fees and fines for our insufficient contributions to the Employee Benefits and non-registration of an account for social insurance or housing fund. As of the date of this prospectus, we have not received any notice from the relevant government authorities or any claim or request from these employees in this regard. However, we cannot assure you that the relevant government authorities will not require us to pay the outstanding amount and impose late fees or fines on us, in which case our business, financial condition and results of operations may be adversely affected.

 

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Any catastrophe, including outbreaks of health pandemics and other extraordinary events, could have a negative impact on our business operations.

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, wars, riots, terrorist attacks or similar events could cause severe disruption to our daily operations, and may even require a temporary closure of our facilities. Our business could also be adversely affected by the effects of Ebola virus diseases, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome (SARS), COVID-19, or other epidemics. Our business operation could be disrupted if any of our employees or contracted workers are suspected of having any of the aforementioned epidemics or another contagious disease or condition, since it could require our employees and contracted workers to be quarantined or our offices to be disinfected. In addition, our business, financial condition, results of operations and prospects could be materially and adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

Risks Related to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

Our revenues are all sourced from China. Accordingly, our business financial condition, results of operations and prospects are influenced by economic, political and legal developments in China. Economic reforms begun in the late 1970s have resulted in significant economic growth. However, any economic reform policies or measures in China may from time to time be modified or revised. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among different economic sectors.

The PRC government exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Although the PRC economy has grown significantly in the past decade, that growth may not continue, as evidenced by the slowing of the growth of the PRC economy since 2012. In addition, China’s economic condition has been, and may continue to be, impacted by the recent global outbreak of COVID-19 and the corresponding government-mandated quarantine measures. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business, financial condition and results of operations, lead to reduction in demand for our services and adversely affect our competitive position.

Uncertainties with respect to the PRC legal system could adversely affect us.

The PRC legal system is based on written statutes and court decisions that have limited precedential value. The PRC legal system is evolving rapidly, and therefore the interpretations and enforcement of many laws, regulations and rules may contain inconsistencies and uncertainties.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC judicial and administrative authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of a judicial or administrative proceeding than in more developed legal systems. Furthermore, the PRC legal system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result, we may not always be aware of any potential violation of these policies and rules. These uncertainties my impede our contractual, property and procedural rights, which could adversely affect our business, financial condition and results of operations.

 

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Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and China’s foreign exchange policies, among other things. In 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of IMF completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly against the backdrop of a surging U.S. dollar and persistent capital outflows from China. This depreciation halted in 2017, and the Renminbi appreciated approximately 7% against the U.S. dollar during this one-year period. In 2018, a new round of Renminbi depreciation emerged under the influence of a strong U.S. dollar and the Sino-US trade friction. In August 2019, Renminbi once plunged to the weakest level against the US dollar in more than a decade, which raised fears of further escalation in the Sino-US trade friction as the United States labeled China as a currency manipulator after such sharp depreciation. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

Significant revaluation of the Renminbi may have a material adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or the ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiary in China may be used to pay dividends to our company. However, approval

 

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from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and affiliated entities to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

In light of the flood of capital outflows of China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the ADSs.

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce, or the MOC, be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and affiliated entities, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiary and our affiliated entities. We may make loans to our PRC subsidiary and affiliated entities, or we may make additional capital contributions to our PRC subsidiary, or we may establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or we may acquire offshore entities with business operations in China in an offshore transaction.

Most of these activities are subject to PRC regulations and approvals. For example, loans by us to our wholly owned PRC subsidiary to finance its activities cannot exceed statutory limits and must be registered with

 

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the local counterpart of SAFE. If we decide to finance our wholly owned PRC subsidiary by means of capital contributions, these capital contributions are subject to the requirement of making necessary reporting or filings in the foreign investment comprehensive administrative system and registration with other governmental authorities in China. Due to the restrictions imposed on loans in foreign currencies extended to PRC domestic companies, we are not likely to make such loans to our affiliated entities as PRC domestic companies. Further, we are not likely to finance the activities of our affiliated entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in value-added telecommunication services and certain other businesses.

SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third-party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Although SAFE promulgated in 2019 the Circular on Further Promoting the Cross-border Trade and Investment Facilitation, or SAFE Circular 28, pursuant to which non-investment foreign-invested companies are allowed to conduct domestic equity investment with settled capital from foreign exchange if such investment projects are true and compliant and do not otherwise violate the existing Special Management Measures (Negative List) for the Access of Foreign Investment, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in China.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, or at all, with respect to future loans by us to our PRC subsidiary or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.

SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by

 

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Domestic Residents via Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents or entities’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. On February 13, 2015, SAFE issued Circular on Further Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, or SAFE Circular 13, effective on June 1, 2015, pursuant to which the power to accept SAFE registration was delegated from local SAFE to local qualified banks where the assets or interest in the domestic entity was located. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.

SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.

If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing its profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We have used our best efforts to notify PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange registrations. As of the date of this prospectus, all PRC residents known to us that currently hold direct or indirect ownership interests in our company, except for one minority shareholder, have completed the registration with SAFE as required by SAFE Circular 37. However, we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make or update such registration, and we cannot compel them to comply with SAFE registration requirements. As a result, we cannot assure you that all other shareholders or beneficial owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers, consultants and other employees who are PRC residents and who have been granted share-based awards may have to follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes an overseas listed company. In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or SAFE Circular 7. Under SAFE Circular 7 and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who

 

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are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of share-based awards, the purchase and sale of corresponding shares or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution, or any other material changes. We and our PRC employees who have been granted share-based awards will be subject to SAFE Circular 7 and other relevant rules and regulations upon the completion of this offering. Failure of our PRC share-based award holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute dividends to us, or otherwise materially adversely affect our business.

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or the ADSs holders.

Under the PRC Enterprise Income Tax Law, or the EIT Law, and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to PRC enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued the Circular of the State Administration of Taxation on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance with the De Facto Standards of Organizational Management, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, but not to those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (1) the primary location of the day-to-day operational management is in the PRC; (2) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (3) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (4) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that Quhuo Limited is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of the ADSs. In addition, non-resident enterprise shareholders (including the ADSs holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, dividends paid to our non-PRC individual shareholders (including the ADSs holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us), if such gains are deemed to be from PRC sources. These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of Quhuo Limited would be able to claim the benefits of any tax treaties between their country of tax residence and the

 

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PRC in the event that Quhuo Limited is treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.

We face uncertainties with respect to indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies.

We face uncertainties regarding the reporting on and consequences of previous private equity financing transactions involving the transfer and exchange of shares in our company by non-resident investors. In February 2015, SAT issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or SAT Bulletin 7. Pursuant to SAT Bulletin 7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. On October 17, 2017, SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. SAT Bulletin 37 further clarifies the practice and procedure of the withholding of nonresident enterprise income tax.

There is uncertainty as to the application of SAT Bulletin 37 or previous rules under Bulletin 7. We face uncertainties on the reporting and consequences of private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. Under SAT Bulletin 37 and SAT Bulletin 7, our company may be subject to filing obligations or taxes if our company is the transferor in such transactions, and may be subject to withholding obligations if our company is the transferee in such transactions.

Increases in labor costs in the PRC may adversely affect our business, financial condition and results of operations.

The PRC Labor Contract Law has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written employment contracts, to enter into employment contracts with no fixed term under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. Furthermore, the PRC Labor Contract Law sets forth additional restrictions and increases the costs involved with dismissing employees. To the extent that we need to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect our ability to do so in a timely and cost-effective manner, and we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.

In addition, we are required by PRC laws and regulations to make social insurance registration and open housing fund account with relevant governmental authorities and pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. If we fail to make adequate social insurance and housing fund contributions, we may be subject to fines and legal sanctions, and our business, financial condition and results of operations may be adversely affected.

 

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Risks Related to Our Corporate Structure

The PRC government may find that the contractual arrangements that establish our corporate structure for operating our business do not comply with applicable PRC laws and regulations.

Current PRC laws and regulations impose certain restrictions on foreign ownership of companies that engage in certain business operations, such as value-added telecommunications services. In June 2019, the Ministry of Commerce, or MOFCOM, and the National Development and Reform Commission, or the NDRC, promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or the Negative List (2019 version), which became effective on July 30, 2019, in order to amend the Guidance Catalogue of Industries for Foreign Investment. In June 2020, MOFCOM and the NDRC promulgated the Negative List (2020 version) which will become effective on July 23, 2020 and replace the Negative List (2019 version). Pursuant to the Negative List (2020 version), foreign investment in value-added telecommunications services (except for e-commerce, domestic multiparty communication, store and forward service and call center) falls within the Negative List. As a result, foreign investors can only conduct investment activities through equity or contractual joint ventures with certain shareholding requirements and approvals from competent authorities. PRC partners are required to hold the majority interests in the joint ventures and approval from MOFCOM and the Ministry of Industry and Information Technology, or MIIT, for the incorporation of the joint ventures and the business operations.

Current PRC laws and regulations impose restrictions or prohibitions on foreign ownership and investment in companies that engage in value-added telecommunication services. We are an exempted company incorporated in the Cayman Islands. Beijing Quhuo Information Technology Co., Ltd., or WFOE, is our wholly-owned PRC subsidiary and a foreign-invested enterprise under PRC laws. We conduct our business in China through Beijing Quhuo Technology Co., Ltd., or our VIE, and its subsidiaries, or collectively our affiliated entities, in China, and may in the future commence or acquire businesses that are subject to the restrictions with respect to value-added telecommunication services, including our recently launched payday loan services. We, through WFOE, entered into a series of contractual arrangements with the VIE and its registered shareholders, in order to (1) exercise effective control over our affiliated entities, (2) receive substantially all of the economic benefits of our affiliated entities, and (3) have an exclusive option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law. We have been and expect to continue to be dependent on our affiliated entities to operate our business in China. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our affiliated entities and hence consolidate their financial results under U.S. GAAP. See “Corporate History and Structure” for details.

In the opinion of our PRC counsel, Commerce & Finance Law Offices, (1) the ownership structures of WFOE and the VIE in China currently do not, and immediately after giving effect to this offering, will not, result in any violation of the applicable PRC laws or regulations currently in effect; and (2) the contractual arrangements between WFOE, the VIE and its registered shareholders governed by PRC laws and regulations are currently valid, binding and enforceable, and will not result in any violation of the applicable PRC laws or regulations currently in effect. However, we have been further advised by our PRC counsel that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, the PRC government may ultimately take a view contrary to or otherwise different from the opinion of our PRC counsel. If the PRC government otherwise find that we are in violation of any existing or future PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:

 

   

revoking the business and operating licenses of our company;

 

   

discontinuing or restricting any related-party transactions between our group and our affiliated entities;

 

   

imposing fines and penalties, confiscating the income from our company, or imposing additional requirements for our operations which we may not be able to comply with;

 

   

requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements and deregistering the equity pledges of the VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exercise effective control over our affiliated entities;

 

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restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China, particularly the expansion of our business through strategic acquisitions; or

 

   

restricting the use of financing sources by us or our affiliated entities or otherwise restricting our or their ability to conduct business.

Any of these events could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If occurrences of any of these events results in our inability to direct the activities of our affiliated entities in China, and/or our failure to receive the economic benefits from our affiliated entities, we may not be able to consolidate their financial results in our consolidated financial statements in accordance with U.S. GAAP.

Any failure by the VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

We have relied and expect to continue to rely on the contractual arrangements with the VIE and its shareholders to operate our business in China. For a description of these contractual arrangements, see “Corporate History and Structure.”

However, these contractual arrangements may not be as effective as direct ownership in providing us with control over our affiliated entities. Any of our affiliated entities, including the VIE and its shareholders, could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. For example, the VIE may fail to pass the annual inspection of the ICP license, which would negatively impact our business operations. In the event that the shareholders of the VIE breach the terms of these contractual arrangements and voluntarily liquidate the VIE, or the VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by our affiliated entities, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if the VIE undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of the assets of the VIE, thereby hindering our ability to operate our business as well as constrain our growth.

If the VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. Our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these agreements would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our affiliated entities, and our ability to conduct our business may be negatively affected. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

 

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The shareholders of the VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business, financial condition and results of operations.

The shareholders of the VIE may have actual or potential conflicts of interest with us. These shareholders may breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIE, which would have a material adverse effect on our ability to effectively control our affiliated entities and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with the VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainties as to the outcome of any such legal proceedings.

Our contractual arrangements may be subject to scrutiny by the PRC tax authorities and they may determine that we or our affiliated entities owe additional taxes, which could materially and adversely affect our business, financial condition and results of operations.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We could face material and adverse tax consequences if the PRC tax authorities determine that our contractual arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of our affiliated entities in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our affiliated entities for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, if WFOE requests the shareholders of our affiliated entities to transfer their equity interests at nominal or no value pursuant to the contractual arrangements, such transfer could be viewed as a gift and subject WFOE to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our affiliated entities for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our affiliated entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

Uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Enterprise Investment Law and how it may impact the viability of our current corporate structure, corporate governance, business, financial condition, results of operations and prospects.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The current Foreign Investment Law does not mention concepts such as “actual control” and “controlling PRC companies by contracts or trusts” that were included in the previous drafts, nor does it specify regulations on controlling through contractual arrangements. As a result, this regulatory topic remains unclear under the Foreign Investment Law. However, since the Foreign Investment Law is relatively new, uncertainties still exist in relation to its interpretation and implementation, and failure to take timely and appropriate measures to cope with the regulatory-compliance challenges could result in a material adverse effect on us. For instance, though the Foreign

 

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Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and if yes, how our contractual arrangements should be dealt with. In addition, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. In the worst-case scenario, we may be required to unwind our existing contractual arrangements and/or dispose of the relevant business operations, which could have a material adverse effect on our current corporate structure, corporate governance, business, financial condition, results of operations and prospects.

We may rely on dividends paid by our PRC subsidiary to fund cash and financing requirements. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.

We are a holding company, and we may rely on dividends to be paid by our PRC subsidiary for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to the holders of the ADSs and our ordinary shares and service any debt we may incur. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

Under PRC laws and regulations, wholly foreign-owned enterprises in the PRC, such as WFOE, may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our wholly-owned PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

Risks Related to the ADSs and this Offering

An active trading market for our ordinary shares or the ADSs may not develop and the trading price for the ADSs may fluctuate significantly.

Our ADSs have been approved for listing on NASDAQ. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for the ADSs or our ordinary shares, and we cannot assure you that a liquid public market for the ADSs will develop. If an active public market for the ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected. The initial public offering price for the ADSs was determined by negotiation between us and the underwriters based upon several factors, and we cannot assure you that the trading price of the ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs, and may not be able to resell ADSs at or above the price they paid, or at all.

The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of

 

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the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material and adverse effect on the trading price of the ADSs.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

variations in our revenues, earnings and cash flow;

 

   

announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

   

announcements of new services and expansions by us or our competitors;

 

   

announcements of new policies, rules or regulations relating to the internet or the consumer services industry in China;

 

   

changes in financial estimates by securities analysts;

 

   

detrimental adverse publicity about us, our services, our competitors or our industry;

 

   

additions or departures of key personnel;

 

   

fluctuations of exchange rates between the Renminbi and the U.S. dollar;

 

   

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

   

potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price

 

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for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.

Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for each ADS than the corresponding amount paid by existing shareholders for their ordinary shares. As a result, you will experience immediate and substantial dilution of approximately US$8.79 per ADS (assuming no exercise of the underwriters’ option to purchase additional ADSs). This number represents the difference between (1) our pro forma net tangible book value as adjusted per ADS of US$1.21 as of December 31, 2019, after giving effect to this offering and (2) the initial public offering price of US$10.00 per ADS. In addition, you will experience further dilution to the extent that our Class A ordinary shares are issued upon the vesting of any share awards under our equity incentive plans. All of the Class A ordinary shares issuable under our then equity incentive plans will be issued at a purchase price on a per ADS basis that is less than the public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 3,300,000 ADSs (equivalent to 3,300,000 Class A ordinary shares) outstanding immediately after this offering, or 3,788,100 ADSs (equivalent to 3,788,100 Class A ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we, our directors, executive officers and existing shareholders have agreed not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

Our proposed dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Our authorized and issued ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering (with certain shares remaining undesignated, with power for our directors to designate and issue such classes of shares as they think fit). Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to 15 votes per share. We will sell Class A ordinary shares in the form of ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

Mr. Leslie Yu, our chairman and chief executive officer, has control over us and our corporate matter. Immediately prior to the completion of this offering, Mr. Yu will beneficially own all of our issued Class B

 

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ordinary shares. These Class B ordinary shares will constitute approximately 12.13% of our total issued and outstanding share capital immediately after the completion of this offering and 72.34% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering due to the disparate voting powers associated with our dual-class share structure, assuming the underwriters do not exercise their option to purchase additional ADSs. As a result of the dual-class share structure and the concentration of ownership, Mr. Yu will have considerable influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs.

Certain shareholder advisory firms have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium account, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs or even lose your entire investment in our ADSs.

 

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We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that will improve our results of operations or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

The M&A Rules, which were adopted in 2006 by six PRC regulatory agencies, including the CSRC, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain how long it will take us to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, financial condition, results of operations and prospects.

Our PRC counsel has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on NASDAQ because (1) our wholly owned PRC subsidiary was established by foreign direct investment, rather than through a merger or acquisition of a domestic company as defined under the M&A Rules, and (2) there is no statutory provision that clearly classifies the contractual arrangements among our wholly owned PRC subsidiary, our VIE and its shareholders as a type of acquisition transaction regulated by the M&A Rules. However, we cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

Our post-offering memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and the ADSs.

We will adopt our post-offering memorandum and articles of association that will become effective immediately prior to the completion of this offering. Our post-offering memorandum and articles of association

 

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will contain provisions which could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law and conduct our operations primarily in China.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law of the Cayman Islands, as amended, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of associations) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obligated to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. If we choose to follow home country practice, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

In addition, we conduct substantially all of our business operations in China, and substantially all of our directors and senior management are based in China, which is an emerging market. The SEC, U.S. Department of Justice and other authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including company directors and officers, in certain emerging markets, including China. Additionally, our public shareholders may have limited rights and few practical remedies in emerging markets where we operate, as shareholder claims that are common in the United States, including class action securities law and fraud claims, generally are difficult to pursue as a matter of law or practicality in many emerging markets, including China. For example, in China, there are significant legal and other obstacles to

 

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obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, the regulatory cooperation with the securities regulatory authorities in the Unities States has not been efficient in the absence of a mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law which became effective in March 2020, no foreign securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to foreign securities regulators.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands exempted company and all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against us, our assets, our directors and officers or their assets. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares represented by your ADSs in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying Class A ordinary shares represented by your ADSs in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw such shares. Under our post-offering memorandum and articles of association that will become effective immediately prior to the completion of this offering, the minimum notice period required for convening a general meeting is ten calendar days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the underlying Class A ordinary shares represented by your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested.

You may not receive cash dividends if the depositary decides it is impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities underlying our ADSs, after deducting its

 

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fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of our ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

We and the depository are entitled to amend the deposit agreement and to change the rights of ADSs holders under the terms of such agreement, and we may terminate the deposit agreement, without the prior consent of the ADSs holders.

We and the depository are entitled to amend the deposit agreement and to change the rights of the ADSs holders under the terms of such agreement, without the prior consent of the ADSs holders. We and the depositary may agree to amend the deposit agreement in any way we decide is necessary or advantageous to us. Amendments may reflect, among other things, operational changes in the ADS program, legal developments affecting ADSs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment are disadvantageous to ADSs holders, ADSs holders will only receive 30 days’ advance notice of the amendment, and no prior consent of the ADSs holders is required under the deposit agreement. Furthermore, we may decide to terminate the ADS facility at any time for any reason. For example, terminations may occur when we decide to list our shares on a non-U.S. securities exchange and determine not to continue to sponsor an ADS facility or when we become the subject of a takeover or a going-private transaction. If the ADS facility will terminate, ADSs holders will receive at least 90 days’ prior notice, but no prior consent is required from them. Under the circumstances that we decide to make an amendment to the deposit agreement that is disadvantageous to ADSs holders or terminate the deposit agreement, the ADSs holders may choose to sell their ADSs or surrender their ADSs and become direct holders of the underlying Class A ordinary shares, but will have no right to any compensation whatsoever.

You may experience dilution of your holdings due to inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADSs holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

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Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.

As a holder of our ADSs, you are a party to the deposit agreement under which our ADSs are issued. Under the deposit agreement, any action or proceeding against or involving the depositary arising out of or based upon the deposit agreement or the transactions contemplated thereby or by virtue of you owning the ADSs (including any such action or proceeding that may arise under the U.S. federal securities laws) may only be instituted in a state or federal court in New York, New York. In addition, under the deposit agreement, you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding. Such exclusive jurisdiction may, among other things, discourage lawsuits against or involving us or the depositary, lead to increased costs to bring a claim or limit your ability to bring a claim in a judicial forum you find favorable.

In addition, the depositary may, in its sole discretion, require that any claim or dispute arising from the relationship created by the deposit agreement, including any claims under the U.S. federal securities laws and claims not in connection with this offering, be referred to and finally settled by an arbitration conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association. As arbitration provisions in commercial agreements have generally been respected by federal courts and state courts of New York, we believe that the arbitration provisions in the deposit agreement are enforceable under federal law and the laws of the State of New York. If the depositary elects to have any claim or dispute arising under the deposit agreement be referred to and finally settled by an arbitration, this could result in increased costs to bring a claim, limited access to information and other imbalances of resources between you as ADS holders and us, and could place limits on the ability of you as ADS holders to bring a claim in an arbitration forum that you may find favorable. Furthermore, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the terms and subject to the conditions of the deposit agreement as amended. See “Description of American Depositary Shares” for more information.

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, ADSs holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to

 

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such claims, which may, among other things, limit and discourage lawsuits against us and/or the depositary and lead to limited access to information and other imbalances of resources between you as ADS holders and us. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices for corporate governance matters that differ significantly from the NASDAQ corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the corporate governance listing standards.

Our ADSs have been approved for listing on NASDAQ. The NASDAQ corporate governance listing standards permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NASDAQ corporate governance listing standards.

For instance, we are not required to: (1) have a majority of the board be independent; (2) have a compensation committee or a nominations or corporate governance committee consisting entirely of independent directors; or (3) have regularly scheduled executive sessions with only independent directors each year. We intend to rely on some of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of NASDAQ.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

   

the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;

 

   

the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

   

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

   

the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of NASDAQ. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely than that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

 

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We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. As a result, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

We are a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.

As a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

We will be a “controlled company” under the Nasdaq Stock Market Rules, and we, as a result, can rely on exemptions from certain corporate governance requirements that could adversely affect our public shareholders.

Mr. Leslie Yu, our chairman and chief executive officer, will hold a majority of the aggregate voting power of our company upon the completion of this offering. Therefore, we will qualify as a “controlled company” under

 

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the Nasdaq Stock Market Rules. Under these rules a company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the Nasdaq Stock Market Rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. We may elect to rely on any of such exemptions so long as we remain a controlled company and during any transition period following the time when we are no longer a controlled company. Should we choose to do so, you would not have the same protections afforded to shareholders of companies that are subject to all of NASDAQ corporate governance requirements.

We may be a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors owning the ADSs or our ordinary shares.

A non-U.S. corporation, such as our company, will be considered a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. Although the law in this regard is not entirely clear, we treat our VIE (and its subsidiaries) as being owned by us for U.S. federal income tax purposes because we control its management decisions and are entitled to substantially all of the economic benefits associated with it. As a result, we consolidate its results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of our VIE (and its subsidiaries) for U.S. federal income tax purposes, we would likely be treated as a PFIC for the current taxable year and any subsequent taxable year.

Assuming that we are the owner of our VIE (and its subsidiaries) for U.S. federal income tax purposes, and based upon our current and projected income and assets, including the proceeds from this offering, and projections as to the value of our assets, we do not expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be given in this regard because the determination of whether we will be or become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income and assets. Fluctuations in the market price of the ADSs may cause us to be classified as a PFIC for the current or future taxable years because the value of our assets for purposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined by reference to the market price of the ADSs from time to time (which may be volatile). If our market capitalization subsequently declines, we may be or become classified as a PFIC for the current taxable year or future taxable years. Furthermore, the composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. Under circumstances where our revenue from activities that produce passive income significantly increases relative to our revenue from activities that produce non-passive income, or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase.

If we were treated as a PFIC for any taxable year during which a U.S. investor held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply to the U.S. Holder. See “Taxation—United States Federal Income Taxation—Passive foreign investment company rules.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements with respect to our business, operating results and financial condition as well as our current expectations, assumptions, estimates and projections about our industry. All statements other than statements of historical fact in this prospectus are forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

These forward-looking statements can be identified by words or phrases such as the words “may,” “will,” “aim,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “likely to,” “plan,” “should,” and similar expressions. We have based these forward-looking statements largely on our current expectations and projections of future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, without limitation, statements relating to:

 

   

our goals and strategies;

 

   

our future business development, financial condition and results of operations;

 

   

expected changes in our revenue, costs or expenditures, and our potential need for additional capital and the availability of such capital;

 

   

our projected markets and growth in markets, including our projected growth of demand for our service offerings in the markets;

 

   

our ability to retain an increase number of industry customers, workers and service offerings;

 

   

competition in our industry;

 

   

relevant government policies and regulations relating to our industry;

 

   

general economic and business conditions globally and in China;

 

   

the length and severity of the recent COVID-19 outbreak and its impact on our business and industry;

 

   

our use of the proceeds from this offering; and

 

   

assumptions underlying or related to any of the foregoing.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from and worse than what we expect. Moreover, new risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus also contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. Our industry may not grow at the rate projected by market data, or at all. Failure of the market to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. In addition, projections or estimates about our business and financial prospects involve significant risks and

 

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uncertainties. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering, will be approximately US$28.0 million, or approximately US$32.5 million if the underwriters exercise their option to purchase additional ADSs in full.

The principal purposes of this offering are to increase our financial flexibility and create a public market for the ADSs for the benefit of all shareholders, retained talented employees by providing them with equity incentives and obtain additional capital. We currently intend to use the net proceeds of this offering as follows:

 

   

approximately 20% for expanding our business in multiple industry settings, including ride-hailing, housekeeping and other services;

 

   

approximately 20% for upgrading our technology infrastructure;

 

   

approximately 20% for marketing and brand promotions;

 

   

approximately 20% for funding potential strategic acquisitions, investments and alliances, although we do not presently have specific plans and are not currently engaged in any discussions or negotiations with respect to any such transaction; and

 

   

the remaining balance for working capital and other general corporate purposes.

The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, and the rate of growth, if any, of our business. The foregoing represents our current intentions to use and allocate the net proceeds of this offering based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—Risks Related to the ADS and this Offering—We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.”

To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits.

In utilizing the proceeds from this offering, as an offshore holding company, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions and to our affiliated entities only through loans, subject to applicable government reporting, registration and approvals. Subject to satisfaction of applicable government reporting, registration and approval requirements, we may extend inter-company loans to our wholly foreign-owned subsidiary in China or make additional capital contributions to our wholly-foreign-owned subsidiary to fund its capital expenditures or working capital. For an increase of registered capital of our wholly foreign-owned subsidiary, we need to submit a report of such modification information to the Ministry of Commerce or its local counterparts through the Enterprise Registration System and the National Enterprise Credit Information Publicity System. If we provide funding to our wholly foreign-owned subsidiary through loans, the total amount of such loans may not exceed either (1) the difference between the entity’s total investment as approved by the foreign investment authorities and its registered capital, or (2) two times, or the then applicable statutory multiple, the amount of the entity’s net assets, calculated in accordance with PRC GAAP, at our election. Such loans must be registered with SAFE or its local branches, which usually takes up to 20 working days to complete. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the

 

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proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and affiliated entities, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

We have not declared or paid any dividends since our incorporation. We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Our board of directors has complete discretion in deciding the payment of any future dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. The declaration and payment of dividends will depend upon, among other things, our future operations and earnings, capital requirements and surplus, our financial condition, contractual restrictions, general business conditions and other factors as our board of directors may deem relevant. See “Description of Share Capital—Our Post-offering Memorandum and Articles of Association—Dividends.”

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us or of our VIE to pay cash dividend payments to us. See “Risk Factors—Risks Relating to Doing Business in China—We may rely on dividends paid by our PRC subsidiary to fund cash and financing requirements. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.”

If we pay any dividends, we will pay our ADS holders to the same extent as holders of our Class A ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2019:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (1) the automatic conversion of all of our issued and outstanding preferred shares on a one-for-one basis into 24,131,100 Class A ordinary shares immediately prior to the completion of this offering, (2) the re-designation of all issued and outstanding ordinary shares into 8,676,130 Class A ordinary shares and 6,296,630 Class B ordinary shares on a one-for-one basis, respectively, immediately prior to the completion of this offering, on a one-for-one basis as determined by our existing shareholders in connection with their approval of our post-offering memorandum and articles of association that will become effective immediately prior to the completion of this offering, and (3) the recognition of one-time share-based compensation expenses of RMB22.3 million upon the satisfaction of the IPO performance condition of certain options for which the service-based condition had been fully or partially satisfied as of December 31, 2019; and

 

   

on an as pro forma as adjusted basis to reflect (1) the automatic conversion of all of our issued and outstanding preferred shares on a one-for-one basis into 24,131,100 Class A ordinary shares immediately prior to the completion of this offering, (2) the re-designation of all issued and outstanding ordinary shares into 8,676,130 Class A ordinary shares and 6,296,630 class B ordinary shares on a one-for-one basis, respectively, immediately prior to the completion of this offering, on a one-for-one basis as determined by our existing shareholders in connection with their approval of our amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering, (3) the recognition of one-time share-based compensation expenses of RMB22.3 million upon the satisfaction of the IPO performance condition of certain options for which the service-based condition had been fully or partially satisfied as of December 31, 2019, and (4) the sale of 3,300,000 Class A ordinary shares represented by ADSs by us in this offering at the initial public offering price of US$10.00 per ADS, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise their option to purchase additional ADSs.

Although the 9,502,550 shares held by a nominee of our share-based payment trust in connection with our 2019 Share Incentive Plan are issued and outstanding as disclosed elsewhere in this prospectus, they are not deemed to be outstanding on an actual, pro forma or pro forma as adjusted basis from an accounting perspective, and therefore, are excluded from the calculation of the capitalization table.

 

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You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    As of December 31, 2019  
    Actual     Pro forma     Pro forma as
Adjusted(1)
 
    RMB     US$     RMB     US$     RMB     US$  
    (in thousands)  

Mezzanine equity:

           

Series A redeemable convertible preferred shares (US$0.0001 par value; 1,335,370 shares authorized, issued and outstanding as of December 31, 2019; none outstanding on a pro forma or a pro forma as adjusted basis)

    46,130       6,626       —         —         —         —    

Series B redeemable convertible preferred shares (US$0.0001 par value; 9,500,030 shares authorized, issued and outstanding as of December 31, 2019; none outstanding on a pro forma or a pro forma as adjusted basis)

    332,251       47,725       —         —         —         —    

Series C1 redeemable convertible preferred shares (US$0.0001 par value; 5,107,720 shares authorized, issued and outstanding as of December 31, 2019; none outstanding on a pro forma or a pro forma as adjusted basis)

    193,609       27,810       —         —         —         —    

Series C2 redeemable convertible preferred shares (US$0.0001 par value; 2,377,370 shares authorized, issued and outstanding as of December 31, 2019; none outstanding on a pro forma or a pro forma as adjusted basis)

    96,569       13,871       —         —         —         —    

Series D redeemable convertible preferred shares (US$0.0001 par value; 5,810,610 shares authorized, issued and outstanding as of December 31, 2019; none outstanding on a pro forma or a pro forma as adjusted basis)

    362,442       52,062       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity:

    1,031,001       148,094       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ deficit:

           

Ordinary shares (US$0.0001 par value; 475,868,900 shares authorized, 24,475,310 shares issued, and 14,972,760 shares outstanding as of December 31, 2019; none outstanding on a pro forma or a pro forma as adjusted basis)

    17       2       —         —         —         —    

Class A ordinary shares (US$0.0001 par value; none authorized, issued and outstanding as of December 31, 2019; 300,000,000 shares authorized, 42,309,780 shares issued, and 32,807,230 shares outstanding on a pro forma basis; 300,000,000 shares authorized, 45,609,780 shares issued, and 36,107,230 outstanding on a pro forma as adjusted basis)

    —         —         23       3       25       4  

Class B ordinary shares (US$0.0001 par value; none authorized, issued and outstanding as of December 31, 2019; 6,296,630 shares authorized, issued and outstanding on a pro forma or a pro forma as adjusted basis)

    —         —         4       1       4       1  

Additional paid-in capital

    434,151       62,362       1,487,474       213,662       1,682,198       241,632  

Accumulated deficit

    (1,212,257     (174,130     (1,234,589     (177,338     (1,234,589     (177,338

Accumulated other comprehensive loss

    (1,231     (177     (1,231     (177     (1,231     (177
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Quhuo Limited shareholders’ (deficit)/equity

    (779,320     (111,943     251,681       36,151       446,407       64,122  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interests

    2,871       412       2,871       412       2,871       412  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit)/equity

    (776,449     (111,531     254,552       36,563       449,278       64,534  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity, non-controlling interests and shareholders’ (deficit)/equity

    254,552       36,563       254,552       36,563       449,278       64,534  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

The pro forma as adjusted information discussed above is illustrative only.

As of the date of this prospectus, there has been no material change to our capitalization as set forth above.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per Class A ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of December 31, 2019 was approximately US$23.2 million, or US$1.55 per ordinary share outstanding at that date, and US$1.55 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share as adjusted from the initial public offering price per ordinary share.

Without taking into account any other changes in net tangible book value after December 31, 2019, other than to give effect to (1) the automatic conversion of all of our outstanding preferred shares on a one-to-one basis into 24,131,100 Class A ordinary shares immediately prior to the completion of this offering; (2) the re-designation of all outstanding ordinary shares into 8,676,130 Class A ordinary shares and 6,296,630 Class B ordinary shares on a one-for-one basis, respectively, immediately prior to the completion of this offering; (3) the recognition of a one-time share-based compensation expenses of RMB22.3 million upon the satisfaction of the IPO performance condition of certain options for which the service-based condition had been fully or partially satisfied as of December 31, 2019; and (4) the issuance and sale by us of Class A ordinary shares represented by ADSs in this offering at the initial public offering price of US$10.00 per ADS after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma adjusted net tangible book value as of December 31, 2019 would have been US$51.2 million or US$1.21 per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and US$1.21 per ADS. This represents an immediate increase in net tangible book value of US$0.62 per ordinary share, or US$0.62 per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$8.79 per ordinary share, or US$8.79 per ADS, to new investors in this offering.

The following table illustrates such dilution:

 

     Per ordinary
share
     Per ADS  

Initial public offering price

   US$ 10.00      US$ 10.00  

Net tangible book value as of December 31, 2019

   US$ 1.55      US$ 1.55  

Pro forma net tangible book value after giving effect to the automatic conversion of all of our outstanding preferred shares into ordinary shares

   US$ 0.59      US$ 0.59  

Pro forma as adjusted net tangible book value after giving effect to (1) the automatic conversion of all of our outstanding preferred shares into ordinary shares, (2) the recognition of one-time share-based compensation expenses upon the satisfaction of the IPO performance condition, and (3) this offering

   US$ 1.21      US$ 1.21  

Dilution in net tangible book value to new investors in this offering

   US$ 8.79      US$ 8.79  

 

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The following table summarizes, on a pro forma as adjusted basis as of December 31, 2019, the differences between existing shareholders and the new investors with respect to the number of Class A ordinary shares (in the form of ADSs or Class A ordinary shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include Class A ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

     Ordinary Shares
Purchased
     Total Consideration      Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      Percent
(%)
     Amount
(in thousands)
     Percent
(%)
 

Existing shareholders

     39,103,860        92.2      US$ 38,436        53.8      US$ 0.98      US$ 0.98  

New investors

     3,300,000        7.8      US$ 33,000        46.2      US$ 10.00      US$ 10.00  
  

 

 

    

 

 

    

 

 

    

 

 

       

Total

     42,403,860        100.0      US$ 71,436        100.0        

SBCVC Fund IV, L.P., an existing shareholder, has subscribed for and been allocated 160,000 ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered.

The pro forma information discussed above is illustrative only.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We were incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

 

   

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

All of our operations are conducted in China, and all of our assets are located in China. All of our directors and officers (including director appointees) are nationals or residents of jurisdictions other than the United States, and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Cogency Global Inc., located at 122 East, 42th Street, 18th Floor, New York, NY 10168, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Cayman Islands

We have been advised by Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that there is uncertainty as to whether the courts of the Cayman Islands would (1) recognize and enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provision of the federal securities laws of the United States or the securities laws of any state in the United States, or (2) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.

We have also been advised by Maples and Calder (Hong Kong) LLP that, although there is no statutory recognition in the Cayman Islands of judgments obtained in the federal or state courts of the U.S., a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (1) is given by a foreign court of competent jurisdiction, (2) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (3) is final and conclusive, (4) is not in respect of taxes, a fine or a penalty, and (5) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

 

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PRC

Commerce & Finance Law Offices, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of China would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Commerce & Finance Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the jurisdiction where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against us in the PRC for disputes relating to contracts or other property interests, the PRC court may accept a course of action based on the laws of the parties’ express mutual agreement in contracts choosing PRC courts for dispute resolution if (1) the contract is signed and/or performed within China, (2) the subject of the action is located within China, (3) the company (as defendant) has seizable properties within China, (4) the company has a representative organization within China, or (5) other circumstances prescribed under the PRC law. The action may be initiated by a shareholder through filing a complaint with the PRC court. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in an action unless the home jurisdiction of such foreign citizens or companies restricts the rights of PRC citizens and companies.

In addition, it will be difficult for U.S. shareholders to originate actions against us in China in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

We are an exempted company with limited liability incorporated in the Cayman Islands in June 2019 and a holding company of our group. We commenced operations through Beijing Quhuo Technology Co., Ltd., or Beijing Quhuo, in 2012. Over a span of seven-year development, we have expanded our business from initially the on-demand food delivery industry into various industries and have become a leading tech-enabled workforce operational solution platform in China.

Beginning in 2019, we underwent a series of restructuring in anticipation of this offering, which was completed in March 2020. In June 2019, our founders, through their respective controlled entities, incorporated Quhuo Limited in the Cayman Islands as our proposed listing entity and holding company with no material operations of its own. From June 2019 to July 2019, we incorporated various subsidiaries, including Quhuo Investment Limited, Quhuo Technology Investment (Hong Kong) Limited and Beijing Quhuo Information Technology Co., Ltd., or WFOE, all of which are investment holding companies. In August 2019, we gained control and became the sole beneficiary of Beijing Quhuo, or the VIE, through a series of contractual arrangements between WFOE, the VIE and the VIE’s registered shareholders. We conduct our workforce operational solution business primarily through the VIE and its subsidiaries in China. In August 2019, Quhuo Limited issued preferred shares to the VIE’s existing investors to reflect their respective equity interests in the VIE prior to the restructuring. However, the shareholders of the VIE may have actual or potential conflicts of interest with us. They may breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIE, which would have a material adverse effect on our ability to effectively control our affiliated entities and receive economic benefits from them. See “Risk Factors—Risks Related to Our Corporate Structure—The shareholders of the VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business, financial condition and results of operations.”

 

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The following diagram illustrates our simplified corporate structure, including our principal subsidiaries, our VIE and its subsidiaries, as of the date of this prospectus:

 

LOGO

 

(1)

The shareholders of Beijing Quhuo Technology Co., Ltd., or Beijing Quhuo, include Lili Sun, spouse of Mr. Leslie Yu, Mr. Shuyi Yang, Mr. Zhen Ba, Ningbo Maiken Investment Management LLP and Mr. Tongtong Li, holding 25.7264%, 24.9784%, 9.6547%, 38.8250% and 0.8154% of the equity interests of Beijing Quhuo, respectively.

(2)

The remaining 30% of the equity interests of Nantong Runda Marketing Planning Co., Ltd. is owned by two independent individuals.

(3)

The remaining 49% of the equity interests of Jiangxi Youke Automobile Rental Service Co., Ltd. is owned by an independent individual.

Contractual Arrangements

Current PRC laws and regulations impose restrictions or prohibitions on foreign ownership and investment in companies that engage in value-added telecommunication services. We are a company registered in the Cayman Islands, and WFOE, our PRC subsidiary, is a foreign-invested enterprise under PRC laws. We conduct our business in China through Beijing Quhuo, our VIE, and its subsidiaries, or collectively our affiliated entities, in China, and may in the future commence or acquire businesses that are subject to the restrictions with respect to

 

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value-added telecommunication services, including our recently launched payday loan services. We have entered into a series of contractual arrangements, through WFOE, with our VIE and its registered shareholders to obtain effective control over affiliated entities, through which we commence our business.

Our contractual arrangements with our VIE and its shareholders allow us to (1) exercise effective control over our affiliated entities, (2) receive substantially all of the economic benefits of our affiliated entities, and (3) have an exclusive call option to purchase all or part of the equity interests in our VIE when and to the extent permitted by PRC law.

As a result of our direct ownership in WFOE and the contractual arrangements with our VIE, we have become the primary beneficiary of our VIE, and, therefore, have consolidated the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

The following is a summary of the currently effective contractual arrangements by and among WFOE, our VIE and its shareholders.

Agreements that provide us with effective control over our VIE

Power of Attorney. Pursuant to the power of attorney dated as of August 23, 2019 executed and issued by our VIE’s shareholders, each of them irrevocably appointed and authorized WFOE or its designee(s) to act on their respective behalf as exclusive agent and attorney-in-fact, to the extent permitted by PRC law, with respect to all rights of shareholders concerning all the equity interest held by each of these shareholders in our VIE, including but not limited to the power to vote on its behalf on all matters of our VIE requiring shareholder approval under PRC laws and regulations and the articles of association of our VIE, rights to information relating to all business aspects of our VIE, proposing to convene or attend shareholder meetings, signing the resolutions and minutes of such meetings, exercising all the other rights as shareholders, such as nomination rights, appointment rights, the right to receive dividends and the right to sell, transfer, pledge or dispose of all the equity held in part or in whole.

Equity Interest Pledge Agreements. Under each of the equity interest pledge agreements dated as of August 23, 2019 entered into by and among WFOE, our VIE and each of its shareholders, each of our VIE’s shareholders will pledge all of their equity interests in our VIE to WFOE as security and guarantee on performance of the respective obligations of our VIE and each of its shareholders under the exclusive call option agreement, the exclusive business cooperation agreement and the power of attorney. If any of our VIE or its shareholders breach their contractual obligations under those agreements, WFOE, as the pledgee, will be entitled to certain rights, including enforcing the pledge immediately. WFOE may transfer all or any of its rights and obligations under any of the equity interest pledge agreements to its designee(s) any time after notifying our VIE and the signing shareholder. This pledge has become effective since the date the pledged equity interests were registered with the competent administration for industry and commerce and will remain in effect until the fulfillment of all the obligations under the exclusive call option agreement, the exclusive business cooperation agreement and the power of attorney.

Letters of Shareholder Undertaking, Letters of Spousal Undertakings and Letter of Confirmation. Pursuant to each of the letters of shareholder undertaking dated as of August 23, 2019 executed and provided by each of the individual shareholders of our VIE, each of the letters of spousal undertakings dated as of as of August 23, 2019 executed and provided by each of the spouse of our VIE’s individual shareholders and a letter of confirmation dated as of August 23, 2019 executed and issued by Mr. Leslie Yu in favor of us, each of the individual shareholders and the spouse of such shareholders, among others, (1) confirmed the duly authorization and validity of and the arrangements under the exclusive call option agreement, the exclusive business cooperation agreement, the equity interest pledge agreements and the power of attorney, (2) unconditionally and irrevocably agreed that the in the event of their deaths, incapacity or other circumstances under which they no longer have the ability to perform their obligations under the agreements described herein, their respective equity

 

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interests in our VIE together with all interests attached thereto will be transferred, free of charge and without any condition, to WFOE or its designee(s) to the extent permitted by PRC laws; and (3) confirmed that the respective equity interests of our VIE’s shareholders in our VIE are exclusive and personal assets of such shareholders, instead of common assets jointly owned with their respective spouse, and agreed to be subject to the obligations and arrangements under the agreements described herein in the event any equity interest in our VIE will be held by the respective spouse of such shareholders.

Agreements that allow us to receive economic benefits from our VIE

Exclusive Business Cooperation Agreement. Pursuant to the exclusive business cooperation agreement dated as of August 23, 2019 entered into by and between WFOE and our VIE, WFOE has the exclusive right, during the term of the exclusive business cooperation agreement to provide or designate any third-party to provide, among others, comprehensive business support, technological support, and relevant consulting services, the scope of which is to be determined by WFOE from time to time. WFOE owns the exclusive intellectual property rights created as a result of the performance of this agreement. In exchange, our VIE and its subsidiaries pay service fees to WFOE at the time and in an amount to be determined by WFOE in its sole discretion. This agreement shall remain effective for ten years from the execution date and may be extended by WFOE at its sole discretion.

Agreements that provide us with the call option to purchase the equity interests in our VIE

Exclusive Call Option Agreement. Under the exclusive call option agreement dated as of August 23, 2019 entered into by and between WFOE, our VIE and its shareholders, each of the shareholders of our VIE irrevocably granted WFOE or its designated representatives an exclusive right to purchase, to the extent permitted by the PRC laws and regulations and at the sole discretion of WFOE all or any part of their equity interests in our VIE at a purchase price equal to the lowest price permissible under the PRC laws and regulations. The shareholders of our VIE shall also promptly give all considerations they received from the exercise of the options to WFOE or its designee(s). WFOE or its designated representatives have sole discretion as to when to exercise such options, either in part or in full. Without prior written consent of WFOE, our VIE’s shareholders shall not, among others, sell, transfer, mortgage, create any pledge or encumbrance on or otherwise dispose their equity interests in our VIE. The term of this agreement is ten years and may be extended at WFOE’s sole discretion until the entire equity interests in our VIE transferred to WFOE or its designee(s).

In the opinion of Commerce & Finance Law Offices, our PRC legal counsel:

 

  (1)

the ownership structures of our VIE and WFOE, currently and immediately after giving effect to this offering, will not result in any violation of applicable PRC laws and regulations currently in effect; and

 

  (2)

the contractual arrangements between WFOE, our VIE and its shareholders governed by PRC law, currently and immediately after giving effect to this offering, are valid, binding and enforceable under the PRC law, and will not result in any violation of applicable PRC laws and regulations currently in effect.

However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to or otherwise different from the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or our VIE is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Risk Factors—Risks Related to Our Corporate Structure—The PRC government may find that the contractual arrangements that establish our corporate structure for operating our business do not comply with applicable PRC laws and regulations,” “Risk Factors—Risks Related to Our Corporate Structure—

 

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Uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Enterprise Investment Law and how it may impact the viability of our current corporate structure, corporate governance, business, financial condition, results of operations and prospects” and “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

Financial Support Undertaking Letters

We executed a financial support undertaking letter addressed to our VIE, pursuant to which we irrevocably undertake to provide unlimited financial support to our VIE to the extent permissible under the applicable PRC laws and regulations, regardless of whether our VIE has incurred an operational loss. The form of financial support includes but is not limited to cash, entrusted loans and borrowings. We will not request repayment of any outstanding loans or borrowings from our VIE if it or its shareholders do not have sufficient funds or are unable to repay such loans or borrowings. The financial support undertaking letter is effective from the date of the other agreements entered into among WFOE, our VIE and its shareholders until the earlier of (1) the date on which all of the equity interests of our VIE have been acquired by us or our designated representative(s), and (2) the date on which we in our sole and absolute discretion unilaterally terminate the applicable financial support undertaking letter by giving 30-day prior written notice to our VIE.

We expect to provide the financial support if and when required with a portion of the proceeds from this offering and proceeds from the issuance of equity or debt securities in the future.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of operations for the years ended December 31, 2017, 2018 and 2019, the selected consolidated statements of cash flows data for the years ended December 31, 2017, 2018 and 2019 and the selected consolidated balance sheets data as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read the following information in conjunction with those financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Historical results for any prior period are not necessarily indicative of results to be expected for any future period.

Selected Consolidated Statements of Operations

 

     For the Year Ended December 31,  
     2017     2018     2019  
     RMB     RMB     RMB     US$  
     (in thousands)  

Revenues

     654,802       1,474,475       2,055,789       295,296  

Cost of revenues

     (626,193     (1,357,837     (1,893,513     (271,986
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     28,609       116,638       162,276       23,310  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (50,038     (168,541     (174,730     (25,099
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (21,429     (51,903     (12,454     (1,789
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income tax

     (13,564     (40,316     8,131       1,168  

Income tax expense

     (405     (3,979     (21,580     (3,100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (13,969     (44,295     (13,449     (1,932
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Data(1)

        

Adjusted net (loss)/income

     (10,670     45,327       51,350       7,376  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Non-GAAP Financial Measure.”

Selected Consolidated Balance Sheets Data

 

     As of December 31,  
     2018      2019  
     RMB      RMB     US$  
     (in thousands)  

Cash

     17,343        126,779       18,211  

Short-term investments

     74,165        56,275       8,083  

Accounts receivable, net

     156,368        276,966       39,784  

Prepayments and other current assets

     17,487        43,058       6,185  

Amounts due from related parties

     25,748        18,392       2,642  

Total current assets

     291,111        521,470       74,905  

Total assets

     469,616        743,896       106,854  

Total current liabilities

     240,449        452,080       64,939  

Total liabilities

     265,183        489,344       70,291  

Total mezzanine equity

     1,031,001        1,031,001       148,094  

Total shareholders’ deficit

     (826,568)        (776,449     (111,531

Total liabilities, mezzanine equity, non-controlling interests and shareholders’ deficit

     469,616        743,896       106,854  

 

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Selected Consolidated Statements of Cash Flows Data

 

     For the Year Ended December 31,  
     2017     2018     2019  
     RMB     RMB     RMB     US$  
     (in thousands)  

Net cash (used in)/generated from operating activities

     (28,615     19,807       17,624       2,533  

Net cash (used in)/generated from investing activities

     (65,102     (94,281     12,483       1,792  

Net cash generated from financing activities

     71,350       82,495       80,550       11,570  

Effect of exchange rate changes on cash

     (80     179       (1,221     (175

Net (decrease)/increase in cash

     (22,447     8,200       109,436       15,720  

Cash at the beginning of the period

     31,590       9,143       17,343       2,491  

Cash at the end of the period

     9,143       17,343       126,779       18,211  

Key Operating Metrics

The following table sets forth certain key operating metrics relating to our business.

 

    For the Three Months Ended  
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
 
    (in thousands)  

Number of average monthly active workers

    18       24       25       23       23       26       41       41  

Number of average monthly delivery orders

    11,135       14,696       16,884       15,574       13,856       16,616       28,666       29,221  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section titled “Selected Consolidated Financial and Operating Data” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We were the largest workforce operational solution platform in China as measured by the number of average monthly active workers in 2019, according to the F&S report. We provide tech-enabled, end-to-end operational solutions to blue-chip on-demand consumer service businesses in industries with significant e-commerce exposure, including food delivery, ride-hailing, housekeeping and shared-bike maintenance. In 2019, we ranked No.1 in the on-demand food delivery solution market in terms of both the number of delivery orders and revenue, with a market share exceeding that of the next top four market players combined in terms of both the number of delivery orders and revenue, according to the F&S report.

We currently provide four industry-tailored operational solutions, including on-demand food delivery solutions, ride-hailing solutions, housekeeping solutions and shared-bike maintenance solutions. We generate revenue primarily from service fees paid by our industry customers, and to a lesser extent, from rental fees under our car leasing agreements with drivers engaged in our ride-hailing solutions. We incur cost from paying service fees to workers engaged in our solutions as independent contractors.

We have grown rapidly in recent years to achieve greater economies of scale. Our revenues were RMB654.8 million, RMB1,474.5 million and RMB2,055.8 million (US$295.3 million) in 2017, 2018 and 2019, respectively. We recorded net loss of RMB14.0 million, RMB44.3 million and RMB13.4 million (US$1.9 million) in 2017, 2018 and 2019, respectively. Excluding the effect of share-based compensation expenses, we recorded adjusted net loss of RMB10.7 million, adjusted net income of RMB45.3 million and adjusted net income of RMB51.4 million (US$7.4 million) in 2017, 2018 and 2019, respectively. See “—Non-GAAP Financial Measure” for a reconciliation of our net loss to adjusted net income (loss).

General Factors Affecting Our Results of Operations

Our results of operations and financial condition are affected by general factors driving China’s on-demand consumer service market and workforce operational solution market, including (1) economic factors, such as China’s overall economic growth, the increase in per-capita disposable income and the level and growth in consumer spending in China, (2) technology factors, such as development of mobile technology and the rate of mobile internet penetration in China, and (3) labor factors, such as rising labor costs in China. Unfavorable changes in any of these general factors could materially and adversely affect our business and results of operations.

Specific Factors Affecting Our Results of Operations

While our business is influenced by general factors affecting the on-demand consumer service market and workforce operational solution market in China generally, our results of operations are also directly affected by certain company specific factors, including the following major factors:

Our ability to grow on-demand food delivery solutions

We currently generate substantially all of our revenues from our on-demand food delivery solutions, and our ability to grow these solutions is critical to our results of operations and financial condition. Factors affecting the

 

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growth of our on-demand food delivery solutions include the overall market demand for online ordering of prepared food, the competitiveness of our solutions in terms of service quality and pricing, our ability to maintain and increase our fee levels vis-à-vis industry customers, our strategic partnerships with blue-chip industry customers, our relationships with workers on our platform, and our ability to increase the share of wallet from industry customers in the current geographical markets where we operate as well as our ability to expand into new geographical markets. Adverse changes of these factors will affect our ability to grow on-demand food delivery solutions.

Our ability to expand our customer portfolio and industry coverage

Certain industry customers for our on-demand food delivery solutions have contributed a significant portion of our revenues in the past. The business performance of these industry customers will affect our results of operations and prospects. We continually seek to diversify our customer portfolio to reduce the concentration of our revenue stream through competitive solution offerings. In addition, we launched ride-hailing, housekeeping and shared-bike maintenance solutions in recent years, and we plan to continue to expand into new industries. Our platform and business model in the new industries we recently entered into have not been fully proven given our limited operating history. We may incur significant cost and experience a prolonged ramp-up period, and our ability to apply our accumulated industry knowledge and operational experience to these new industries is critical to our business growth and prospects.

Our ability to attract, retain and manage workers cost-effectively

Our operational cost is affected by the number of workers on our platform and the amount of service fees we paid to workers and third-party labor service companies. Our continued growth depends in part on our ability to cost-effectively attract, retain and manage workers on our platform, especially our ability to cultivate a flexible workforce and deploy the same workers across different industry settings by having them serve multiple roles offered on our platform to optimize our operational cost. We have focused on offering better earning opportunities and career prospects and enhancing the bonds among our workers. Our ability to attract, retain and manage workers cost-effectively can be affected by a number of factors, including the quality of our training, the work-life support and services we provide, the attractiveness of the earning opportunities and career prospects we offer, and other macroeconomic, social and political factors that may affect labor cost, supply or migration.

Our ability to compete and manage our growth effectively

As the market for workforce operational solution platforms within a single industry setting is highly fragmented, we must continue to compete effectively in order to solidify our market leading position and maintain long-term profitability. In each industry setting we serve, we compete with labor outsourcing companies and service suppliers that are independent from or affiliated with industry customers, as well as online workforce marketplaces. In addition, we have historically incurred significant costs in a lump sum to acquire the rights to render on-demand food delivery services in additional food delivery areas for certain industry customers and may continue to make more such acquisitions to expand the geographical coverage of our on-demand food delivery solutions. As we continue to grow our business and increase our market share, our ability to acquire more service stations at favorable pricing, control our costs and expenses, improve operational efficiency by achieving greater economies of scale, and compete effectively with competitors is crucial to our sustainable growth.

Continued investment in our technology infrastructure and talent

We continue to invest in our technology infrastructure, including Quhuo+, to accommodate the expanded scope and heightened complexity of our operations. An enhanced technology infrastructure based on Quhuo+ will allow us to continually optimize our operational efficiency, refine our solutions through improved data-driven analytics, facilitate our expansion into new geographical markets and industries. We also continue to invest in talent, particularly technicians, engineers and other tech-related talents, which will increase our research

 

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and development expenses. Our ability to maintain and improve the functionality of our technology infrastructure in line with our business scale will be a key driver for our sustainable growth.

Seasonality

We experience seasonality in our business, primarily attributable to the seasonality of our industry customers’ businesses. For example, we generally experience an increase in demand for our on-demand food delivery solutions during inclement weather conditions and holidays, and suffer a shortage of workforce during Chinese New Year holidays which may fall between late January and late February. Other seasonal trends may develop or these current seasonal trends may become more extreme, which would contribute to fluctuations in our results of operations.

Strategic investment and acquisitions

We have made, and intend to continue to make, strategic acquisitions to solidify our current market presence and expand into new industries. We intend to selectively pursue strategic alliances and investments to further strengthen our competitiveness. We will evaluate and execute alliance, investment and acquisition opportunities that complement and scale up our business, optimize our profitability, help us expand into adjacent industries and add new capabilities to our platform. Our strategic alliances, investments and acquisitions may affect our business growth.

COVID-19 outbreak

Since the outbreak of COVID-19 throughout China and other countries and regions, a series of precautionary and control measures have been implemented worldwide to contain the virus. The outbreak of COVID-19 has had certain negative impact on the overall economy of the regions where we deliver our solutions.

COVID-19 spread rapidly throughout China in the first quarter of 2020, which traditionally is also the off season of our business due to the Chinese New Year holidays. The average monthly number of delivery orders fulfilled through our on-demand food delivery solutions was approximately 16.9 million in the first quarter of 2020, representing a decrease by approximately 42% compared to approximately 29.2 million in the previous quarter, albeit an increase by approximately 22% compared to approximately 13.9 million in the first quarter of the previous year. In addition, the business volume of our ride-hailing solutions, shared-bike maintenance solutions and housekeeping solutions and other services was adversely affected by the COVID-19 outbreak to varying extent.

Amid the COVID-19 outbreak, we expanded our on-demand delivery solutions to tap into the grocery delivery market, as stay-at-home orders and social distancing caused an increase in the demand of local grocery delivery services. We entered into cooperation with new industry customers, such as Taoxianda and Fresh Hema, to mitigate the negative impact of COVID-19 on our on-demand food delivery business by unlocking underutilized workforce capacity.

Our revenues increased by 12.6% from RMB348.7 million in the three months ended March 31, 2019 to RMB392.6 million (US$56.4 million) in the three months ended March 31, 2020, primarily due to the increase in revenues generated from our on-demand food delivery solutions as a result of our continued market penetration and expansion, partially offset by the impacts of the recent COVID-19 pandemic on our revenues. See “Prospectus Summary—Recent Developments” for selected unaudited financial data for the three months ended or as of March 31, 2020.

We have not experienced material adverse impact to our liquidity and cash flows since the outbreak. Except for the impact discussed above, we do not anticipate any prolonged material adverse impact on our business,

 

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results of operations and financial condition from the COVID-19 outbreak, as the Chinese government has gradually lifted the travel restrictions and other quarantine measures in China and economic activities have begun to recover and return to normal nationwide during the second quarter of 2020. We are nonetheless closely monitoring the development of the COVID-19 outbreak and continuously evaluating any potential impact on our business, results of operations and financial condition. See “Risk Factors—Risks Related to Our Business and Industry—Any health pandemics, including the recent global outbreak of COVID-19, and other natural disasters and calamities, could have a material adverse effect on our business operations.”

Key Components of Our Results of Operations

Revenues

We generate revenues from on-demand food delivery solutions, shared-bike maintenance solutions, ride-hailing solutions and housekeeping solutions. In 2017, 2018 and 2019, our total revenues were RMB654.8 million, RMB1,474.5 million and RMB2,055.8 million (US$295.3 million), respectively. The following table sets forth the breakdown of our total revenues, both in absolute amounts and as a percentage of total revenues, for the periods indicated.

 

    For the Year Ended December 31,  
    2017     2018     2019  
    RMB     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Revenues:

             

On-demand food delivery solutions

    654,802       100.0       1,444,616       98.0       2,027,351       291,210       98.6  

Shared-bike maintenance solutions

    —         —         27,823       1.9       21,244       3,052       1.0  

Ride-hailing solutions

    —         —         2,036       0.1       6,932       996       0.4  

Housekeeping solutions and other services

    —         —         —         —         262       38       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    654,802       100.0       1,474,475       100.0       2,055,789       295,296       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

On-demand food delivery solutions

In 2017, 2018 and 2019, our revenues generated from our on-demand food delivery solutions were RMB654.8 million, RMB1,444.6 million and RMB2,027.4 million (US$291.2 million), representing 100.0%, 98.0% and 98.6% of our total revenues in the same periods, respectively. We derive revenue from service fees paid by industry customers based on the number of fulfilled orders, generally subject to monthly dynamic KPI-based adjustments, such as the timely delivery rate and complaint rate. Different industry customers may use different formulas to calculate such adjustments, which may change from time to time in line with their specific requirement and assessment of our services.

Shared-bike maintenance solutions

We launched our shared-bike maintenance solutions in January 2018. Our revenues generated from shared-bike maintenance solutions were nil, RMB27.8 million and RMB21.2 million (US$3.1 million) in 2017, 2018 and 2019, respectively. We derive revenue from service fees paid by bike-sharing companies based on service hours and/or the number of shared-bikes we transported and identified as malfunctioned.

Ride-hailing solutions

We launched our ride-hailing solutions in October 2018. Our revenues generated from ride-hailing solutions were nil, RMB2.0 million and RMB6.9 million (US$996,000) in 2017, 2018 and 2019, respectively. We primarily derived revenue from rental fees under our car leasing agreements with drivers.

 

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Housekeeping solutions and other services

We launched our housekeeping solutions in January 2019, and continuously tapped into new industries to provide diversified, flexible earning opportunities for workers on our platform. We generated revenues of RMB262,000 (US$38,000) from housekeeping solutions and other services in 2019. We primarily derived revenue from service fees paid by industry customers based on the number of fulfilled orders.

Cost of revenues

Our cost of revenues was RMB626.2 million, RMB1,357.8 million and RMB1,893.5 million (US$272.0 million) in 2017, 2018 and 2019, respectively. The following table sets forth the breakdown of our cost of revenues by our business lines, both in absolute amount and as a percentage of our total revenues, for the periods indicated.

 

    For the Year Ended December 31,  
    2017     2018     2019  
    RMB     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Cost of revenues:

             

On-demand food delivery solutions

    626,193       95.6       1,325,907       89.9       1,866,276       268,074       90.8  

Shared-bike maintenance solutions

    —         —         27,894       1.9       17,851       2,564       0.9  

Ride-hailing solutions

    —         —         4,036       0.3       9,045       1,299       0.4  

Housekeeping solutions and other services

    —         —         —         —         341       49       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    626,193       95.6       1,357,837       92.1       1,893,513       271,986       92.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues related to our on-demand food delivery solutions was RMB626.2 million, RMB1,325.9 million and RMB1,866.3 million (US$268.1 million) in 2017, 2018 and 2019, respectively, representing substantially all of our total cost of revenues. Cost of revenues related to our on-demand delivery solutions primarily consist of service fees paid to our delivery riders. The following table sets forth the components of cost of revenues related to our on-demand food delivery solutions, both in absolute amount and as a percentage of our total revenues for the periods indicated.

 

    For the Year Ended December 31,  
    2017     2018     2019  
    RMB     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Cost of revenues for on-demand food delivery solutions:

             

Service fees paid to delivery riders

    570,082       87.0       1,173,414       79.5       1,640,145       235,592       79.8  

Service fees paid to team leaders

    16,947       2.6       57,280       3.9       96,514       13,863       4.7  

Hiring expenses for delivery riders(1)

    10,304       1.6       26,079       1.8       42,190       6,060       2.1  

Others(2)

    28,860       4.4       69,134       4.7       87,427       12,559       4.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    626,193       95.6       1,325,907       89.9       1,866,276       268,074       90.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents service fees paid to third-party labor service companies and referral fees paid to existing delivery riders on our platform.

(2)

Represents rental fees and property management fees related to service stations, insurance and on-demand delivery supplies purchased for riders, amortization for intangible assets, and taxes and surcharges.

Cost of revenues related to our ride-hailing solutions primarily consist of rental fees we paid to lessors for certain rented vehicles and the depreciation expense and maintenance expense associated with the vehicles we owned. Cost of revenues related to our shared-bike maintenance solutions and housekeeping solutions and other services primarily consist of the service fees paid to workers engaged in these solutions.

 

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Gross profit and gross profit margin

Our gross profit was RMB28.6 million, RMB116.6 million and RMB162.3 million (US$23.3 million) in 2017, 2018 and 2019, respectively, and our gross profit margin was 4.4%, 7.9% and 7.9% for the same periods, respectively. The following table sets forth the breakdown of our gross profit and gross profit margin by our business lines for the periods indicated.

 

    For the Year Ended December 31,  
    2017     2018     2019  
    RMB         %         RMB         %         RMB     US$         %      
    (in thousands, except for percentages)  

Gross profit:

             

On-demand food delivery solutions

    28,609       4.4       118,709       8.2       161,075       23,136       7.9  

Shared-bike maintenance solutions

    —         —         (71     (0.3     3,393       488       16.0  

Ride-hailing solutions

    —         —         (2,000     (98.2     (2,113     (303     (30.4

Housekeeping solutions and other services

    —         —         —         —         (79     (11     (28.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    28,609       4.4       116,638       7.9       162,276       23,310       7.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

Our operating expenses consist of general and administrative expenses, research and development expenses and (loss)/gains on disposal of intangible assets. The following table sets forth the components of operating expenses, in absolute amounts and as a percentage of our total revenues, for the periods indicated.

 

    For the Year Ended December 31,  
    2017     2018     2019  
    RMB         %         RMB         %         RMB     US$     %  
    (in thousands, except for percentages)  

Operating expenses:

             

General and administrative expenses

    (46,816     (7.1     (161,839     (11.0     (161,160     (23,149     (7.8

Research and development expenses

    (3,222     (0.5     (6,702     (0.4     (9,730     (1,398     (0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss on disposal of intangible assets, net

    —         —         —         —         (3,840     (552     (0.2

Total operating expenses

    (50,038     (7.6     (168,541     (11.4     (174,730     (25,099     (8.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

We recorded general and administrative expenses of RMB46.8 million, RMB161.8 million and RMB161.2 million (US$23.1 million) in 2017, 2018 and 2019, respectively. Our general and administrative expenses consist primarily of (1) share-based compensation expenses, (2) salaries and benefits for our operational staff, and (3) office expenses. We expect that our general and administrative expenses will continue to increase in absolute amount in the foreseeable future as we further grow our existing business and enter into new industries, and we will incur increased costs related to complying with our reporting obligations after we become a public company under U.S. securities laws. We also seek to optimize the cost structure of our company to control the relative level of general and administrative expenses as percentage of our revenues.

Research and development expenses

We recorded research and development expenses of RMB3.2 million, RMB6.7 million and RMB9.7 million (US$1.4 million) in 2017, 2018 and 2019, respectively. Our research and development expenses consist primarily of salaries and benefits for our research and development personnel. We believe that our continued investment in research and development is critical to our growth and expect that our research and development expenses will continue to increase in absolute amount as we seek to upgrade our technology infrastructure, including Quhuo+, to support our business growth.

 

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Taxation

Cayman Islands

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution, brought within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.

British Virgin Islands

Our wholly-owned subsidiary in the British Virgin Islands, Quhuo Investment Limited and all dividends, interest, rents, royalties, compensation and other amounts paid by Quhuo Investment Limited to personas who are not resident in the British Virgin Islands and any capital gains realized with respect to any shares, debt obligations, or other securities of the Company by persons who are not resident in the British Virgin Islands are exempt from all provisions of the Income Tax Ordinance in the British Virgin Islands.

No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the British Virgin Islands with respect to any shares, debt obligation or other securities of the Company.

All instruments relating to transfers of property to or by Quhuo Investment Limited and all instruments relating to transactions in respect of the shares, debt obligations or other securities of Quhuo Investment Limited and all instruments relating to other transactions relating to the business of Quhuo Investment Limited are exempt from payment of stamp duty in the British Virgin Islands. This assumes that Quhuo Investment Limited does not hold an interest in real estate in the British Virgin Islands.

There are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to Quhuo Investment Limited or its members.

Hong Kong

Our wholly-owned subsidiary in Hong Kong, Quhuo Technology Investment (Hong Kong) Limited, is subject to an income tax rate of 16.5% for taxable income earned in Hong Kong. No provision for Hong Kong profit tax has been levied as we did not have assessable income that was earned in or derived from our Hong Kong subsidiary during the period indicated. Hong Kong does not impose a withholding tax on dividends.

PRC

Our WFOE, VIE and VIE’s subsidiaries in China are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the EIT Law, which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

In 2017, Huadian Tianze Enterprise Management Service Co., Ltd. was qualified for small and micro-sized enterprise, or SME, and eligible for a 50% reduction of taxable income and a reduced enterprise income tax rate of 20%. In 2018, Jilin Taisen Biotechnology Service Co., Ltd. and Huadian Tianze Enterprise Management Service Co., Ltd. were qualified for SME and eligible for such preferential tax treatments. In 2019, Jilin Taisen Biotechnology Service Co., Ltd. and Huadian Tianze Enterprise Management Service Co., Ltd. were qualified for SME. Jilin Taisen Biotechnology Service Co., Ltd. was in a loss status as of June 30, 2019 and Huadian Tianze Enterprise Management Service Co., Ltd. was eligible for a 75% reduction of taxable income and a reduced enterprise income tax rate of 20% in 2019.

 

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Our revenues derived from the provision of on-demand food delivery services and shared-bike maintenance services are subject to value-added taxes, or VAT, of 6%, and our revenues derived from the rental fees under our ride-hailing services are subject to VAT of 16%, less any deductible VAT we have already paid or borne. They are also subject to surcharges on VAT payments in accordance with PRC law.

As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries. The EIT Law and its implementing rules provide that dividends paid by a PRC entity to a nonresident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (1) it must be a company; (2) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (3) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Nonresident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that nonresident enterprises are not required to obtain preapproval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, we may be able to benefit from the 5% withholding tax rate for the dividends received from PRC subsidiaries if it satisfies the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%, which could result in unfavorable tax consequences to us and our non-PRC shareholders. See “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or the ADSs holders.”

 

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Results of Operations

The following table sets forth a summary of our consolidated results of operations, both in absolute amount and as a percentage of our revenues, for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

     For the Year Ended December 31,  
     2017     2018     2019  
     RMB     %     RMB     %     RMB     US$     %  
     (in thousands, except for percentages)  

Revenues

     654,802       100.0       1,474,475       100.0       2,055,789       295,296       100.0  

Cost of revenues

     (626,193     (95.6     (1,357,837     (92.1     (1,893,513     (271,986     (92.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     28,609       4.4       116,638       7.9       162,276       23,310       7.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

              

General and administrative expenses

     (46,816     (7.1     (161,839     (11.0     (161,160     (23,149     (7.8

Research and development expenses

     (3,222     (0.5     (6,702     (0.4     (9,730     (1,398     (0.5

Loss on disposal of intangible assets, net

     —         —         —         —         (3,840     (552     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (50,038     (7.6     (168,541     (11.4     (174,730     (25,099     (8.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (21,429     (3.2     (51,903     (3.5     (12,454     (1,789     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     104       0.0       44       0.0       275       40       0.0  

Interest expense

     (1,364     (0.2     (3,913     (0.3     (6,093     (875     (0.3

Other income, net (including other income from a related party of nil, RMB7,844 and nil in the year of 2017, 2018 and 2019, respectively)

     10,377       1.6       16,274       1.1       27,730       3,983       1.3  

Share of net (loss)/income from equity method investees

     —         —         (1,449     (0.1     162       23       0.0  

Foreign exchange (loss)/gain

     (1,252     (0.2     631       0.1       (1,489     (214     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income tax

     (13,564     (2.0     (40,316     (2.7     8,131       1,168       0.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (405     (0.1     (3,979     (0.3     (21,580     (3,100     (1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (13,969     (2.1     (44,295     (3.0     (13,449     (1,932     (0.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add: Net loss attributable to non-controlling interests

     —         —         1,681       0.1       1,684       242       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Quhuo Limited

     (13,969     (2.1     (42,614     (2.9     (11,765     (1,690     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Data(1)

              

Adjusted net (loss)/income

     (10,670     (1.6     45,327       3.1       51,350       7,376       2.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

See “—Non-GAAP Financial Measure.”

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenues

Our revenues increased by 39.4% from RMB1,474.5 million in 2018 to RMB2,055.8 million (US$295.3 million) in 2019, primarily due to the increase in revenues generated from our on-demand food delivery solutions as a result of our continued market penetration and expansion.

 

   

Revenues from on-demand food delivery solutions increased by 40.3% from RMB1,444.6 million in 2018 to RMB2,027.4 million (US$291.2 million) in 2019. The increase was primarily (1) driven by the increase in delivery orders fulfilled by delivery riders on our platform, as a result of the growing penetration in our existing geographical markets and the expansion into new geographical markets, as our geographical coverage increased from 551 delivery areas across 47 cities as of December 31, 2018 to 809 delivery areas across 62 cities as of December 31, 2019, and to a lesser extent, (2) driven by an increase in the average service fee per delivery order charged to certain industry customers.

 

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Revenues from shared-bike maintenance solutions decreased by 23.6% from RMB27.8 million in 2018 to RMB21.2 million (US$3.1 million) in 2019, primarily due to the decrease in the geographical coverage of our solutions as we strategically withdrew our operations from a few cities where we underperformed.

 

   

Revenues from ride-hailing solutions increased significantly from RMB2.0 million in 2018 to RMB6.9 million (US$996,000) in 2019, primarily due to the increase in the number of vehicles we leased to ride-hailing drivers on our platform.

 

   

Revenues from housekeeping solutions and other services were nil and RMB262,000 (US$38,000) in 2018 and 2019, respectively. We launched our housekeeping solutions in January 2019 and continuously tapped into other industries to provide diversified, flexible earning opportunities for workers on our platform.

Cost of revenues

Our cost of revenues increased by 39.5% from RMB1,357.8 million in 2018 to RMB1,893.5 million (US$272.0 million) in 2019, primarily due to the increase in the cost related to our on-demand food delivery solutions as a result of our business growth.

 

   

Cost of revenues related to our on-demand food delivery solutions increased by 40.8% from RMB1,325.9 million in 2018 to RMB1,866.3 million (US$268.1 million) in 2019, primarily due to the increases in (1) service fees paid to our delivery riders and team leaders in line with the increase in the orders fulfilled by our delivery riders, (2) insurance expenses for delivery riders, (3) hiring expenses for delivery riders, including service fees paid to third-party labor service companies and referral fees paid to existing delivery riders on our platform, and (4) rental fees paid to lease the workspace for additional service stations to accommodate the increase in delivery rider headcount.

 

   

Cost of revenues related to our shared-bike maintenance solutions decreased by 36.0% from RMB27.9 million in 2018 to RMB17.9 million (US$2.6 million) in 2019, which was generally in line with the decline of the business volume of our shared-bike maintenance solutions, primarily due to the decrease in the geographical coverage of our solutions as we strategically withdrew our operations from a few cities where we underperformed.

 

   

Cost of revenues related to our ride-hailing solutions increased significantly from RMB4.0 million in 2018 to RMB9.0 million (US$1.3 million) in 2019, primarily due to the increase in the number of vehicles we rented from third parties.

 

   

Cost of revenues related to our housekeeping solutions and other services was nil and RMB341,000 (US$49,000) in 2018 and 2019, respectively, as we launched our housekeeping solutions in January 2019 and have continuously tapped into other industries since then.

Gross profit

As a result of the foregoing, our gross profit increased by 39.1% from RMB116.6 million in 2018 to RMB162.3 million (US$23.3 million) in 2019. Our gross profit margin remained stable at 7.9% in 2018 and 2019.

Operating expenses

General and administrative expenses

Our general and administrative expenses decreased by 0.4% from RMB161.8 million in 2018 to RMB161.2 million (US$23.1 million) in 2019, primarily due to the decrease in share-based compensation expenses from RMB89.6 million in 2018 to RMB64.8 million (US$9.3 million) in 2019, which was consistent with the vesting

 

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schedule of options granted under our share incentive plan. For detailed analysis on changes of our share-based compensation, see “—Critical Accounting Policies and Estimates—Share-based compensation.” Excluding the effect of share-based compensation, our general and administrative expenses would have increased by 33.4% from RMB72.2 million in 2018 to RMB96.4 million (US$13.8 million) in 2019, primarily due to the increases in (1) salaries and benefits for our operational staff, and (2) professional service fees, partially offset by the decrease in office expenses.

Research and development expenses

Our research and development expenses increased by 45.2% from RMB6.7 million in 2018 to RMB9.7 million (US$1.4 million) in 2019, primarily due to the increase in salaries and benefits for our research and development personnel.

Loss on disposal of intangible assets

We recorded loss on disposal of intangible assets of nil and RMB3.8 million (US$0.6 million) in 2018 and 2019, respectively, primarily due to transfer of customer relationships in certain delivery areas for our on-demand food deliver solutions to third parties.

Operating loss

As a result of the foregoing, we incurred operating loss of RMB51.9 million and RMB12.5 million (US$1.8 million) in 2018 and 2019, respectively.

Interest expense

Our interest expense increased by 55.7% from RMB3.9 million in 2018 to RMB6.1 million (US$0.9 million) in 2019, primarily associated with our short-term bank borrowings for restructuring purpose.

Other income, net

We recorded other income, net of RMB16.3 million and RMB27.7 million (US$4.0 million) in 2018 and 2019, respectively, primarily consisting of (1) governmental subsidies, (2) service fees paid by third parties to us for labor consulting services and IT services we provided, and (3) investment income from commercial bank deposits and disposal of our equity interest in an equity method investee company, and partially offset by other expenses, primarily consisting of finance charges.

Share of net (loss)/income from equity method investees

We recorded share of net loss from equity method investees of RMB1.4 million and share of net income from equity method investees of RMB0.2 million (US$23,000) in 2018 and 2019, respectively, primarily due to the net loss or income incurred by our equity method investees.

Foreign exchange (loss)/gain

We recorded a foreign exchange gain of RMB0.6 million and a foreign exchange loss of RMB1.5 million (US$0.2 million) in 2018 and 2019, respectively, primarily due to fluctuations in the exchange rates in the process of our restructuring.

Income tax expense

Our income tax expense increased significantly from RMB4.0 million in 2018 to RMB21.6 million (US$3.1 million) in 2019, primarily due to the increase in our taxable income generated from our on-demand food delivery solutions.

 

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Net loss

As a result of the foregoing, we incurred net loss of RMB44.3 million and RMB13.4 million (US$1.9 million) in 2018 and 2019, respectively.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenues

Our revenues increased significantly from RMB654.8 million in 2017 to RMB1,474.5 million in 2018, primarily due to a significant increase in revenues from our on-demand food delivery solutions as a result of our continued market penetration and expansion.

 

   

Revenues from on-demand food delivery solutions increased significantly from RMB654.8 million in 2017 to RMB1,444.6 million in 2018. The increase was primarily (1) driven by the increase in delivery orders fulfilled by delivery riders on our platform, as a result of the growing penetration in our existing geographical markets and the expansion into new geographical markets, as our geographical coverage increased from 481 delivery areas across 40 cities as of December 31, 2017 to 551 delivery areas across 47 cities as of December 31, 2018, and to a lesser extent, (2) driven by an increase in the average service fee per delivery order charged to certain industry customers.

 

   

Revenues from shared-bike maintenance solutions were nil and RMB27.8 million in 2017 and 2018, respectively. We launched our shared-bike maintenance solutions in January 2018 and currently expect that our shared-bike maintenance solutions will remain consistent with the market trends for the shared-bike industry.

 

   

Revenues from ride-hailing solutions were nil and RMB2.0 million in 2017 and 2018, respectively. We launched our ride-hailing solutions in October 2018 and currently expect business growth driven by the market conditions and our continued penetration in the ride-hailing market.

Cost of revenues

Our cost of revenues increased significantly from RMB626.2 million in 2017 to RMB1,357.8 million in 2018, primarily due to the increase in the cost related to our on-demand food delivery solutions as a result of our business growth.

 

   

Cost of revenues related to our on-demand food delivery solutions increased significantly from RMB626.2 million in 2017 to RMB1,325.9 million in 2018, primarily attributable to (1) the increase in service fees paid to our delivery riders and team leaders due to the increase in the orders fulfilled by our delivery riders, (2) the increase in the insurance and on-demand delivery supplies, (3) the increase in the hiring expenses for delivery riders, including service fees paid to third-party labor service companies and referral fees paid to existing delivery riders on our platform, and (4) the increase in the rental fees paid to lease the workspace for additional service stations to accommodate the increase in delivery rider headcount.

 

   

Cost of revenues related to our shared-bike maintenance solutions was nil and RMB27.9 million in 2017 and 2018, respectively, as we launched our shared-bike maintenance solutions in January 2018.

 

   

Cost of revenues related to our ride-hailing solutions was nil and RMB4.0 million in 2017 and 2018, respectively, as we launched our ride-hailing solutions in October 2018.

Gross profit

As a result of the foregoing, our gross profit increased significantly from RMB28.6 million in 2017 to RMB116.6 million in 2018. Our gross profit margin increased from 4.4% in 2017 to 7.9% in 2018, primarily due to the improved operational efficiency and economies of scale as a result of our business growth.

 

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Operating expenses

General and administrative expenses

Our general and administrative expenses increased significantly from RMB46.8 million in 2017 to RMB161.8 million in 2018, primarily due to the significant increase in share-based compensation expenses from RMB3.3 million in 2017 to RMB89.6 million in 2018. For detailed analysis on changes of our share-based compensation, see “—Critical Accounting Policies and Estimates—Share-based compensation.” After deducting the effect of share-based compensation, our general and administrative expenses would have increased by 66.0% from RMB43.5 million in 2017 to RMB72.2 million in 2018, primarily due to (1) the increase in salaries and benefits for our operational staff, (2) the increase in travel expenses, and (3) the increase in office and rental expenses.

Research and development expenses

Our research and development expenses increased significantly from RMB3.2 million in 2017 to RMB6.7 million in 2018, primarily due to the increase in salaries and benefits for our research and development personnel, and rental expenses related to servers utilized by us.

Operating loss

As a result of the foregoing, we incurred operating loss of RMB21.4 million and RMB51.9 million in 2017 and 2018, respectively.

Interest expense

Our interest expense increased significantly from RMB1.4 million in 2017 to RMB3.9 million in 2018, primarily associated with our short-term bank borrowings for working capital purpose.

Other income, net

Our other income, net was RMB10.4 million and RMB16.3 million in 2017 and 2018, respectively, primarily consisting of (1) service fees paid by one of our affiliated entities to us for labor consulting services we provided, (2) governmental subsidies, and (3) investment income from commercial bank deposits, and partially offset by other expenses. Our other expense in 2018 was primarily due to the amount we paid to settle our dispute with an industry customer.

Share of net loss from equity method investees

Our share of net loss from equity method investees was nil and RMB1.4 million in 2017 and 2018, respectively, primarily due to the net loss incurred by our equity method investees.

Foreign exchange (loss)/gain

We recorded a foreign exchange loss of RMB1.3 million in 2017 and a foreign exchange gain of RMB0.6 million in 2018, primarily due to fluctuations in the exchange rates of our foreign currency deposits.

Income tax expense

Our income tax expense increased from RMB0.4 million in 2017 to RMB4.0 million in 2018, primarily due to the increase in our taxable income generated from our on-demand food delivery solutions.

 

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Net loss

As a result of the foregoing, we incurred a net loss of RMB14.0 million and RMB44.3 million in 2017 and 2018, respectively.

Non-GAAP Financial Measure

We use adjusted net income (loss), which is a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net income (loss) represents net income (loss) before share-based compensation expenses. We believe that adjusted net income (loss) helps identify underlying trends in our business that could otherwise be distorted by the effect of share-based compensation expenses. We believe that such non-GAAP financial measure also provides useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

The non-GAAP financial measure is not defined under U.S. GAAP and is not presented in accordance with U.S. GAAP. It should not be considered in isolation or construed as alternatives to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measure in light of the most directly comparable GAAP measures, as shown below. The non-GAAP financial measure presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

The table below sets forth a reconciliation of the non-GAAP financial measure for the periods indicated:

 

     For the Year Ended December 31,  
     2017     2018     2019  
     RMB     RMB     RMB     US$  
     (in thousands)  

Net loss

     (13,969     (44,295     (13,449     (1,932

Add:

        

Share-based compensation expenses

     3,299       89,622       64,799       9,308  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net (loss)/income

     (10,670     45,327       51,350       7,376  
  

 

 

   

 

 

   

 

 

   

 

 

 

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting and financial reporting personnel and other resources to address our internal controls and procedures. In connection with the audits of our consolidated financial statements as of December 31, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019, we and our independent accountant identified a material weakness in our internal control over financial reporting. As defined in the standards established by the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified is our lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and SEC rules.

We are in the process of implementing a number of measures to address these material weakness identified, including: (1) hiring additional accounting and financial reporting personnel with U.S. GAAP and SEC reporting

 

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experience, (2) expanding the capabilities of existing accounting and financial reporting personnel through continuous training and education in the accounting and reporting requirements under U.S. GAAP, and SEC rules and regulations, (3) developing, communicating and implementing an accounting policy manual for its accounting and financial reporting personnel for recurring transactions and period-end closing processes, and (4) establishing effective monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of the Company’s consolidated financial statements and related disclosures.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligation. See “Risk Factors—Risks Related to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We will not “opt out” of such exemptions afforded to an emerging growth company.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make judgment, estimates and assumptions. We continually evaluate these judgment, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and various assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

Consolidation of affiliated entities

To comply with PRC laws and regulations which prohibit foreign control of companies that engage in value-added telecommunication services, we primarily conduct our business in the PRC through our VIE and subsidiaries of the VIE. The equity interests of our VIE are legally held by PRC shareholders. Despite the lack of technical majority ownership, we have effective control of our VIE through a series of contractual agreements and a parent-subsidiary relationship exists between us and our VIE. Through the contractual agreements, the shareholders of our VIE effectively assigned all of their voting rights underlying their equity interests in our VIE to us and therefore, we have the power to direct the activities of our VIE that most significantly impact its

 

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economic performance. We also have the ability and obligations to absorb substantially all the profits or losses of our VIE that potentially could be significant to our VIE. Based on the above, we consolidate our VIE in accordance with SEC Regulation SX-3A-02 and ASC 810, Consolidation. We will reconsider the initial determination of whether a legal entity is a consolidated affiliated entity upon certain events listed in ASC 810-10-35-4 occurring. We will also continuously reconsider whether we are the primary beneficiary of our affiliated entities as facts and circumstances change. See “Risk Factors—Risks Related to Our Corporate Structure.”

Revenue recognition

We have early adopted the requirements of ASC 606, Revenue from Contracts with Customers, or ASC 606, as of January 1, 2017 using the full retrospective method. We apply the five-step model outlined in ASC 606. We account for a contract when we have approval and commitment from the customer, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The adoption of ASC 606 did not have a material impact on our accumulated deficit balance as of January 1, 2017.

On-demand food delivery solutions

We enter into delivery service agreements to provide industry customers with our on-demand food delivery solutions. Industry customers generally divide their intra-city food delivery network into a number of delivery areas. We are responsible for fulfilling all on-demand food delivery orders on a daily and an if-needed basis within specified delivery areas that are managed by us. We manage our delivery rider groups to make sure there are sufficient delivery riders to fulfill all the orders within the delivery areas and assure that the delivery service quality is in compliance with service standards.

We have determined that our obligation is to stand ready to fulfill all the delivery orders and considered the series of services as a single performance obligation. The customers receive the benefit of the services and we on the term of a month-to-month contract has the right to payment as the service are performed. We charge delivery service fees to industry customers based on the number of orders completed at a fixed rate per order, subject to adjustments based on the monthly performance of our services provided. Revenues are variable based on the volume of delivery orders and monthly performance results. The variable consideration becomes fixed at the end of the month when the uncertainty on monthly performance evaluation is resolved. We recognize revenues from on-demand food delivery solutions as we provide the services.

Bike-sharing maintenance solutions

We derive revenue from service fees paid by the bike-sharing company for daily maintenance services we provided. Our shared-bike maintenance solutions include maintaining of orderliness of bikes, redistribution and transportation of idled bikes based on end users’ usage patterns within a designated area, and identification and transportation of malfunctioning bikes.

We have determined that our obligation is to perform maintenance services on the term of a month-to-month contract and considered the series of services as a single performance obligation. The customer receives the benefit of the services and we have the right to payment as the service are performed. We charge maintenance service fees to the bike-sharing company based on the number of service hours and the number of shared-bikes transported. Revenues are variable based on volume of service performed and we recognize revenues as the services are rendered.

Pursuant to ASC 606-10-32-2A, we have elected to exclude from revenue sales taxes and other similar taxes that are both imposed on and are concurrent with revenue producing transactions. Therefore, revenues are recognized net of value added taxes.

 

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Ride-hailing solutions

We generate revenue from ride-hailing solutions primarily from car rental fees paid by drivers on our platform according to our car leasing agreements with them. These arrangements are classified as operating leases as defined within ASC 840, Leases. We recognize revenues from such arrangements on a straight-line basis over the lease term.

To a lesser extent, we also generate revenues from provision of ride-hailing driver management services to certain ride-hailing platforms as an agent, and recognize such revenues on a net basis.

Redeemable convertible preferred shares

The redeemable convertible preferred shares, or preferred shares, have been classified as mezzanine equity as they may be redeemed at the option of the holders on or after an agreed upon date which is outside our sole control. The preferred shares were initially measured at fair value. The preferred shares are not currently redeemable, but it is probable that the preferred shares will become redeemable. There is no accretion to be recognized because the carrying amount of the preferred shares is greater than the redemption value.

The holders of preferred shares have the ability to convert the instrument into our ordinary shares. We have evaluated the embedded conversion option in the preferred shares to determine if there were any embedded derivatives requiring bifurcation and to determine if there were any beneficial conversion features. The conversion option of the preferred shares does not qualify for bifurcation accounting because the conversion option is clearly and closely related to the host instrument and the underlying ordinary shares are not publicly traded nor readily convertible into cash. The contingent redemption options of the convertible preferred shares did not qualify for bifurcation accounting because the underlying ordinary shares were neither publicly traded nor readily convertible into cash. There were no other embedded derivatives that are required to be bifurcated.

Beneficial conversion features exist when the conversion price of the convertible preferred shares is lower than the fair value of the ordinary shares at the commitment date, which is the issuance date in our case. When a beneficial conversion feature, or BCF, exists as of the commitment date, its intrinsic value is bifurcated from the carrying value of the convertible preferred shares as a contribution to additional paid-in capital. On the commitment date, there is no beneficial conversion feature to be recognized because the most favorable conversion price used to measure the beneficial conversion feature of the preferred shares was higher than the fair value per ordinary share. We determined the fair value of our ordinary shares with the assistance of an independent third party valuation firm.

The contingent conversion price adjustment is accounted for as a contingent BCF. In accordance with ASC paragraph 470-20-35-1, changes to the conversion terms that would be triggered by future events not controlled by an issuer should be accounted as contingent conversions, and the intrinsic value of such conversion options would not be recognized until and unless a triggering event occurred. No contingent BCF has been recognized for the periods presented.

Income taxes

We follow the liability method of accounting for income taxes in accordance with ASC 740, Income Taxes, or ASC 740. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.

We accounted for uncertainties in income taxes in accordance with ASC 740. Interest and penalties arising from underpayment of income taxes shall be computed in accordance with the related PRC tax law. The amount

 

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of interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interest and penalties recognized in accordance with ASC 740 are classified in the consolidated statements of comprehensive loss as income tax expense.

In accordance with ASC 740, we recognize in our consolidated financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement.

Share-based compensation

All of our share-based awards to employees were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values. We early adopted ASU No. 2018-7, Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting on January 1, 2017. Share-based awards to non-employees were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair value. We have elected to recognize share-based compensation using the accelerated method, for all share-based awards granted with graded vesting based on service conditions.

In determining the value of share options granted to employees and non-employees, we have used the binomial option pricing model, with assistance from an independent third-party valuation firm. Under this option pricing model, certain assumptions, including the risk-free interest rate, the expected volatility, the suboptimal exercise factor, the fair value per ordinary share, the expected dividend yield and the post-vesting forfeiture rate are required in order to determine the fair value of our options. The fair value of share options was estimated on the date of grant using the following key assumptions:

 

     For the year ended
December 31, 2017
    For the year ended
December 31, 2018
    For the year ended
December 31, 2019
 

Risk-free interest rate

     3.62% or nil       3.37% or nil       1.52%-3.62% or nil  

Expected volatility

     30.39% or nil       30.67% or nil       29.53%-32.67% or nil  

Suboptimal exercise factor

     2.2 or nil     2.2 or nil       2.2-2.5 or nil  

Fair value per ordinary share

     RMB16.47       RMB32.10       US$5.14  

Expected dividend yield

     0     0     0

Post-vesting forfeiture rate

     0     0     0

A change in the terms or conditions of the awards is accounted for as a modification of the award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the fair value of the awards and other pertinent factors at the modification date. For vested awards, we recognize incremental compensation cost in the period the modification occurs. For unvested awards, we recognize over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date. If the fair value of the modified award is lower than the fair value of the original award immediately before modification, the minimum compensation cost we recognize is the cost of the original award.

Fair Value Estimate

We are required to estimate the fair value of the ordinary shares underlying our options when performing the fair value calculations with the binomial option model. Therefore, our board of directors has estimated the fair value of our ordinary shares at various dates, with input from management, considering the third-party valuations of ordinary shares at each grant date. The valuations of our ordinary shares were performed using

 

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methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Audit and Accounting Practice Aid Series: Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Guide. In addition, our board of directors considered various objective and subjective factors, along with input from management and the independent third-party valuation firm, to determine the fair value of our ordinary shares, including: external market conditions affecting the industry, trends within the industry, the prices at which we sold preferred shares, the superior rights and preference of the preferred shares or other senior securities relative to our ordinary shares at the time of each grant, the results of operations, financials position, our stage of development and business strategy, the lack of an active public market for our ordinary shares, the likelihood of achieving a liquidity event such as an initial public offering or liquidation of the Company, the likelihood of redemption of the preference shares, risk free rate obtained from interest rate market, and historical volatility of the ordinary shares which takes several comparable companies into account. In order to determine the fair value of our ordinary shares underlying each share-based award grant, we first determined our business enterprise value, or BEV, and then allocated the BEV to each element of our capital structure (redeemable convertible preferred shares and ordinary shares) using a hybrid method comprising the probability-weighted expected return method and the option pricing method. In our case, three scenarios were assumed, namely: (i) the liquidation scenario, in which the option pricing method was adopted to allocate the value between redeemable convertible preferred shares and ordinary shares, and (ii) the redemption scenario, in which the option pricing method was adopted to allocate the value between redeemable convertible preferred shares and ordinary shares, and (iii) the mandatory conversion scenario, in which equity value was allocated to redeemable convertible preferred shares and ordinary shares on an as-if converted basis.

In determining the fair value of the ordinary shares, we applied the discounted cash flow analysis based on our projected cash flow using our best estimate as of the valuation date. The determination of our fair value of the ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, and our operating history and prospects at the time of valuation.

We determined the fair value of our share awards granted to employees and non-employees as of the date of grant, taking into consideration the various objective and subjective factors described above. We computed the per share weighted-average estimated fair value for share awards based on the binomial option pricing model.

Once public trading market of the ADSs has been established in connection with the completion of this offering, it will no longer be necessary for us to estimate the fair value of our ordinary shares in connection with our accounting for granted share awards.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash generated from our operations and external financing.

As of December 31, 2018 and 2019, we had RMB17.3 million and RMB126.8 million (US$18.2 million) in cash, respectively. Our cash consists primarily of cash and demand deposits. We believe that our current cash and anticipated cash flow from operating and financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months without considering the proceeds from this offering.

We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities and financing activities, including the net proceeds we will receive from this offering. We may, however, require additional cash resources due to changing business conditions or other future developments, including acquisitions or investments we may decide to selectively pursue. If our existing cash resources are insufficient to meet our requirements, we may seek to issue equity or debt securities or obtain credit facilities. The issue of additional equity securities, including convertible debt securities, would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be

 

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available in the amounts we need or on terms acceptable to us, if at all. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

The following table sets forth a summary of our cash flows for the periods indicated:

 

    For the Year Ended December 31,  
    2017     2018     2019  
    RMB     RMB     RMB     US$  
    (in thousands)  

Net cash (used in)/generated from operating activities

    (28,615     19,807       17,624       2,533  

Net cash (used in)/generated from investing activities

    (65,102     (94,281     12,483       1,792  

Net cash generated from financing activities

    71,350       82,495       80,550       11,570  

Effect of exchange rate changes on cash

    (80     179       (1,221     (175

Net (decrease)/increase in cash

    (22,447     8,200       109,436       15,720  

Cash at the beginning of the period

    31,590       9,143       17,343       2,491  

Cash at the end of the period

    9,143       17,343       126,779       18,211  

Operating activities

Net cash generated from operating activities was RMB17.6 million (US$2.5 million) in 2019, primarily due to a net loss of RMB13.4 million (US$1.9 million), (1) adjusted for certain non-cash items, mainly including share-based compensation of RMB64.8 million (US$9.3 million), amortization of RMB10.6 million (US$1.5 million), deferred income taxes of RMB9.3 million (US$1.3 million), and loss on disposal of intangible assets, net of RMB3.8 million (US$0.6 million), (2) adjusted for changes in certain working capital items that positively impact the cash flow from operating activities, mainly including an increase of RMB78.8 million (US$11.3 million) in accounts payable, an increase of RMB15.1 million (US$2.2 million) in income tax payable, and an increase of RMB13.7 million (US$2.0 million) in other non-current liabilities, and (3) partially offset by changes in certain working capital items that negatively impact the cash flow from operating activities, mainly including an increase of RMB112.4 million (US$16.1 million) in accounts receivable, an increase of RMB51.8 million (US$7.4 million) in other non-current assets, and an increase of RMB11.3 million (US$1.6 million) in prepayments and other current assets.

Net cash generated from operating activities was RMB19.8 million in 2018, primarily due to a net loss of RMB44.3 million, (1) adjusted for certain non-cash items, mainly including share-based compensation of RMB89.6 million, amortization of RMB9.0 million, and deferred income taxes of RMB2.4 million, (2) adjusted for changes in certain working capital items that positively impact the cash flow from operating activities, mainly including a decrease of RMB23.7 million in prepayments and other current assets, and an increase of RMB4.5 million in accounts payable, and (3) partially offset by changes in certain working capital items that negatively impact the cash flow from operating activities, mainly including an increase of RMB28.2 million in other non-current assets, an increase of RMB25.9 million in amounts due from related parties, and an increase of RMB15.7 million in accounts receivable.

Net cash used in operating activities was RMB28.6 million in 2017, primarily due to a net loss of RMB14.0 million, (1) adjusted for certain non-cash items, mainly including impairment of intangible assets of RMB3.6 million, share-based compensation of RMB3.3 million, and amortization of RMB2.2 million, and (2) adjusted for changes in certain working capital items that negatively impact the cash flow from operating activities, mainly including an increase of RMB50.9 million in accounts receivable, an increase of RMB26.4 million in prepayments and other current assets, and an increase of RMB16.5 million in other non-current assets, and (3) partially offset by changes in certain working capital items that positively impact the cash flow from operating activities, mainly including an increase of RMB64.3 million in accounts payable.

 

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Investing activities

Net cash generated from investing activities amounted to RMB12.5 million (US$1.8 million) in 2019, which was primarily attributable to (1) proceeds from sales of short-term investments of RMB2,715.0 million (US$390.0 million), (2) proceeds from disposal of intangible assets in customer relationships of RMB21.2 million (US$3.0 million), and (3) proceeds from disposals of long-term investments of RMB11.0 million (US$1.6 million), partially offset by (1) purchase of short-term investments of RMB2,691.6 million (US$386.6 million) in commercial bank deposits, (2) acquisition of intangible assets of RMB21.9 million (US$3.1 million), including customer relationships acquired from third parties to cover more delivery areas for our on-demand food delivery solutions and internally-used computer software, and (3) purchase of property and equipment of RMB17.8 million (US$2.6 million).

Net cash used in investing activities amounted to RMB94.3 million in 2018, which was primarily attributable to (1) purchase of short-term investments of RMB2,578.5 million in commercial bank deposits, (2) acquisition of intangible assets of RMB32.5 million, including customer relationships acquired from third parties to cover more delivery areas for our on-demand food delivery solutions and internally-used computer software, and (3) prepayment for long-term investments of RMB30.2 million, partially offset by proceeds from sales of short-term investments in commercial bank deposits of RMB2,554.8 million.

Net cash used in investing activities amounted to RMB65.1 million in 2017, which was primarily attributable to (1) purchase of short-term investments of RMB50.4 million in commercial bank deposits, (2) acquisition of intangible assets of RMB20.4 million, including customer relationships acquired from third parties to cover more delivery areas for our on-demand food delivery solutions and internally-used computer software, (3) prepayment for long-term investments of RMB9.0 million, and (4) acquisition of business, net of cash acquired of RMB8.5 million, partially offset by proceeds from sales of short-term investments in commercial bank deposits of RMB25.0 million.

Financing activities

Net cash generated from financing activities amounted to RMB80.6 million (US$11.6 million) in 2019, which was primarily attributable to (1) proceeds from short-term loans of RMB116.0 million (US$16.7 million), and (2) proceeds from long-term debt of RMB15.2 million (US$2.2 million), partially offset by (1) repayments of short-term debt of RMB45.8 million (US$6.6 million), and (2) repayments of long-term debt of RMB3.8 million (US$0.5 million).

Net cash generated from financing activities amounted to RMB82.5 million in 2018, which was primarily attributable to (1) proceeds from short-term loans of RMB85.8 million, and (2) capital contributions by shareholders of RMB28.7 million, partially offset by repayments of short-term loans of RMB36.9 million.

Net cash generated from financing activities amounted to RMB71.4 million in 2017, which was primarily attributable to (1) capital contributions by shareholders of RMB94.5 million, and (2) proceeds from short-term loans of RMB63.3 million, partially offset by repayments of short-term loans of RMB86.4 million.

Capital Expenditures

Our capital expenditures were RMB1.2 million, RMB3.9 million and RMB17.8 million (US$2.6 million) in 2017, 2018 and 2019, respectively. Our capital expenditures were primarily used for the purchase of property and equipment, such as vehicles in connection with our ride-hailing solutions and electronic equipment. We will continue to make capital expenditures to meet the expected growth of our business.

 

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Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2019:

 

     Payment due by period  
     Total      Less than
one year
     one – three
years
 
     (RMB in thousands)  

Operating lease commitments(1)

     22,138        19,288        2,850  

Long-term debt(2)

     19,921        7,979        11,942  

Short-term loans(3)

     136,000        136,000         

 

(1)

Represents minimum payments under non-cancelable operating leases related to vehicles in connection with our ride-hailing solutions, office premises and on-demand food delivery service stations that expire at various dates. Our operating lease commitments have no renewal options, rent escalation clauses and restrictions or contingent rents.

(2)

In August 2018, we entered into an agreement with a third party, pursuant to which we borrowed RMB9.4 million to purchase 100 vehicles for a total consideration of RMB11.8 million for our ride-hailing solution business. Under the terms of the agreement, we shall repay the debt in fixed monthly installments over 36 months. The implied interest rate was 14.86%. We obtained the ownership of the vehicles at inception of the arrangement and registered the vehicles as the collateral for the borrowing. In addition, in July 2019, we entered into an agreement with a third party, pursuant to which we borrowed RMB15.2 million. We are required to repay the borrowings in fixed monthly installments over 36 months. The implied interest rate ranged from 8.45% to 8.98%.

(3)

We have entered into several banking facilities, pursuant to which we borrowed short-term loans with interest rates ranging from 4.0% to 6.0%. All short-term loans were intended for general working capital purposes.

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Holding Company Structure

Quhuo Limited is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries and our VIE and its subsidiaries in China. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries and fees paid by our VIE. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.

In addition, our subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance of the PRC, or PRC GAAP. Under PRC law, each of our PRC subsidiaries, our VIE and its subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory surplus reserve until such reserve reaches 50% of its registered capital. In addition, each of our wholly foreign-owned subsidiaries in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds as well as staff bonus and welfare funds at its discretion, and our VIE may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.

 

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Inflation

To date, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2017, 2018 and 2019 were increases of 1.8%, 1.9% and 4.5%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

Quantitative and Qualitative Disclosure about Market Risk

Foreign exchange risk

Substantially all of our revenues and expenses are denominated in Renminbi. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S. dollar had been stable and traded within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. Accordingly, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.

We estimate that we will receive net proceeds of approximately US$28.0 million from this offering, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and assuming the underwriters do not exercise their option to purchase additional ADSs. Assuming that we convert the full amount of the net proceeds from this offering into RMB, a 10% appreciation of the U.S. dollar against RMB, from a rate of RMB6.9618 to US$1.00 to a rate of RMB7.6580 to US$1.00, will result in an increase of RMB19.5 million in our net proceeds from this offering. Conversely, a 10% depreciation of the U.S. dollar against the RMB, from a rate of RMB6.9618 to US$1.00 to a rate of RMB6.2656 to US$1.00, will result in a decrease of RMB19.5 million in our net proceeds from this offering.

 

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Interest rate risk

Our exposure to interest rate risk primarily relates to our short-term loan. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.

After completion of this offering, we may invest the net proceeds we receive from the offering in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Recent Accounting Pronouncements

A list of recently issued accounting pronouncements that are relevant to us is included in note 2 of our consolidated financial statements included elsewhere in this prospectus.

 

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MARKET OPPORTUNITIES

The information presented in this section has been derived from an industry report commissioned by us and prepared by Frost & Sullivan, an independent research firm, regarding our industry and our market position in China. We refer to this report as the F&S report. We believe that the sources of such information are appropriate, and we have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading in any material respect or that any fact has been omitted that would render such information false or misleading in any material respect. However, neither we nor any other party involved in this offering has independently verified such information, and neither we nor any other party involved in this offering makes any representation as to the accuracy or completeness of such information. Therefore, investors are cautioned not to place any undue reliance on the information, including statistics and estimates, set forth in this section or similar information included elsewhere in this prospectus.

Emergence of Workforce Operational Solution Platforms

Rapid growth of China’s on-demand consumer service market

The on-demand consumer service market comprises companies that fulfill consumer demand via the immediate delivery of goods and services primarily through technology platforms in a number of industry settings, including food delivery, ground transportation, housekeeping, bike-sharing, caretaking and other services. China’s on-demand consumer service market has flourished and gradually become an integral part of consumers’ daily lives, primarily driven by society-wide embracement of the on-demand economy. According to the F&S report, China’s on-demand consumer service market, in terms of gross transaction value, increased from RMB1,296.4 billion in 2015 to RMB4,641.4 billion in 2019 at a CAGR of 37.6%, and is expected to reach RMB9,482.2 billion by 2024 at a CAGR of 15.4% from 2019 to 2024. The following factors have driven the rapid growth of China’s on-demand consumer service market:

Rapid urbanization. China’s rapid urbanization and continued expansion of populated cities have accelerated the growth of the consumer service industry, as residents in urban areas generally have higher demand for a wide range of consumer services. According to the F&S report, the urbanization rate in China increased from 56.1% in 2015 to 60.6% in 2019, and is expected to reach 64.8% by 2024. By the end of 2018, China had 164 cities with a population of over one million, as compared to only 10 cities of such size in the U.S. The population density in urban cities in China was 2,526 people per square kilometer in 2018, over approximately 7.5 times that of the United States and approximately 2.4 times that of Japan.

Consumption upgrade. China continues to shift its economic growth model from investment-driven to consumption- and service-driven. The ongoing urbanization in China has created a mass consumer base with increasing disposable income and strong consumption desires. According to the F&S report, China’s per capita disposable income is expected to grow at a CAGR of 8.0% from 2019 to 2024, outpacing the nominal GDP growth rate of 7.7% over the same period. The rise in Chinese consumers’ income levels has led to significant changes in consumer behavior towards discretionary expenditures and a proliferation of consumer services promoting quality of life through convenience and efficiency.

Democratization of mobile internet. According to the F&S report, China’s mobile internet population is expected to increase from 864.0 million in 2019 to 1,157.0 million in 2024 at a CAGR of 6.0%. The democratization of mobile internet and advanced mobile payment infrastructure accelerated the growth of the on-demand consumer service market.

Challenges in China’s on-demand consumer service market

The proliferation of on-demand consumer service companies, such as on-demand food delivery and ride-hailing platforms, has created enormous demand for flexible, stable and trained workers to deliver standardized,

 

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high-quality services vis-à-vis their end consumers. However, China’s labor market currently faces multiple challenges. China’s working-age population declined over the last five years, and is expected to continue to decrease from 890.0 million in 2019 to 862.3 million in 2024, primarily due to population aging and declining birth rates. A mismatch between the availability of unemployed but poorly-trained workers and the demand for well-trained workers has exacerbated the unbalanced supply and demand for qualified workers in China. This, together with other macroeconomic factors such as inflation, have resulted in a rise in labor costs. On-demand consumer service companies lack the resources or capability to deliver goods, services or experiences offline all by themselves, which generally requires a sufficient number of trained workers with industry-specific know-how.

Against this backdrop, on-demand consumer service companies began to collaborate with third-party companies and engage independent contractors or part-time workers to deliver services to their end consumers under the flexible workforce model. According to the F&S report, the market size of the flexible workforce model in terms of revenue grew rapidly from RMB1,265.5 billion in 2015 to RMB4,388.0 billion in 2019 at a CAGR of 36.5%, and is expected to reach RMB9,587.3 billion by 2024 at a CAGR of 16.9% from 2019 to 2024. The penetration rate of China’s flexible workforce model was approximately 13.3% in 2019, compared to that of 43.6% in Japan and 33.9% in the United States, and is expected to increase to approximately 22.2% in 2024.

Emerging workforce operational solution platforms

Workforce operational solution platforms have emerged in China, and their solutions have become critical to the business performance of on-demand consumer service companies to maintain their service quality and consumer satisfaction. Compared with traditional human resource service companies that are primarily focused on recruitment and administrative services, workforce operational solution companies provide end-to-end solutions to fully address the operational demands of on-demand consumer service companies. Among other things, workforce operational solution platforms help on-demand consumer service companies mobilize a large team of untrained workers and offer systematic professional training to transform them into trained workers capable of delivering standardized services. The following table illustrates the major differences between workforce operational solution platforms and traditional human resource service companies:

 

LOGO

 

Source: F&S report

Furthermore, compared with in-house operations or crowdsourcing, workforce operational solutions can significantly improve the operational efficiency and/or reduce operational costs for on-demand consumer service companies in the offline delivery of goods, services and experiences. However, the market for workforce operational solutions within a single industry is highly fragmented, consisting of a large number of small-scale, single-industry service suppliers with limited operational experience or geographical coverage. These market players generally lack a set standard in terms of service quality and worker qualifications or the capability of maintaining standardized, high-quality services on par with industry customers’ operational requirements. They may also lack advanced proprietary technology infrastructure and data analytics capability, and as a result, may fail to appropriately distribute delivery riders among different delivery areas with uneven order volumes, which could lead to inconsistent service capacity and poor service quality. Market players compete on operational scale

 

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and technology infrastructure that support their solution offerings in standardized quality across different geographical markets and industries. Those who are able to set the market standard in terms of service quality, proprietary technologies and operating leverage are more likely to capture the consolidation opportunities in the highly fragmented market.

Overview of China’s Workforce Operational Solution Platform Market

Market overview

Workforce operational solution platforms provide industry-tailored solutions that facilitate the business operations of on-demand consumer service companies by delivering goods, services and experiences to their end consumers. China’s workforce operational solution platform market has achieved significant growth over the past few years. The market size increased from RMB106.3 billion in 2015 to RMB240.8 billion in 2019 at a CAGR of 22.7%, and is expected to reach RMB680.6 billion by 2024 at a CAGR of 23.1% from 2019 to 2024, according to the F&S report.

Market Size of China’s Workforce Operational Solution Platform Market (2015-2024E)

 

LOGO

 

Source: F&S report

China’s on-demand food delivery market and the corresponding workforce operational solution platform market

On-demand food delivery services allow consumers to order food online and receive delivery offline with ease. According to the F&S report, the gross merchandise volume of China’s on-demand food delivery market increased from RMB60.0 billion in 2015 to RMB641.2 billion in 2019 at a CAGR of 80.8%, and is expected to reach RMB1,897.5 billion by 2024 at a CAGR of 24.2% from 2019 to 2024. The penetration rate of on-demand food delivery services is expected to increase from 35.7% in 2019 to 46.4% in 2024.

On-demand food delivery platforms provide delivery services to their restaurant partners in two ways, namely the premium delivery model and the crowdsourcing model. Under the premium delivery model, on-demand food platforms engage and manage well-trained delivery riders primarily through workforce operational solution platforms to ensure high-quality delivery services. By comparison, under the crowdsourcing model, qualified but not necessarily trained individuals bid delivery orders on the on-demand food delivery platforms at their discretion. The primary purpose of the crowdsourcing model is to fulfill orders with relatively

 

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low unit costs and supplement premium delivery services during peak hours. The following table illustrates the major differences between the premium delivery model and the crowdsourcing model:

 

LOGO

 

Source: F&S report

Driven by the incentive to improve their returns and strengthen their brands through high-quality delivery services, on-demand food delivery platforms have gradually adopted the premium delivery model since 2015. According to the F&S report, the gross merchandise volume of premium delivery market is expected to increase from RMB286.5 billion in 2019 to RMB1,160.1 billion in 2024 at a CAGR of 32.3%. Moreover, since 2018, some major on-demand food delivery platforms have also terminated their in-house delivery operations and engaged only third parties to fulfill premium deliveries. The corresponding workforce operational solution platform market for the on-demand food delivery industry, in terms of revenue, increased from RMB3.2 billion in 2015 to RMB49.1 billion in 2019 at a CAGR of 97.9%, and is expected to reach RMB178.1 billion by 2024 at a CAGR of 29.4% from 2019 to 2024.

Market Size of China’s Workforce Operational Solution Platform Market in the On-demand Food Delivery Industry

(2015-2024E)

 

LOGO

 

Source: F&S report

 

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Major on-demand food delivery platforms have embraced the full outsourcing of workforce operational solution platforms to fulfill premium deliveries primarily for the following reasons:

Reduced operational cost. Workforce operational solution platforms can achieve a 50% cost saving on average compared to in-house delivery services.

Improved competitive advantage. The on-demand food delivery industry is highly complex and requires market players to conduct training for delivery riders on requisite motorcycle riding skills and techniques, communication, compliance matters, and emergency procedure, and respond to emergency situations and protect delivery riders and themselves from potential liabilities. Through strategic partnerships with workforce operational solution platforms, market players can improve their competitive advantage by being extricated from such economic and operational burdens and allocating more resources on their core business operations.

The corresponding workforce operational solution platform market for the on-demand food delivery industry is highly fragmented. Quhuo ranked No.1 in terms of both revenue and the number of delivery orders in 2018 and 2019, respectively, according to the F&S report.

 

LOGO

 

LOGO

China’s ride-hailing market and the corresponding workforce operational solution platform market

Ride-hailing companies connect passengers and local drivers operating private vehicles or leased vehicles. The gross merchandise volume of China’s ride-hailing market increased from RMB45.1 billion in 2015 to RMB290.6 billion in 2019 at a CAGR of 59.3%, and is expected to reach RMB470.7 billion by 2024 at a CAGR of 10.1% from 2019 to 2024, according to the F&S report.

 

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Ride-hailing companies engage more than 60% of drivers through workforce operational solution platforms, primarily for the following reasons:

Reduced operational cost. Workforce operational solution platforms can achieve a 60% cost saving on average compared to in-house operations.

Adequate supply of qualified vehicles and drivers. According to the F&S report, in 2019, less than 6% of ride-hailing drivers and less than 4% registered ride-hailing vehicles in China were in strict compliance to have obtained relevant permits and operation licenses despite the heightened regulations. Against the backdrop, ride-hailing companies prefer to partner with workforce operational solution platforms that have assembled a fleet of qualified vehicles and established a network of qualified drivers in local markets.

More efficient screening and onboarding process. Workforce operational solution platforms are well-versed in handling relevant procedures, such as registrations of vehicles and drivers, license applications and automobile financing so that they are able to complete screening and onboarding processes more efficiently.

Auto-related and driver-centric service offerings. With auto-related and driver-centric services, such as filing for insurance claims, roadside assistance and vehicle repair and maintenance, workforce operational solution platforms are well-positioned to retain existing drivers and attract new drivers for ride-hailing companies.

The corresponding workforce operational solution platform market for the ride-hailing service industry, in terms of revenue, increased from RMB100.9 billion in 2015 to RMB157.3 billion in 2019 at a CAGR of 11.7%, and is expected to reach RMB295.7 billion by 2024 at a CAGR of 13.5% from 2019 to 2024.

Market Size of China’s Workforce Operational Solution Platform Market in the Ride-hailing Industry

(2015-2024E)

 

LOGO

 

Source: F&S report

There has been fierce competition among workforce operational solution platforms that serve the ride-hailing industry. Certain market players are affiliated with automakers or ride-hailing companies so they have access to funds and resources to sustain and expand their operations. Ride-hailing companies nonetheless frequently engage third-party workforce operational solution platforms, such as Quhuo, to access a sufficient number of well-trained drivers.

China’s housing rental service market and the corresponding workforce operational solution platform market

Housing rental service providers in China, including long-term housing rental platforms and online accommodation and sharing platforms, play an important role in pairing long-term and short-term housing supply and demand. Long-term housing rental platforms operate under a purchase-and-operate or lease-and-operate model, specializing in transforming housing units, offering ready-to-move-in housing services and facilitating a variety of housing-related, value-added services. Accommodation sharing and booking platforms operate and manage an online marketplace for residential hosts to accommodate guests with lodging services. There are two

 

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types of online accommodation and sharing platforms: business-to-consumer (B2C) platforms and consumer-to-consumer platforms (C2C). Unlike C2C platforms which serve as pure-play marketplaces, B2C platforms engage in management and operation of the property entrusted to them. According to the F&S report, the gross merchandise volume of China’s housing rental service market increased from RMB674.5 billion in 2015 to RMB1,326.3 billion in 2019 at a CARG of 18.4%, and is expected to reach RMB1,726.6 billion by 2024 at a CAGR of 5.4% from 2019 to 2024.

In China’s housing rental service market, long-term housing rental platforms and B2C online accommodation and sharing platforms generally have demand for standardized, efficient and responsive residence services, such as housekeeping services, in order to improve customer experience, which in turn requires a large number of flexible, skilled workers to deliver such services.

Housing rental service providers mainly partner with workforce operational solution platforms to deliver housekeeping services, primarily for the following reasons:

Reduced operational cost. Workforce operational solution platforms can achieve up to a 15% and a 30% cost saving on average for housing rental service providers compared to in-house operations and crowdsourcing, respectively.

Comprehensive training and management. Workforce operational solution platforms are able to provide proper training to housekeepers to enhance their capabilities to maintain high-standard productivity and service quality. Moreover, workforce operational solution platforms also provide proper guidance to housekeepers to assist their daily operational activities.

Sufficient workforce supply and relatively low turnover rate. Housing rental service providers need to engage an adequate number of housekeepers to meet their increasing demands along with their expansion, especially during peak seasons. Workforce operational solution platforms, with operations across various industries, are able to maintain a team of housekeepers by encouraging male workers in their network to bring in their female relatives. Moreover, workforce operational solution platforms can maintain a relatively low turnover rate among housekeepers on their platforms by virtue of comprehensive training, management and other support and services.

According to the F&S report, the corresponding workforce operational solution platform market, in terms of revenue, increased from RMB1.6 billion in 2015 to RMB5.1 billion in 2019 at a CAGR of 33.6%, and is expected to reach RMB15.3 billion by 2024, representing a CAGR of 24.6% from 2019 to 2024.

China’s bike-sharing market and the corresponding workforce operational solution platform market

Bike-sharing services allow consumers to utilize publicly parked bikes to meet their short-distance transportation needs. The gross merchandise volume of China’s bike-sharing market experienced significant growth from 2015 to 2019 at a CAGR of 137.5%, which created a buoyant demand for shared-bike maintenance services. These services comprise distribution and transportation of shared-bikes, including identification and replacement of malfunctioning bikes, and repair and maintenance of shared-bikes. The bike-sharing market is expected to grow at a more sustainable CAGR of 12.1% from 2019 to 2024. The corresponding workforce operational solution platform market for the bike-sharing industry, in terms of revenue, is expected to reach RMB7,207.5 million by 2024 at a CAGR of 6.7% from 2019 to 2024.

Bike-sharing platforms have great demands for a massive, flexible and standardized workforce to fulfill shared-bike maintenance services, especially considering the labor-intensive nature of the market and a pattern of fluctuation of such demands. Most bike-sharing platforms have outsourced entirely the distribution and transportation of shared-bikes to third-party workforce operational solution platforms, and will increasingly engage third-party workforce operational solution platforms for repair and maintenance of bikes, in light of higher operational efficiency and lower working capital pressure. According to the F&S report, workforce operational solution platforms can achieve up to a 15% cost saving on average compared to in-house operations.

 

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BUSINESS

Our Mission

Our mission is to enable on-demand consumer service companies to do better business and individuals on our platform to create better lives.

Overview

We were the largest workforce operational solution platform in China as measured by the number of average monthly active workers in 2019, according to the F&S report. We provide tech-enabled, end-to-end operational solutions to blue-chip on-demand consumer service businesses in industries with significant e-commerce exposure, including food delivery, ride-hailing, housekeeping and bike-sharing. In 2019, we ranked No.1 in the on-demand food delivery solution market in terms of both the number of delivery orders and revenue, with a market share exceeding that of the next top four market players combined in terms of both the number of delivery orders and revenue, according to the F&S report. Within the on-demand consumer service ecosystem, we play a unique and indispensable role as the link between consumer service businesses and the end consumers to enable the delivery of goods, services and experiences to consumers.

Our story began in 2012 when a trio of ex-DHL entrepreneurs founded our company to partner with the rapidly growing on-demand food delivery businesses in China and provide a platform of large, flexible and standardized workforce focused on the last-mile delivery of prepared food. In the years that followed, the on-demand consumer service industry has flourished with the increasing society-wide consumer embracement of the on-demand economy, driven by rapid urbanization, consumption upgrade and democratization of mobile internet. According to the F&S report, China’s on-demand consumer service market, in terms of gross transaction value, increased from RMB1,296.4 billion in 2015 to RMB4,641.4 billion in 2019 at a CAGR of 37.6%, and is expected to reach RMB9,482.2 billion by 2024 at a CAGR of 15.4% from 2019 to 2024. The proliferation of on-demand consumer service industry has created a new and expansive demand for flexible, stable and trained workforce to deliver standardized, high-quality services to consumers. However, China’s labor market is experiencing significant challenges, including a continuous decline in skilled working-age labor force and persistently increasing labor costs. The on-demand consumer service companies also generally lack in-house resources or capability to deliver standardized and high-quality services to end consumers. This mismatch among demand, supply and capability creates an enormous and sustainable business opportunity for us. As a clear leader in the workforce operational solution market, we believe we are well positioned to capture the enormous opportunity in this highly fragmented market with a number of small-scale, single-industry players incapable of delivering standardized solutions.

To the on-demand consumer service companies that we serve, our solutions have become critical to their business strategy, operational focus and financial performance. We have established deep-rooted, long-standing partnerships with blue-chip industry customers in an increasing number of on-demand consumer service industries in China. Our platform helps industry customers mobilize a large team of workers and utilize a combination of training, performance monitoring and refinement, and incentives to transform them into skilled workers who can follow industry-specific, standardized and highly efficient service procedures. In the on-demand food delivery market alone, we were able to achieve an average of approximately 40% cost saving for industry customers in terms of operational cost per order in 2018, according to the F&S report. Leveraging our technology capabilities, we conduct data-driven operational analysis to assist our industry customers in improving their service quality and consumer satisfaction. For example, we have been able to work with our largest industry customer and limit our delivery time for prepared food generally within 30 minutes. As of December 31, 2019, we partnered with industry customers mostly comprising top market players in their respective industries, such as Meituan, Ele.me and KFC in the on-demand food delivery industry, Mobike in the bike-sharing industry, Didi in the ride-hailing industry and Anxin Home in the housing rental industry. Our geographic footprint reached 73 cities across 26 provinces, municipalities and autonomous regions in China as of December 31, 2019.

 

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To the workers on our platform, we believe we have become a “go-to” one-stop platform that provides them with diversified, flexible earning opportunities. Workers are also attracted to our platform for career advancement prospects and various work-life support and services. We empower workers with minimal work experience to begin their career and progress with us and promoted over 330 workers on our platform to team leaders and other management roles in 2019. In the three months ended December 31, 2019, we had approximately 40,800 average monthly active workers on our platform. We believe that the size of our workforce allows us to further cement our relationship with industry customers and become their partner of choice when they enter new geographical markets or new on-demand consumer service industries. Workers on our platform are also encouraged to bring in their friends, relatives and acquaintances to continually and organically expand our workforce network. Over 74% of those who joined our platform in 2019 were referred by existing workers. We believe that the bonds among workers on our platform can be forged by such social relations, minimizing worker turnovers and making our platform more stable.

Our ability to quickly scale up our business and effectively manage our workers rests on Quhuo+, a proprietary technology infrastructure that centralizes our operational management and streamlines our solution process. For workers in a management position, such as team leaders for our on-demand food delivery solutions, Quhuo+ allows them to pinpoint workers on our platform to monitor their workload and performance, and dynamically manage staffing and maintain solution quality. With Quhuo+, team leaders are able to transcribe industry-specific KPIs obtained from industry customers into executable guidance for workers on our platform, and benchmark workforce performance across all workers and teams based on data-driven analytics to refine our solutions and optimize our operational efficiency. For rank-and-file workers, Quhuo+ allows them to review their workload, access on-the-job training and review their performance. As a result, we are able to cultivate a specialized yet flexible workforce and deploy the same workers across different industry settings based on their work schedules by, for example, allowing delivery riders on our platform to take part in our shared-bike maintenance solutions during their off-peak hours, which serves to optimize our operational cost and also diversify their earning opportunities. We have developed Quhuo+ into a scalable modular system with customizable parameters and settings to smoothly manage and transfer massive workers across different regions and industries we serve, which forms the bedrock of our highly scalable and replicable business model. As a result, we are able to scale our operations and replicate our success into greenfield regions or industries quickly and cost-effectively with minimal incremental costs on infrastructure. For example, we became No.1 in the shared-bike maintenance solution market in terms of revenue in 2018, according to the F&S report, within a span of 12 months.

We have grown rapidly in recent years to achieve greater economies of scale, which, coupled with our technology capabilities, increases our industry customers’ dependency on our platform. As our platform continues to grow, we are attracting customers from more industries as well as a greater number of workers. This powerful network effect has created strong entry barriers and underpins our long-term growth. Our revenues were RMB654.8 million, RMB1,474.5 million and RMB2,055.8 million (US$295.3 million) in 2017, 2018 and 2019, respectively. We recorded net loss of RMB14.0 million, RMB44.3 million and RMB13.4 million (US$1.9 million) in 2017, 2018 and 2019, respectively. Excluding the effect of share-based compensation expenses, we recorded adjusted net loss of RMB10.7 million, adjusted net income of RMB45.3 million and adjusted net income of RMB51.4 million (US$7.4 million) in 2017, 2018 and 2019, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measure” for a reconciliation of our net loss to adjusted net income (loss).

 

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We operate in a vibrant ecosystem consisting of workforce operational solution platforms, including us, on-demand consumer service companies and end consumers. The following diagram is a simplified presentation of our role in this ecosystem:

 

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Our Strengths

We believe the following competitive strengths contribute to our success and differentiate us from our competitors:

Leading tech-enabled workforce operational solution platform capturing market opportunity

We were the largest workforce operational solution platform in China as measured by the number of average monthly active workers in 2019, according to the F&S report. We provide tech-enabled, end-to-end operational solutions to on-demand consumer service companies. We ranked No.1 in the on-demand food delivery solution market in terms of both the number of delivery orders and revenue in 2019, with a market share exceeding that of the next top four market players combined in terms of both the number of delivery orders and revenue, according to the F&S report. We enjoy a significant early mover advantage as a pioneer in the market. We launched our on-demand food delivery solutions in 2013 and have continued to innovate and diversify our solution offerings to capitalize on the enormous market opportunity and unleash additional earning opportunities for workers on our platform. As of December 31, 2019, we served blue-chip customers from different industry settings with over 143,000 registered workers on our platform and a nationwide footprint of 73 cities across 26 provinces, municipalities and autonomous regions in China, covering both metropolises such as Beijing, Shanghai, Guangzhou and Shenzhen and a number of lower-tier cities with growth potential.

End-to-end operational solutions driving customer satisfaction and business growth

We provide industry customers with standardized, high-quality solutions to address their specific operational demands. We help industry customers mobilize a large team of untrained workers and utilize a combination of training, performance monitoring and refinement, and incentives to transform them into skilled workers who can follow industry-specific, standardized service procedures. Leveraging Quhuo+, our proprietary technology infrastructure, we conduct data-driven operational analysis to assist industry customers in improving their service quality and consumer satisfaction. For example, through our on-demand food delivery solutions, we were able to generally limit our average delivery time within 30 minutes and achieve an average on-time delivery rate of over 98% for our largest industry customer in 2019.

 

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Our solutions alleviate industry customers from the burden associated with discovering, training, managing and maintaining a sufficient number of skilled workers, allowing them to improve the efficiency of the final touchpoint of the delivery of goods, services and experiences. For example, in the on-demand food delivery market alone, we were able to achieve an average of approximately 40% cost saving for industry customers in terms of operational cost per order in 2018, according to the F&S report. Through their partnerships with us, industry customers are freed to focus on their core business activities and achieve their business objectives cost-effectively.

Our solutions have allowed us to achieve rapid business growth and solidify our market leadership. The total number of cities within our network increased from 31 as of January 1, 2017 to 73 as of December 31, 2019. The average monthly number of delivery orders fulfilled through our on-demand food delivery solutions increased from approximately 7.9 million in the three months ended December 31, 2017 to approximately 15.6 million in the three months ended December 31, 2018, and further to approximately 29.2 million in the three months ended December 31, 2019.

Proprietary technology infrastructure boosting operational efficiency and expansion

We take pride in Quhuo+, a proprietary technology infrastructure that centralizes our operational management and streamlines our solution process. For workers in a management position, such as team leaders for our on-demand food delivery solutions, Quhuo+ allows them to pinpoint workers on our platform to monitor their workload and performance and dynamically manage staffing and maintain solution quality. With Quhuo+, team leaders are able to transcribe industry-specific KPIs obtained from industry customers into executable guidance for workers on our platform, and benchmark workforce performance across all workers and teams based on data-driven analytics to refine our solutions and optimize our operational efficiency. For rank-and-file workers, Quhuo+ allows them to review their workload, access on-the-job training and review their performance. As a result, we are able to cultivate a specialized yet flexible workforce and deploy the same workers across different industry settings based on their work schedules by, for example, allowing delivery riders on our platform to take part in our shared-bike maintenance solutions during their off-peak hours, which serves to optimize our operational cost and also diversify their earning opportunities. We have developed Quhuo+ into a scalable modular system with customizable parameters and settings to smoothly manage and transfer massive workers across different regions and industries we serve, which has become the bedrock of our highly replicable and scalable business model. As a result, we are able to scale our operations and replicate our success into greenfield regions or industries quickly and cost-effectively with minimal incremental costs on infrastructure. For example, we became No.1 in the shared-bike maintenance solution market in terms of revenue generated from the redistribution and transportation of idle bikes in 2018, according to the F&S report, within a span of 12 months.

Deep-rooted, long-standing partnerships with blue-chip industry customers

We have established deep-rooted, long-standing partnerships with many blue-chip industry customers in a variety of on-demand consumer service businesses. We believe we have forged a symbiotic relationship with our industry customers to the extent that our solutions have become a vital, indispensable part of their service value chain. For example, in the on-demand food delivery market, we are among the earliest third-party service suppliers of Meituan and Ele.me. The industry customers that collectively contributed more than 90% of our revenue in 2019 have been with us for more than four years. As of December 31, 2019, we served 12 industry customers mostly comprising top market players in their respective industries.

We have received numerous awards and recognition from industry customers. For example, we received an Outstanding Contribution Award from Meituan and a Best Performance of the Year Award from KFC in 2018. We were recognized as the Best Partner by Ele.me for the first quarter of 2019.

 

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Compelling value proposition to workers solidifying our platform

We believe we have become a “go-to” one-stop platform that provides workers with diversified earning opportunities. Our platform also appeals to workers through career advancement prospects and various work-life support and services, including assistance with legal and tax compliance, financial support, insurance, labor disputes and accident handling. We focus on transforming individuals into trained workers capable of delivering standardized services in different industry settings through a combination of onboarding training, practical in-the-field coaching, and ongoing daily reviews, covering topics including service techniques and manners and complaint handling. We also focus on cultivating a community that encourages every worker to pursue a better life with us by offering them the opportunity of advancing from a novice worker to the management position, such as a team leader, in recognition of their diligence, dedication and personal growth. Many workers joined us also for the flexibility we provide in terms of work types, working hours, geographic locations and career options. Serving various on-demand consumer service businesses, we offer diversified work opportunities for workers with differentiated skillsets to maximize our repository of workers. The number of our average monthly active workers increased from over 15,400 in the three months ended December 31, 2017 to over 23,300 in the three months ended December 31, 2018, and further to over 40,800 in the three months ended December 31, 2019.

We encourage workers on our platform to bring in their relatives, friends and acquaintances with diversified work opportunities we offer. We believe that the social bonds among workers can make our network more stable and sustainable. Our strong word-of-mouth reputation also speaks to our attractiveness to workers. In 2019, over 74% of those who joined our platform were referred by existing workers.

Powerful network effect creating strong competitive edge

Our platform provides compelling value propositions to both industry customers and workers, creating a powerful network effect. As our platform becomes more attractive to workers, we are able to deploy a massive number of workers through a nationwide network and standardize our solution quality across geographical markets for industry customers that also operate on a nationwide basis. Over time, we believe our solutions have become a vital, indispensable part of the service value chain of industry customers who, as a result, have become increasingly dependent on us to achieve their business objectives vis-à-vis end consumers. As we continue to solidify our partnerships with industry giants and grow our customer base, we expect to attract more workers by offering better earning opportunities and career prospects, which in return will enhance our capacity to partner with more industry customers. As our platform grows larger, we will achieve greater economies of scale and establish a common, scalable infrastructure to expand into different geographical markets and industries with minimal incremental operating cost. We believe that the powerful network effect represents a formidable competitive advantage in scaling our operations across different geographical markets and industries.

Visionary and seasoned management team with proven track record

We were founded by a trio of ex-DHL entrepreneurs, who have been working closely together for over 10 years. We benefit from the leadership of a management team with prominent strategic visions, in-depth industry expertise, extensive managerial and operational experience, and proven execution capability. As market forerunners, the key members of our management have an average of 17 years of relevant industry experience. Mr. Leslie Yu, our founder and chief executive officer, is a successful, renowned entrepreneur and a former senior business manager at DHL. Mr. Shuyi Yang, our co-founder and vice president, has previously served various senior positions at DHL, eNet and iSoftStone. Mr. Zhen Ba, our co-founder and vice president, has previously served various senior positions at DHL and LF Logistics. Other key members of our management have previously served in leading private and public companies across logistics, e-commerce and information technology sectors. We believe that, under the leadership of our management team, we are able to follow the market trend and execute our business strategies.

 

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Our Strategies

We intend to further grow our business by pursuing the following strategies:

Strengthen our market leading position

We will continue to strengthen our market leading position. We endeavor to set the market standard in terms of solution quality and worker qualifications and stay abreast of the evolving industry trend and customer demand. We also seek to further solidify our partnerships with key industry customers by optimizing our solutions. We intend to establish or maintain our partnerships with top market players in each industry we serve and attract long-tail customers. We will also attract more workers to expand our service capacity to serve more prospective customers.

Increase market penetration and expansion

We intend to leverage our established workforce resources and infrastructure in existing industries and geographical markets to scale up our operation quickly and cost-effectively, with minimal incremental cost on infrastructure. We seek to deepen our penetration in existing industries, such as the ride-hailing and the housekeeping markets, and also seek to explore and exploit additional industries, such as the grocery delivery, the vehicle maintenance service, the last-mile express delivery, the commercial cleaning and the caregiving markets, to unlock new earning opportunities for workers and diversify our customer portfolio. As part of our expansion, we plan to deploy the same workers across industry settings to allow them to participate in different solutions we offer based on their work schedules. In addition, we intend to solidify our presence in existing geographical markets and expand into lower-tier cities following the footsteps of our industry customers into new growth markets.

Invest in technology and enhance data insights

We will continue to invest in our technology. We seek to enhance the functionality and configuration of Quhuo+ to improve our operational and managerial efficiency, and develop new features and functions and improve the user experience to create more values for workers. We also seek to improve the scalability of Quhuo+ to allow seamless interface configuration between different solution scenarios and geographies. Additionally, we intend to make the mobile app version of Quhuo+ accessible to any workers interested in flexible, gainful work opportunities, and ultimately develop Quhuo+ into a widely-adopted operational management platform across multiple sectors by all businesses.

Enhance worker loyalty to our platform

We will continue to invest in additional value-added services to workers on our platform. For example, we intend to provide workers with suitable wealth management products and financial advisory services in collaboration with third-party financial service providers. We also seek to offer more flexible, diversified earning opportunities to workers on our platform as we continue to tap into new consumer service industries. We believe that these value-added services and increasing opportunities for workers will enhance their loyalty to our platform and drive word-of-mouth referrals.

Pursue strategic alliances, investments and acquisitions

We intend to selectively pursue strategic alliances, investments and acquisitions to further strengthen our competitiveness. We will evaluate and execute alliance, investment and acquisition opportunities that complement and scale up our business, optimize our profitability, help us expand into adjacent industries and add new capabilities to our platform.

 

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Our Value Propositions to Industry Customers and Workers

We enable the delivery of standardized goods, services and experiences cost-effectively:

 

   

Industry-tailored solutions. We launched our on-demand food delivery solutions in 2013 and have continued to expand our solution offerings to other industry settings, including ride-hailing, housekeeping and bike-sharing. We have crafted our solutions to address the specific operational requirements from customers in different industries, leveraging Quhuo+ which is developed based on our accumulated industry knowledge and operational experience and applicable across different geographical markets and industries.

 

   

Standardized solution quality. We transcribe comprehensive, dynamic KPIs imposed by industry customers into executable guidance to workers on our platform. We formulate a set of industry-specific, standardized operational procedures, covering, among other topics, service delivery techniques, conversation manners and complaint handling. We impart this knowledge through on-the-job training and detailed action plans to guide worker performance, which allows us to maintain standardized solution quality on par with the requirements from industry customers across different geographical markets and industries.

 

   

Improved operational efficiency. Our solutions lift the burden associated with searching for, contracting with, training, managing and paying a sufficient number of individual workers under the traditional labor employment model for industry customers to fulfill services to their consumers. Our solutions enable industry customers to commit their limited operational and managerial resources to their core business activities and achieve their business objectives cost-effectively. As we have standardized our solution quality among an expansive repository of workers across geographical markets and industries, our solutions also effectively aid industry customers in executing their expansion strategies.

We empower workers on our platform and enable them to create better lives:

 

   

Diversified earning opportunities. Our platform lessens workers’ job-hunting burden and unleashes attractive earning potential serving our industry customers. We empower workers with minimal work experience to begin their career and progress with us. We help workers with working gear and provide them with training and other resources to help them elevate productivity and earning levels. As we continually expand into new industries, we offer more diversified types of positions to existing workers, so that they could further exploit their earning potential by serving multiple roles across different industries. We also enable them to bring in their friends, relatives and acquaintances with differentiated skillsets and aspirations who are on the lookout for earning opportunities.

 

   

Supportive worker community. We value the workers on our platform and care for their well-being. We provide comprehensive support and services to a novice worker in discharging his or her daily work routines and to a team leader in managing work assignment and tracking performance. We also assist workers in obtaining insurance, on-the-job and safety training, emergency assistance and applicable permits and licenses application. We continually innovate our support and service to workers, and recently launched payday loan services in collaboration with third parties to ease their short-term liquidity problems. As a result, we have created a supportive community for workers, which drives worker loyalty and word-of-mouth referrals.

 

   

Career advancement opportunities. We cultivate a work environment that encourages every worker to take on more responsibilities, providing the support and the opportunity for them to not only make a living but also pursue a long-term career with us. As a novice worker accumulates work experience and develops management skills, we offer such worker the advancement opportunity to become a team leader and more.

 

   

Work-life flexibility. Many workers left the traditional employment model and joined us for more flexibility in terms of work types, working hours, geographic locations and career options. For

 

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example, workers may select to work for a day shift or a night shift and change their working schedules easily by reporting to the team leader. As we continually diversify working opportunities on our platform, workers can rotate to take part in different solutions we offer to find the most suitable jobs based on their skillsets, objectives and personalities.

The value propositions we offer to industry customers and workers have created a powerful network effect. As we continue to solidify our partnerships with industry giants and grow our customer base, we expect to attract more workers by offering better earning opportunities and career prospects, which in return will enhance our capacity to partner with more industry customers. As we grow larger, we will achieve greater economies of scale and establish a common, scalable infrastructure to expand into different geographical markets and industries with minimal incremental operating cost. We believe that the powerful network effect represents a formidable competitive advantage in scaling our operations across different geographical markets and industries. The following diagram illustrates our services and support to industry customers and workers on our platform:

 

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Our Solutions

We have established a solid market presence in the on-demand food delivery industry and continued to expand into other industries by leveraging our accumulated industry knowledge and operational experience. We currently provide four industry-tailored operational solutions, including on-demand food delivery solutions, ride-hailing solutions, housekeeping solutions and shared-bike maintenance solutions.

On-demand food delivery solutions

We launched our on-demand food delivery solutions in February 2013. We operate exclusively under the premium delivery model which is characterized by, among others, higher service quality, service reliability and delivery speed compared to the crowdsourcing model. According to the F&S report, driven by the incentive to improve their returns and strengthen their brands through high-quality delivery services, major on-demand food delivery platforms have gradually adopted the premium delivery model since 2015 and have fully partnered with third-party workforce operational solution platforms, such as us, to fulfill premium deliveries in lieu of in-house delivery operations. With our on-demand food delivery solutions, industry customers are able to scale up their delivery coverage quickly and complete additional deliveries at low incremental costs.

Our industry customers typically divide their intra-city food delivery network into a number of delivery areas. We and our industry customers generally enter into a standard form delivery service agreement, pursuant to which we are assigned certain number of delivery areas within a city. We deploy delivery riders on our

 

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platform to serve each industry customer. On the one hand, each delivery rider on our platform, after being assigned to a certain industry customer, obtains access to that customer’s mobile app and dispatch portal to receive and complete delivery orders. We, on the other, offer onboarding logistics support and training, and manage delivery riders on our platform through Quhuo+. With our support, each team leader on our platform sets up a service station for one or more delivery areas, and supervises all delivery riders in that service station under a unified management standard. Our team leaders also manage customer relationships within their assigned delivery areas. Under the supervision of the team leader, all delivery riders dispatched from a specific service station will be responsible solely for the delivery orders initiated within and destined for that delivery area. We may adjust the dispatch of workers among different delivery areas to accommodate the peak demand and seasonality swings for different industry customers.

A delivery service agreement typically is one year in term and is renewable by mutual consent. The agreement grants us a non-exclusive right to provide on-demand food delivery services within designated delivery areas and contains certain restrictive covenants. See “Risk Factors—Risks Related to Our Business and Industry—We may be held liable for breach of contract under our agreements with industry customers.” If we breach the terms of the delivery service agreement and fail to rectify the breach within a prescribed time frame, industry customers may unilaterally adjust the scope of our business cooperation, deduct outstanding fees payable to us, and/or terminate the agreement. We are also obligated to indemnify industry customers for personal injury and property loss or damage sustained by any third party caused by us or from the rendering of our delivery services. We sometimes are required to place a deposit with an industry customer, from which the customer is entitled to deduct liquidated damages or economic losses sustained. We derive revenue from service fees paid by industry customers based on the number of fulfilled orders, subject to KPI-based adjustments.

A typical delivery service agreement also sets forth detailed service standards and KPIs to measure the efficiency and effectiveness of our delivery services and the workplace safety in our daily operations, such as the timely delivery rate, complaint rate and accident rate. To ensure the quality of our solutions and cultivate a safety-conscious work environment, we require all delivery riders on our platform to abide by our delivery service standards. We have formulated a set of criteria in relation to service techniques and manners and safety consciousness that generally follow the KPIs required by our industry customers in an understandable manner for workers. We provide delivery riders with systematic training programs consisting of onboarding training, practical in-the-field training, and daily review and face-to-face meetings. The training covers topics ranging from delivery techniques, conversation manners, driving skills and techniques, complaint handling to health and safety matters. We continually evaluate their performance based on our service criteria, give them timely feedback based on the analysis of their track record, and guide their rectification. In addition, we have implemented various measures to enhance the safety of delivery riders on our platform, including assistance in obtaining insurance and handling emergency situations.

 

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The following flowchart illustrates the typical transaction process of our on-demand food delivery solutions:

 

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As of December 31, 2019, we delivered our on-demand food delivery solutions in 62 cities in China. In the three months ended December 31, 2017, 2018 and 2019, our average monthly delivery riders were over 15,400, 22,700 and 39,900, respectively, and the average monthly delivery orders fulfilled by those delivery riders were approximately 7.9 million, 15.6 million and 29.2 million, respectively. Despite the large volume of orders we handle, we generally limited our average delivery time within 30 minutes and achieved an average on-time delivery rate of over 98% for our largest industry customer in 2019.

Ride-hailing solutions

We launched our ride-hailing solutions in October 2018. Under the current regulatory regime in China, ride-hailing drivers are required to obtain licenses both for themselves and for the vehicles they steer. According to the F&S report, less than 6% ride-hailing drivers and less than 4% registered ride-hailing vehicles in the market were in strict compliance with relevant regulations in 2019. Ride-hailing companies and drivers may be subject to fines and bans for violation of the relevant regulations. We attract ride-hailing companies with our access to a fleet of qualified ride-hailing drivers that are in short supply. We attract qualified candidates to our platform with our car leasing arrangements, under which we sublease vehicles with the requisite license to drivers and charge them monthly rental fees. As a result, we relieve their financial burden in obtaining a vehicle when they enter the ride-hailing market. We also provide them with strong driver-centric support and services, such as filing for insurance claims, roadside assistance and vehicle repair and maintenance. In addition to inviting qualified ride-hailing drivers to join us, we also motivate workers with driving skills on our platform to obtain the required permit so that they could become qualified ride-hailing drivers and take part in our ride-hailing solutions. As of December 31, 2019, we had over 670 full-time ride-hailing drivers on our platform and had access to a pool of over 5,100 other workers on our platform that meet the requisite minimum years of driving experience to become qualified ride-hailing drivers. We believe that it is more cost-effective to convert existing eligible workers on our platform into drivers than to attract new drivers through referrals or marketing campaigns and that our access to a large pool of eligible workers represents incremental growth potential.

Drivers use mobile apps from the ride-hailing companies to acquire and complete ride orders. We receive the performance data from ride-hailing companies and analyze these data to help drivers refine their services and increase their ratings and income level.

We primarily derive revenue from rental fees under our car leasing agreements with drivers. We may also charge ride-hailing companies services fees based on our consulting services to them.

 

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As of December 31, 2019, we delivered our ride-hailing solutions to a major ride-hailing company in eight cities. Drivers on our platform fulfilled approximately 2,659,000 rides in 2019.

Housekeeping solutions and other services

We launched our housekeeping solutions in January 2019. We encourage workers on our platform with referral bonuses to bring in their relatives, friends and acquaintances to join our platform for our housekeeping solutions, which we believe helps us grow our workforce organically and enhance the stability and sustainability of our worker community. See “—Workers on Our Platform.”

We tailor our housekeeping solutions primarily for housing rental service providers, including accommodation sharing and booking platforms and long-term rental apartments, which typically require standardized, high-quality housekeeping services to be provided on an efficient and responsive basis. Our industry customer issues detailed operational guidelines to ensure the consistency of solution quality, and we relay such requirements to housekeepers on our platform and formulate detailed action plans and trainings for them. Upon completion of each service order, the housekeepers must photograph or videotape the cleaned property and submit the evidence to the industry customer through a specified communication channel. Our industry customer also conducts inspection of the cleaned property from time to time to ensure solution quality.

We derive revenue from service fees paid by our industry customer based on the number of fulfilled orders, subject to KPI-based adjustments. As of December 31, 2019, we delivered housekeeping solutions to two long-term housing rental service providers in three cities.

In addition, we continuously tap into new industries to provide diversified, flexible earning opportunities for workers on our platform. As of the date of this prospectus, we provide additional services including grocery delivery and vehicle maintenance services. We derive revenue from service fees paid by industry customers based on the number of fulfilled orders.

Shared-bike maintenance solutions

We launched our shared-bike maintenance solutions in January 2018 to address the imminent demand for maintenance and distribution services from bike-sharing companies. A common issue plaguing the bike-sharing businesses is the disproportionate geographical distribution of bikes as the demand for bikes can be unpredictable, asymmetric and fluctuating among different neighborhoods throughout the day. As a result, bike-sharing companies must deploy fleets of vehicles to redistribute the bikes to guarantee a desirable number of bikes at different locations. It is also critical for bike-sharing companies to identify, repair and replace malfunctioning bikes not only to improve user experience but also to prevent safety hazards and other incidents that may result from malfunctioning bikes. Our shared-bike maintenance solutions presently include maintaining of orderliness of bikes, redistribution and transportation of idle bikes based on usage patterns within a designated area, and identification and transportation of malfunctioning bikes.

As the demand for our shared-bike maintenance solutions is more flexible compared to that of our on-demand food delivery solutions, we encourage delivery riders on our platform to take part in our shared-bike maintenance solutions during their off-peak hours. As of December 31, 2019, approximately 25% of the workers engaged in the shared-bike maintenance solutions were on a part-time basis from working as delivery riders on our platform. We believe we can further unlock underutilized workforce capacity as we continue to innovate our solutions and expand into new industries.

We derive revenue from service fees paid by bike-sharing companies based on service hours and/or the number of shared-bikes we transported and identified as malfunctioned. As of December 31, 2019, we delivered shared-bike maintenance solutions to a major bike-sharing company in six cities.

Our Geographic Footprint

We are able to operate across multiple industries within a single city in a highly efficient manner as we consolidate the management of each business line based on Quhuo+ and our offline business support team. As of December 31, 2019, our geographic footprint reached 73 cities across 26 provinces, municipalities and

 

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autonomous regions in China, among which we provided solutions for multiple industries in eight cities. The following map illustrates our nationwide geographic footprint as of December 31, 2019.

 

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We generally focus on each city’s primary business districts and then gradually expand to adjacent areas to optimize our operational efficiency and cost management. We have already covered most provincial capitals and other major cities in China. We have also expanded into lower-tier cities, following the footsteps of our industry customers. We consider both external and internal factors in determining whether to launch our solution offerings in a new city. For example, we take into account the size of the local workforce market, the level of average wage, the on-the-ground pricing of industry customers, and the prospective synergies between the expansion and our existing presence.

Workers on Our Platform

We establish business outsourcing relationships with workers on our platform, pursuant to which we pay service fees to workers engaged in our solutions, including those in a management position such as team leaders for our on-demand food delivery solutions, as independent contractors through third-party labor service companies on a monthly basis. The service fees comprise base pay calculated based on the number of fulfilled orders and adjustments calculated based on other criteria that follow the KPIs required by our industry customers.

The number of our average monthly active workers increased from over 15,400 in the three months ended December 31, 2017 to over 23,300 in the three months ended December 31, 2018, and further to over 40,800 in

 

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the three months ended December 31, 2019. We believe we have become a “go-to” one-stop platform that provides workers with stable earning opportunities across different industry settings, career advancement prospects, and a supportive community with inclusive work-life support and services. As many workers joined us as fresh high school or college graduates with minimal work experience, we enable them to begin their career and progress on our platform. Moreover, many workers quit their old jobs under the traditional employment model, such as factory workers, and joined us for higher earning potential and more flexibility in terms of working hours and career options.

We manage workers on our platform primarily through Quhuo+. We provide comprehensive support to a novice worker in discharging his or her daily work routines and to a team leader in managing work assignment and tracking performance. We help workers with working gear and provide them with training and other resources to help them smoothly get started and elevate their productivity and earning levels. We also assist them in emergency assistance and applicable permits and license application. We cultivate a work environment that encourages every worker to take on more responsibilities, providing the support and the opportunity for them to not only make a living but also pursue a long-term career with us. As a novice worker accumulates the work experience and develops management skills, we offer the advancement opportunity to become a team leader and more. We also provide performance-based incentives to award excellence and motivate internal competition. As we continue to innovate our support to workers, we recently launched payday loan services in collaboration with a third-party credit information company, an asset management company and a lending company, through which we connect workers with loan providers to help ease their short-term liquidity problems. As of the date of this prospectus, we have not generated any material revenues from our payday loan services.

We attract workers to join us through multiple online and offline channels. We encourage the workers on our platform to bring in their friends, relatives and acquaintances to expand our worker network. Over 74% of those who joined our platform in 2019 were referred by existing workers. We believe that the bonds among workers on our platform can be forged by such social relations, making our platform more stable and sustainable. We also make it possible for those who have temporarily left our platform to return to our platform. As their past job performance and other work information can be tracked down and retrieved, we are able to streamline the process for returnees.

Quhuo+

We have developed Quhuo+ to centralize our operational management and streamline our solution process by eliminating middle-layer information gathering and reporting, which we believe is a key differentiator from many competitors that utilize a traditional model featuring multiple layers of management. We utilize Quhuo+ to monitor the workload and performance of workers on our platform and analyze their performance data, which allows us to dynamically manage staffing and continually benchmark workforce performance across all workers and teams to maintain solution quality. In particular, by leveraging our data analytics capability, we are able to instruct each service station to deploy an appropriate number of delivery riders with the strongest track record of performance to serve a certain delivery area in need. We continue to refine our solutions and optimize our service quality and operational efficiency, through data-driven analytics based on worker management, solution performance and customer feedback.

With Quhuo+, we have assigned an internal team of operational managers to track and benchmark the performance data generated from our service stations for our on-demand food delivery solutions and assist our team leaders in formulating performance improvement plans for the service stations they are in charge of. Our operational managers communicate with team leaders periodically to review the operating data on Quhuo+ and discuss measures to address any issues identified. They are also in charge of maintaining relationships with industry customers, helping team leaders design and implement service fee plans of their respective service stations, applying for large expenses on behalf of their designated service stations, and assisting each service station in optimizing efficiency and reducing cost, logistics management, annual inspection of business registration, corporate culture development, and tax and financing matters. We believe our operational managers

 

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are able to help team leaders become more adaptive to the management role and develop and improve their effective managerial skills by applying the data and functions on Quhuo+. As of December 31, 2019, we had a team of over 200 operational managers, all employed by us. The following screenshots illustrate the various aspects and metrics of our internal management interface based on Quhuo+:

 

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Quhuo+ allows us to cultivate a specialized yet flexible workforce and deploy the same workers across different industry settings based on their work schedules by, for example, allowing delivery riders on our platform to take part in our shared-bike maintenance solutions during their off-peak hours, which serves to optimize our operational cost and also diversify their earning opportunities. We have developed Quhuo+ into a scalable modular system with customizable parameters and settings to smoothly manage and transfer a large team of workers across different regions and industries we serve and continually support the expanded scope and heightened complexity of our operations. As a result, we are able to scale our operations and replicate our success into greenfield regions or industries quickly and cost-effectively with minimal incremental costs on infrastructure. As illustrated by the following screenshot, the team leader who operates in multiple industries can review the operating income and the staffing of multiple operational solutions in one management account:

 

 

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For workers in a management position, in particular team leaders for our on-demand food delivery solutions, Quhuo+ assists them with tactical planning and allows them to smoothly manage the daily operations of their designated service stations with a cluster of data-driven management modules:

 

   

Performance review. Among other things, Quhuo+ presents a team leader visualized graphs of a number of KPIs that help him review the operational performance of the corresponding service station. The team leader can examine the detailed breakdown of monthly income and expenditure of a specific

 

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service station, as well as the ranking of that service station to guide his management planning, such as cost and staffing adjustment.

 

   

Workforce management. The team leader can add in, modify and review workers’ personal information, as well as to terminate the business relationship with a certain worker.

 

   

Procurement management. The team leader can inspect the distribution and stock of working gear of any given period and submit the request for supplies procurement.

 

   

Expense management. The team leader can monitor a variety of operating expenses to guide budget making, including utilities, lease expenses, insurance expenses and other allowance expenses.

 

   

Service fee management. Under the guidance of our management team, team leaders can create and test service fee plans of the service stations under their management.

The following screenshots illustrate the interface of the portal designed for workers in a management position:

 

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For rank-and-file workers, we utilize Quhuo+ to achieve centralized data management. Once a worker signs up with our platform, Quhuo+ guides him or her through the following procedures:

 

   

Account setup. Each worker is assigned a user identification number for account setup. Workers can rotate through our various industry-tailored operational solutions without registering multiple accounts, as their information is seamlessly accessible and transferrable in Quhuo+.

 

   

Filing for individually-owned business registration. We require workers on our platform to register themselves as individually-owned businesses so that they may enjoy tax benefits. We facilitate the online filing of registrations for all workers.

 

   

Obtaining applicable qualification certificates and insurance coverage. We instruct workers to obtain and upload to Quhuo+ any applicable qualification certificates, such as a health certificate for each delivery rider and housekeeper, and a driver’s permit for each ride-hailing driver. We also purchase various insurances for workers on our platform to protect them from possible damages to person or property during the course of providing services.

 

   

Training. To ensure we are delivering exceptional service levels and upholding high quality standards for our industry customers, we have developed ongoing training programs for workers in various forms that cater to the demands of each specific industry customer. Our training materials are accessible through the mobile app anytime and anywhere and are complemented by practical in-the-field training and ongoing daily reviews, covering topics from service manners and techniques, conversation manners, emergencies handling to complaint handling.

 

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After the onboarding process, workers can use the mobile app to check the status of their agreements with us, review their performance, apply for working gear, and refer their relatives, friends and acquaintances to join our platform. They also have the access to the payday loan services we recently launched in collaboration with third parties to ease their short-term liquidity problems. The following screenshots illustrate the interface of the mobile portal designed for regular workers:

 

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Selected Customer Stories

The following stories illustrate how our industry customers have benefited from our solutions.

Customer X

Customer X is a major nationwide on-demand food delivery platform in China. We have partnered with Customer X since shortly after we launched our on-demand food delivery solutions and followed its footsteps to expand into greenfield markets in China in recent years. As of December 31, 2019, our food delivery solutions covered 34 cities for Customer X. Along the way, Customer X has reported that compared to other service suppliers, we generally have higher order fulfillment rate, less delivery time, and lower accident rate and dispute rate.

“We always demand a level of speed and sophistication in our nationwide expansion. Our partnership with Quhuo helps us set up shops faster in a new city by mobilizing a large team of trained workers rapidly and cost-effectively.”—Mr. X, Customer X’s District Manager of Logistics

Customer Y

Customer Y is a fast-food restaurant chain that has been developing its on-demand food delivery services. We have partnered with Customer Y since early 2018 and gained an increase of the share of wallet from Customer Y through our solutions. According to Customer Y’s accounts, among its delivery partners, we have ranked at the top in terms of KPI fulfillment and at the bottom in terms of consumer complaints. In particular, Customer Y appreciates our ability to accommodate the temporary surges in demand for our food delivery solutions during inclement weather conditions and holidays without compromising our solution quality.

 

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“As we continue to open local restaurants with delivery options, we must ensure that we have the capacity to fulfill the delivery services to maintain consumer satisfaction. However, it takes time and resources to deal with worker recruitment, contracts, training, payment and other logistic matters. We believe we should focus on our core restaurant operations and other critical strategic initiatives and let Quhuo take care of the delivery and all there is with it.”—Ms. Y, Customer Y’s District Manager of Operational Excellence

Selected Worker Stories

We hold near and dear to our heart the personal development of the workers on our platform. We believe that we succeed when they succeed. We provide the workers career advancement opportunities and endeavor to diversify their earning options with our presence in multiple, expanding industries. The following stories illustrate the career development and earning options available to workers on our platform.

Story A—from Rider to Driver

Three years ago, Mr. A, a new migrant to a big city, signed up with our platform as a delivery rider. He quickly adapted to the new job with our support. We provided him with onboarding training and a transition period during which time he could learn the ropes at his work without compromising his ratings. We also paired him with an experienced delivery rider as his mentor for practical and emotional support. Recently, Mr. A contemplated becoming a ride-hailing driver, as he obtained a driver’s license a few years ago. He was hoping that this career change would further improve his life. We leased him a vehicle under our car leasing arrangements for ride-hailing solutions. Mr. A is now looking forward to his new job.

Story B—from Rider to Leader

Mr. B, initially a delivery rider on our platform, decided to apply for a team leader position two years ago. He was anxious about this transition as he had no systematic managerial skills. We are here to help. With Quhuo+, Mr. B was able to track the performance results of the riders under his supervision and visualize a number of KPIs that helped him make the right managerial decision at the right time, such as when to dispatch more delivery riders and when to procure more working gear such as takeaway incubators. It turned out to be easier than he thought. Mr. B has since gained a new perspective on life from the responsibilities he now shoulders. He recently decided to apply for a regional manager position. With more responsibilities and financial rewards, Mr. B is happy and full of vim and vigor.

Story C—from Rider to Ranger

Mr. C, a fresh high school graduate, started his first job with us as a delivery rider. He was dispatched to a busy delivery area, which follows a clear pattern of peak and off-peak hours in terms of delivery demands. For example, he gets nonstop delivery orders throughout lunch hours on weekdays but far fewer orders during off-peak hours. Mr. C was eager to pursue more earning opportunities. We encouraged Mr. C and other delivery riders on our platform to participate in our shared-bike maintenance solutions during off-peak hours on a part-time basis. Mr. C quickly seized this opportunity and rejoiced as we filled in his idle hours with work and rewards. He has faith in our ability to continue to diversify our customer portfolio and unleash more earning opportunities on our platform.

And the story goes on. . .

Mr. A’s financial situation has significantly improved after he became a ride-hailing driver. He persuaded his parents to move in with him for the earning opportunities offered by us and the bustling city. Mr. B eventually ended the long-distance relationship and reunited with his newly-wed wife. Mrs. B joined us as a housekeeper as part of our housekeeping solutions. They recently made the down payment for a condo in town. Mr. C fell in love with a girl he met through our platform, and he has been working toward a team leader position. We heard a proposal is underway? Or promotion?

 

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Our Technology

Quhuo+ forms the backbone of our business operations. We strategically designed Quhuo+ to be flexible and scalable with modularized functions. See “—Quhuo+” for details. As of December 31, 2019, we had a dedicated team of 62 technology research and development professionals with an average of five years of the relevant industry experience.

We have developed reliable and stable network infrastructure to ensure high availability and a low risk of downtime. We primarily utilize third-party cloud service providers to host our network infrastructure for core operational functionality, data backup, and artificial intelligence application.

Data Privacy and Security

We process a large amount of data from workers on our platform. We also have access to certain operating data related to our performance from industry customers. We take the privacy of personal data and confidential information seriously and have implemented an internal data security management policy. We have also implemented a combination of various industry-standard encryption algorithms to protect sensitive personal information. In addition, we utilize a system of firewalls to prevent unauthorized access to our internal systems. Replications and backups are performed once every week on our server. Our IT department monitors the performance of our websites, technology systems and network infrastructure to enable us to respond promptly to potential problems. We also continuously review, improve and iterate our data privacy policies and security foundation.

Branding, Marketing and Customer Relationship

We believe word-of-mouth marketing has helped us achieve, and will continue to drive, organic growth in our workers. We also believe brand recognition is critical to our ability to retain or establish partnership with existing or new industry customers, and our general marketing efforts are designed to enhance our brand awareness and reputation among them. We primarily attract new industry customers