424B4 1 d72883d424b4.htm 424(B)(4) 424(B)(4)
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-253910

55,000,000 American Depositary Shares

LOGO

Zhihu Inc.

Representing 27,500,000 Class A Ordinary Shares

 

 

This is an initial public offering of 55,000,000 American depositary shares, or ADSs, by Zhihu Inc. Two ADSs represent one of our Class A ordinary share, par value US$0.000125 per share.

Prior to this offering, there has been no public market for the ADSs or our Class A ordinary shares. Our ADSs have been approved for listing on the New York Stock Exchange under the symbol “ZH.”

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

As of the date of this prospectus, our outstanding share capital consists of Class A ordinary shares and Class B ordinary shares, and Mr. Yuan Zhou beneficially owns all of our issued and outstanding Class B ordinary shares. Mr. Yuan Zhou will beneficially own 7.0% of our total issued and outstanding ordinary shares and 42.4% of the aggregate voting power of our total issued and outstanding ordinary shares immediately after the completion of this offering and the concurrent private placements, assuming that 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 is not convertible into Class B ordinary shares under any circumstances. Each Class B ordinary share is entitled to ten votes, subject to certain conditions, and is convertible into one Class A ordinary share at any time by the holder thereof.

Concurrently with, and subject to, the completion of this offering, certain investors have agreed to purchase US$250.0 million in Class A ordinary shares from us, including (i) US$100.0 million by Alibaba Group Holding Limited (through an affiliate), (ii) US$100.0 million by JD.com, Inc. (through an affiliate), (iii) US$30.0 million by Image Frame Investment (HK) Limited, our shareholder and an affiliate of Tencent Holdings Limited, and (iv) US$20.0 million by Lilith Games (through an affiliate). The concurrent private placements are each conducted at a price per share equal to the initial public offering price adjusted to reflect the ADS-to-Class A ordinary share ratio. Our proposed issuance and sale of Class A ordinary shares to each investor is being made through private placement pursuant to an exemption from registration with the U.S. Securities and Exchange Commission, or the SEC, under Regulation S of the U.S. Securities Act of 1933, as amended, or the Securities Act. Each of the investors has agreed not to, directly or indirectly, sell, transfer, or dispose of any of the Class A ordinary shares acquired in the concurrent private placements for a period of 180 days after the date of this prospectus, subject to certain exceptions.

 

 

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

 

 

PRICE US$9.50 PER ADS

 

 

 

     Per ADS    Total

Initial public offering price

   US$9.50    US$522,500,000

Underwriting discounts and commissions(1)

   US$0.5225    US$28,737,500

Proceeds, before expenses, to us

   US$8.9775    US$493,762,500

 

(1)

See “Underwriting” for additional disclosure regarding underwriting compensation payable by us.

We have granted the underwriters an option to purchase up to an additional 8,250,000 ADSs.

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs against payment in U.S. dollars on or about March 30, 2021.

 

 

 

(in alphabetical order)
Credit Suisse    Goldman Sachs    J.P. Morgan

 

CICC

     CMBI    China Renaissance    CLSA    Haitong International   Lighthouse Capital

   Tiger Brokers

  

FUTU

 

Prospectus dated March 25, 2021.


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TABLE OF CONTENT

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     10  

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

     13  

RISK FACTORS

     16  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     55  

USE OF PROCEEDS

     57  

DIVIDEND POLICY

     58  

CAPITALIZATION

     59  

DILUTION

     61  

ENFORCEABILITY OF CIVIL LIABILITIES

     63  

CORPORATE HISTORY AND STRUCTURE

     65  

SELECTED CONSOLIDATED FINANCIAL DATA

     68  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     70  

INDUSTRY

     92  

BUSINESS

     100  

REGULATION

     114  

MANAGEMENT

     133  

PRINCIPAL SHAREHOLDERS

     140  

RELATED PARTY TRANSACTIONS

     143  

DESCRIPTION OF SHARE CAPITAL

     144  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     156  

SHARES ELIGIBLE FOR FUTURE SALES

     173  

TAXATION

     175  

UNDERWRITING

     181  

EXPENSES RELATED TO THIS OFFERING

     193  

LEGAL MATTERS

     194  

EXPERTS

     195  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     196  

INDEX TO THE 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, and 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 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 free writing prospectus outside of the United States.

Until April 19, 2021 (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

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to invest in our ADSs. This prospectus contains information from an industry report and a survey commissioned by us and prepared by China Insights Consultancy, or CIC, an independent research firm.

Overview

“Do you know?”

The question is embedded in Zhihu ( LOGO )’s Chinese meaning.

A question is not only a yearning for the undiscovered, but also the start of a journey to learn, engage, and share. Zhihu is an iconic online content community where people come to seek inspiration, find solutions, make decisions, and have fun. On Zhihu, our users explore and enjoy a variety of content from daily lifestyle and entertainment topics such as selecting the best tech gadgets or discussing the most popular games and videos, to sophisticated knowledge and experience such as understanding high-energy physics or alpine skiing, and to preparation for life events and decisions such as finding the right career, starting a family, or expecting a baby. Zhihu has attracted a wide array of content creators, including individuals giving firsthand accounts of their unique experiences, tutors providing valuable exam preparation tips, and hobbyists sharing their expertise. Zhihu goes beyond that first question, and brings people together through their common interests.

What is our mission?

We believe that everyone has a wealth of knowledge, experience, and insights irrespective of background or education. We also believe that people desire to enrich themselves while pursuing their interests, academics, careers, and passion.

Our mission is to empower people to share knowledge, experience, and insights, and to find their own answers.

What makes Zhihu great?

Zhihu is the largest Q&A-inspired online community and one of the top five comprehensive online content communities in China, both in terms of average mobile MAUs and revenue in 2020, according to CIC. Zhihu is also recognized as the most trustworthy online content community and widely regarded as offering the highest-quality content in China, according to the CIC Survey. We pride ourselves as a “marketplace of answers,” steadily accumulating trustworthy content through continuous creation and engagement among our users and content creators over a journey of more than ten years. As of December 31, 2020, we had 43.1 million cumulative content creators, who had contributed 315.3 million questions and answers. Our 75.7 million average MAUs in the fourth quarter of 2020 generated 675.7 million average monthly interactions within our vibrant community during the same period.

 



 

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Since our inception, we have worked relentlessly to develop Zhihu into a trustworthy content community. Our users and content creators continuously nurture our community and unique content ecosystem; our ecosystem reinforces our culture and upholds our values; and our culture and values attract and retain more users and content creators. This virtuous cycle allows us to amass the collective intelligence of tens of millions of users and content creators, leading to a “wisdom of the crowd” that delivers a fulfilling Zhihu experience.

Our business is underpinned by the following pillars:

 

   

Our Content and Content Creators. We are content-obsessed. We believe that the quality of our content is fundamental in maintaining the attractiveness and value of our community. The reliability and trustworthiness of our content is constantly enhanced through our AI-powered TopicRank algorithms. The depth and breadth of our community is further enriched by our increasingly diverse content and media formats, from text and image, to audio, video, and live streaming. We have become a content powerhouse where original ideas serve as the source material for comprehensive content creation in the Chinese internet world. We encourage our users to become content creators, and provide multiple channels for our content creators to monetize their contribution in our community. We pride ourselves on our 43.1 million cumulative content creators who had contributed 315.3 million questions and answers as of December 31, 2020.

 

   

Our Users. We have amassed a large, vibrant, and loyal user base with our attractive content, and are constantly improving our content offerings to enhance user experience. We had 75.7 million average MAUs, 469.0 million average monthly viewers, and 675.7 million average monthly interactions in the fourth quarter of 2020, representing year-over-year increases of 33.0%, 28.2%, and 4.8%, respectively. Our high-quality content has enabled us to expand our user base rapidly at low cost, while maintaining high user engagement and loyalty. For our YanPlus users, the average 12th-month retention rate in 2019 was 72%.

 

   

Our Content-Centric Monetization. Zhihu is a community where tens of millions of people come to seek inspiration, find solutions, make decisions, and have fun. This leads to a natural avenue for our users, content creators, and business partners to interact and fulfill their needs. We monetize through online advertising, paid membership, content-commerce solutions, and other services such as online education and e-commerce related services. Our online advertising helps merchants and brands deliver advertisements effectively to a vast targeted audience. Our Yan Selection (盐选) membership program provides paying members with unlimited access to our premium content library. Our pioneering content-commerce solutions provide merchants and brands with effective content-based online marketing solutions, which seamlessly integrate high-quality and marketing utilities into our online content community, significantly enhancing marketing efficiency while benefiting users with valuable commercial information. Through our content-centric monetization approach, we create commercial content that are natural extensions and valuable supplements to our content library, collectively contributing to the quality and credibility of our content. Furthermore, we continually identify and introduce new services, such as online education and e-commerce related services, with more to come.

 

   

Our Technology and Data. We leverage advanced artificial intelligence, big data, and cloud technologies to optimize content creation, distribution, and consumption. Our TopicRank algorithms assess the quality of content based on analysis of users’ credentials and engagement in our community. Our question routing system accurately distributes questions to relevant users. Our feed recommendation and search systems efficiently manage content distribution. Our WaLi (瓦力) monitoring system and WuKong (悟空) anti-spamming system help ensure content appropriateness and a healthy community culture. Our technology and data systems are continuously refined by iteration through the deep pool of data accumulated over our ten years of operations.

 

   

Our Culture and Brand. We promote a culture of sincerity, expertise, and respect (认真专业友善) developed through years of cultivation, fostering a vibrant online community where users contribute



 

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and engage while respecting diversity and valuing constructiveness. Embracing all of these values, our Zhihu brand represents trustworthiness in the Chinese internet world.

What have we accomplished?

We started Zhihu as a Q&A-focused online content community a decade ago. Today, Zhihu is the largest Q&A-inspired online community and one of the top five comprehensive online content communities in China, both in terms of average mobile MAUs and revenue in 2020, according to CIC.

As of December 31, 2020, we had accumulated 315.3 million questions and answers contributed by our 43.1 million content creators. Our average MAUs increased by 33.0% from 56.9 million in the fourth quarter of 2019 to 75.7 million in the fourth quarter of 2020.

We are still in an early stage of monetization, with significant runway for growth across multiple new monetization channels. We started to offer online advertising in 2016, introduced paid content in 2018 and our paid Yan Selection membership program in the first half of 2019, and formally launched our content-commerce solutions in early 2020. We continued to expand our content-centric monetization channels in 2020, including offering online education and e-commerce related services. Our revenue increased from RMB670.5 million in 2019 to RMB1.4 billion (US$207.2 million) in 2020. Our net loss was RMB1.0 billion in 2019 and RMB517.6 million (US$79.3 million) in 2020.

Our Market Opportunities

China’s online content market consists of online content communities primarily offering user-generated content (UGC), and other players such as platforms offering professionally generated content (PGC). The market size of China’s online content community in terms of revenue increased from RMB38.6 billion in 2015 to RMB275.8 billion in 2019, and is expected to further increase to RMB1.3 trillion in 2025, representing a CAGR of 30.3% from 2019, outgrowing the overall online content market. The user base of online content community in China has also expanded significantly from 516.2 million in 2015 to 773.0 million in 2019, and is expected to reach 1.0 billion in 2025, according to CIC.

The monetization of China’s online content community market is still in an early stage with significant growth potential. Revenue per user of China’s online content communities was RMB356.7 in 2019, growing five fold since 2015, and is expected to further increase to RMB1,292.4 in 2025, representing a CAGR of 23.9% from 2019.

In addition, online content communities covering a broad spectrum of content verticals which are referred to as comprehensive online content communities, such as companies like Zhihu, are expected to outgrow online content communities focusing on certain verticals in terms of both user base and revenue.

Our Strengths

 

   

iconic and most trustworthy online content community;

 

   

ever-growing high-quality user-generated content;

 

   

fast growing, diverse, and highly engaged user base;

 

   

innovative and scalable content-centric monetization;

 

   

superior technology infrastructure and data insights; and

 

   

visionary management team and strong shareholder base.



 

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Our Strategies

 

   

enhance content offerings and empower content creators;

 

   

cultivate our brand;

 

   

grow our user base;

 

   

enhance our monetization capabilities;

 

   

strengthen our technology; and

 

   

pursue strategic investments and acquisitions.

Corporate History and Structure

Our founder, Mr. Yuan Zhou, founded Zhihu in late 2010. Between 2010 and 2012, Zhihu was a by-invitation-only, Q&A-focused online content community. We opened up registration to the general public in 2013 and have since then grown into one of the largest comprehensive online content communities in China. We started to offer online advertising in 2016, introduced paid content in 2018 and our paid Yan Selection (盐选) membership program in the first half of 2019, and formally launched our content-commerce solutions in early 2020. We have continued to expand our content-centric monetization channels since 2020, including offering online education and e-commerce related services.

We raised capital through seven rounds of equity financing since our establishment, with the most recent round raising over US$400 million in 2019.

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

 

LOGO

 

Notes:

(1)

Immediately after the completion of this offering and the concurrent private placements, assuming the underwriters do not exercise their option to purchase additional ADSs, (i) Yuan Zhou, our founder, chairman of the board of directors, and chief executive officer, will beneficially own 7.0% of our total issued and outstanding ordinary shares and 42.4% of the aggregate voting power; (ii) the other existing principal shareholders, in aggregate, will beneficially own 52.8% of our total of our total issued and outstanding ordinary shares and 32.7% of the aggregate voting power; and (iii) public investors in this offering, in aggregate, will beneficially own 9.8% of our total issued and outstanding ordinary shares and 6.1% of the aggregate voting power.

(2)

Yuan Zhou holds 21.2% of the equity interests in Zhizhe Tianxia. Seven other individual beneficial owners of our company, namely, Zhong Shao, Liang Zhang, Jixin Huang, Shenshen Li, Jinghua Jin, Jie Bai, and Dahai Li, hold an aggregate of 37.3% of the equity



 

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  interest in Zhizhe Tianxia. Four other beneficial owners of our company, namely, Beijing Chuangxin Fangzhou Technology Co., Ltd., Xiamen Siyuan Investment Management Co., Ltd., Shenzhen Litong Industry Investment Fund Co., Ltd., and Beijing Sogou Information Services Co., Ltd., hold an aggregate of 41.5% of the equity interest in Zhizhe Tianxia.

Our Cayman Islands holding company was established in May 2011. We gained control over Beijing Zhizhe Tianxia Technology Co., Ltd., or Zhizhe Tianxia, through Zhizhe Sihai (Beijing) Technology Co., Ltd., or Beijing WFOE, by entering into a series of contractual arrangements with Zhizhe Tianxia and its shareholders. As a result of our direct ownership in Beijing WFOE and the contractual arrangements with Zhizhe Tianxia, we are regarded as the primary beneficiary of Zhizhe Tianxia, and we treat Zhizhe Tianxia as our consolidated VIE under U.S. GAAP. We have consolidated the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

Summary of Risk Factors

Investing in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus before making an investment in our ADSs. These risks are discussed more fully in the section titled “Risk Factors.”

Risks Relating to Our Business and Industry

Risks and uncertainties related to our business and industry include, but are not limited to, the following:

 

   

Our business depends on our ability to offer high-quality content that meets user preferences and demands.

 

   

Failure to maintain and enhance our brand and reputation may impair our ability to expand our user base and content monetization.

 

   

Our success depends on our ability to attract and maintain an engaged user base.

 

   

We have incurred net loss and negative operating cash flow in the past, which we may continue to experience in the future.

 

   

We may not be able to manage our growth effectively, which may compromise the success of our business.

 

   

We may fail to retain or attract merchants and brands, or increase their spending in our community.

 

   

We cannot assure you that our new business initiatives and monetization strategies will be successfully implemented.

 

   

We operate in a highly competitive market, and may not be able to compete effectively.

 

   

We may fail to keep up with the technological developments.

 

   

We have been, and may continue to be, subject to claims and allegations relating to intellectual property and other causes.

 

   

We may not be able to adequately protect our intellectual property rights, which could adversely affect our business and competitive position.

 

   

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the Public Company Accounting Oversight Board, or the PCAOB, is unable to inspect auditors who are located in China for three consecutive years beginning in 2021. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

Risks Relating to Our Corporate Structure

We are also subject to risks and uncertainties related to our corporate structure, including, but not limited to, the following:

 

   

If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in



 

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the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

   

Our contractual arrangements may not be as effective in providing operational control as direct ownership and our VIE shareholders may fail to perform their obligations under our contractual arrangements.

Risks Relating to Doing Business in China

We face risks and uncertainties related to doing business in China in general, including, but not limited to, the following:

 

   

Changes in China’s economic, political or social conditions, or government policies could materially and adversely affect our business and results of operations.

 

   

The legal system in China embodies uncertainties which could limit the legal protections available to us.

 

   

If we fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environment applicable to our businesses in China, or if we are required to take compliance actions in this regard, our business, financial condition, and results of operations may be materially and adversely affected.

Risks Relating to Our ADSs and This Offering

Risks and uncertainties related to our ADSs and this offering include, but are not limited to, the following:

 

   

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

 

   

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

Implication of Being an Emerging Growth Company

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 Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those 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. Pursuant to the JOBS Act, we have elected to take advantage of the benefits of this extended transition period for complying with new or revised accounting standards. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the



 

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Exchange Act, which would occur if 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.

Implication of Being a Foreign Private Issuer

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 of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the New York Stock Exchange corporate governance listing standards. Currently, we do not plan to rely on home country practices with respect to our corporate governance after we complete this offering.

Corporate Information

Our principal executive offices are located at A5 Xueyuan Road, Haidian District, Beijing 100083, People’s Republic of China. Our telephone number at this address is +86 (10) 8271-6605. Our registered office in the Cayman Islands is located at offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.zhihu.com. The information contained on our website is not a part of this prospectus.

Conventions That Apply to This Prospectus

Unless we indicate otherwise, all information in this prospectus assumes no exercise by the underwriters of their option to purchase up to 8,250,000 additional ADSs representing 4,125,000 Class A ordinary shares from us.

Except where the context otherwise requires, and for purposes of this prospectus only:

 

   

“ADRs” refers to the American depositary receipts that evidence the ADSs;

 

   

“ADSs” refers to the American depositary shares, two of which represent one Class A ordinary share;

 

   

“average monthly active content creators” for a period is calculated by dividing the sum of monthly active content creators for each month during the specified period by the number of months in such period;

 

   

“average monthly paying members” for a period is calculated by dividing the sum of monthly paying members for each month during the specified period by the number of months in such period;

 

   

“CAGR” refers to compound annual growth rate;

 

   

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



 

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“Class A ordinary shares” refers to our Class A ordinary shares with a par value of US$0.000125 per share;

 

   

“Class B ordinary shares” refers to our Class B ordinary shares with a par value of US$0.000125 per share;

 

   

“content creators” refers to users who have generated at least one piece of content;

 

   

“interactions” refers to 16 kinds of social interactions in our community, such as upvotes, downvotes, comments, private messages, likes, follows, favorites, and invites;

 

   

“mobile MAUs” refers to the number of mobile devices that launch our mobile app at least once in a given month;

 

   

“monthly active content creators” refers to the number of content creators who generate at least one piece of content in a given month;

 

   

“monthly active users” or “MAUs” refers to the sum of our mobile MAUs and the number of logged-in users who visit our PC or mobile website at least once in a given month, after eliminating duplicates;

 

   

“monthly paying members” refers to the number of our Yan Selection (盐选) members in a given month;

 

   

“monthly viewers” refers to the sum of the number of mobile devices that launch our mobile app at least once in a given month and the number of independent cookies that visit our PC or mobile website at least once in a given month. The number of monthly viewers is calculated by treating each distinguishable independent cookie or mobile device as a separate user even though some individuals may access our community with more than one independent cookie or using more than one mobile device and multiple individuals may access our community with the same independent cookie or using the same mobile device;

 

   

“ordinary shares” or “shares” refers to our Class A ordinary shares and Class B ordinary shares, par value US$0.000125 per share;

 

   

“paying ratio” for a given period refers to the ratio of our average monthly paying members divided by the average MAUs in the period;

 

   

“piece of content” refers to any piece of questions, answers, articles, videos, groups, or live streaming in our community;

 

   

“PGC” refers to professionally generated content;

 

   

“PUGC” refers to professional user-generated content;

 

   

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

 

   

“retention rate,” as applied to any cohort of YanPlus users in a given period, refers to the percentage of these YanPlus users who made at least one repeated visit to Zhihu after a certain duration. The “12th-month retention rate” for any cohort of YanPlus users in a given month refers to the retention rate in the 12th month after that month. “YanPlus users” for a given month refers to the active users, each with a Yan value of 290 or above. Yan value is a rating that is assigned to users based on their engagement in our community. As an illustration, we had 28.3 million YanPlus users in December 2019;

 

   

“UGC” refers to user-generated content;

 

   

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

 

   

“VIE” refers to variable interest entity, and “our VIE” refers to Beijing Zhizhe Tianxia Technology Co., Ltd., or Zhizhe Tianxia;



 

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“WFOE” refers to wholly foreign-owned enterprise, and “Beijing WFOE” refers to Zhizhe Sihai (Beijing) Technology Co., Ltd., or Zhizhe Sihai; and

 

   

“Zhihu,” “we,” “us,” “our company,” or “our” refers to Zhihu Inc., a Cayman Islands exempted company, and its subsidiaries and the VIE and its subsidiaries, as the context requires.

In this prospectus, city tiers are determined based on a study published in 2017 by China Business Network, a finance media company in China. In particular, tier 1 cities refer to Beijing, Shanghai, Shenzhen, and Guangzhou; new tier 1 cities refer to Chengdu, Chongqing, Hangzhou, Wuhan, Xi’an, Tianjin, Suzhou, Nanjing, Zhengzhou, Changsha, Dongguan, Shenyang, Qingdao, Ningbo, and Dalian; tier 2 cities refer to Kunming, Fuzhou, Wuxi, Xiamen, Jinan, Harbin, Wenzhou, Shijiazhuang, Quanzhou, Nanning, Changchun, Nanchang, Guiyang, Jinhua, Changzhou, Huizhou, Jiaxing, Nantong, Xuzhou, Taiyuan, Zhuhai, Zhongshan, Lanzhou, Taizhou, Shaoxing, Yantai, Foshan, Urumqi, Hefei, and Haikou.

Our reporting currency is Renminbi. This prospectus contains translations from Renminbi to U.S. dollars solely for the convenience of the reader. Unless otherwise stated, all translations from Renminbi to U.S. dollars were made at a rate of RMB6.5250 to US$1.00, the exchange rate in effect as of December 31, 2020, as set forth in the H.10 statistical release of The Board of Governors of the Federal Reserve System. We make no representation that any 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. On March 12, 2021, the exchange rate for Renminbi was RMB6.5081 to US$1.00.



 

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THE OFFERING

 

Offering price

US$9.50 per ADS.

 

ADSs offered by us

55,000,000 ADSs (or 63,250,000 ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

ADSs outstanding immediately after this offering

55,000,000 ADSs (or 63,250,000 ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

Ordinary shares issued and outstanding immediately after this offering

280,752,684 ordinary shares, comprised of 261,525,092 Class A ordinary shares and 19,227,592 Class B ordinary shares (or 284,877,684 ordinary shares if the underwriters exercise their option to purchase additional ADSs in full, comprised of 265,650,092 Class A ordinary shares and 19,227,592 Class B ordinary shares) including 13,157,892 Class A ordinary shares that we will issue and sell in the concurrent private placements, calculated based on the initial offering price of US$9.50 per ADS.

 

The ADSs

Two ADSs represent one Class A ordinary share, par value US$0.000125 per share.

 

  The depositary will hold the underlying Class A ordinary shares represented by your ADSs. You will have rights as provided in the deposit agreement between us, the depositary, and holders and beneficial owners of ADSs from time to time.

 

  We do not expect to pay any cash dividends on our Class A ordinary shares 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.

 

  You may surrender your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any such exchange.

 

  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 deposit agreement as amended.

 

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


 

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Option to purchase additional ADSs

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 8,250,000 additional ADSs.

 

Concurrent private placements

Concurrently with, and subject to, the completion of this offering, certain investors have agreed to purchase US$250.0 million in Class A ordinary shares from us, including (i) US$100.0 million by Taobao China Holding Limited, an affiliate of Alibaba Group Holding Limited, (ii) US$100.0 million by Purus Innovation Limited, an affiliate of JD.com, Inc., (iii) US$30.0 million by Image Frame Investment (HK) Limited, our shareholder and an affiliate of Tencent Holdings Limited, and (iv) US$20.0 million by Lilith Limited, an affiliate of Lilith Games. The concurrent private placements are each conducted at a price per share equal to the initial public offering price adjusted to reflect the ADS-to-Class A ordinary share ratio. Based on the initial public offering price of US$9.50 per ADS, we will issue and sell a total of 13,157,892 Class A ordinary shares in the concurrent private placements. Our proposed issuance and sale of Class A ordinary shares to each investor is being made through private placement pursuant to an exemption from registration with the SEC under Regulation S of the Securities Act. Under the share subscription agreements executed on March 19, 2021, the completion of this offering is the only substantive closing condition precedent for the concurrent private placements, and such private placements will be completed concurrently if this offering is completed. Each of the investors has agreed not to, directly or indirectly, sell, transfer, or dispose of any of the Class A ordinary shares acquired in the concurrent private placements for a period of 180 days after the date of this prospectus, subject to certain exceptions.

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$739.2 million from this offering and the concurrent private placements, or approximately US$813.3 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering and the concurrent private placements for (i) the development of product and service, (ii) marketing and user growth, (iii) research and development, and (iv) general corporate purposes, including potential strategic investments and acquisitions. See “Use of Proceeds” for more information.

 

Lockup

We, our directors, executive officers, and our 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 not to authorize or permit certain employees who collectively beneficially own a substantial



 

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majority of the awards under the 2012 Plan that will become exercisable by the 180th day following the date of this prospectus, to deposit their shares acquired by exercise of options or vesting of other awards with the depositary or otherwise convert such shares into ADSs for sale in the open market, except with prior written consent of the representatives of the underwriters. The foregoing does not affect the right of ADS holders to cancel their ADSs and withdraw the underlying ordinary shares. See “Shares Eligible for Future Sales” and “Underwriting.”

 

Risk factors

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

 

Listing

Our ADSs have been approved for listing on the New York Stock Exchange under the symbol “ZH.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on or about March 30, 2021.

 

Depositary

JPMorgan Chase Bank, N.A.

The number of ordinary shares that will be outstanding immediately after this offering:

 

   

is based on 240,094,792 issued and outstanding ordinary shares (including 220,867,200 Class A ordinary shares and 19,227,592 Class B ordinary shares) as of the date of this prospectus, assuming the automatic conversion of all of our issued and outstanding preferred shares into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering;

 

   

includes 27,500,000 Class A ordinary shares in the form of ADSs that we will issue and sell in this offering, assuming the underwriters do not exercise their option to purchase additional ADSs;

 

   

includes 13,157,892 Class A ordinary shares to be issued in the concurrent private placements; and

 

   

excludes Class A ordinary shares issuable upon exercise of our outstanding options and vesting of our outstanding restricted shares and Class A ordinary shares reserved for future issuances under our 2012 Incentive Compensation Plan.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of operations data and summary consolidated cash flow data for the years ended December 31, 2019 and 2020 and summary consolidated balance sheet data as of December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read this “Summary Consolidated Financial and Operating Data” section together with our consolidated financial statements and the related 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. Our historical results are not necessarily indicative of results expected for future periods.

The following table presents our summary consolidated statements of operations data for the periods indicated.

 

    For the Year Ended December 31,  
    2019     2020  
    RMB     %     RMB     US$     %  
    (in thousands, except for percentages, share, and
per share data)
 

Summary Consolidated Statements of Operations Data

         

Revenue

    670,511       100.0       1,352,196       207,233       100.0  

Cost of revenue

    (358,241     (53.4     (594,399     (91,096     (44.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    312,270       46.6       757,797       116,137       56.0  

Selling and marketing expenses

    (766,465     (114.3     (734,753     (112,606     (54.3

Research and development expenses

    (351,012     (52.3     (329,763     (50,538     (24.4

General and administrative expenses

    (253,268     (37.8     (296,162     (45,389     (21.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (1,370,745     (204.4     (1,360,678     (208,533     (100.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (1,058,475     (157.8     (602,881     (92,396     (44.6

Investment income

    25,035       3.7       56,087       8,596       4.2  

Interest income

    28,669       4.3       24,751       3,793       1.8  

Fair value change of financial instrument

    7,132       1.1       (68,818     (10,547     (5.1

Exchange (losses)/gains

    (9,216     (1.4     62,663       9,604       4.6  

Others, net

    2,675       0.4       11,728       1,797       0.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (1,004,180     (149.7     (516,470     (79,153     (38.2

Income tax expense

    (40     (0.0     (1,080     (166     (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (1,004,220     (149.7     (517,550     (79,319     (38.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share

         

Basic

    (22.99       (18.36     (2.81  

Diluted

    (22.99 )         (18.36     (2.81  

Weighted average shares used in loss per share

         

Basic

    62,249,946         65,279,970       65,279,970    

Diluted

    62,249,946         65,279,970       65,279,970    

Non-GAAP measure:

         

Adjusted net loss(1)

    (824,530     (123.0     (337,460     (51,719     (25.0

 

Note:

(1)

We define adjusted net loss as net loss adjusted for the impact of share-based compensation expenses. Adjusted net loss is not a measure required by, or presented in accordance with, U.S. GAAP. The use of the non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for analysis of, our results of operations or financial condition as reported under U.S. GAAP. For further details, see “—Non-GAAP Financial Measure.”



 

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The following table presents our summary consolidated balance sheet data as of the dates indicated.

 

     As of December 31,  
     2019     2020  
     RMB     RMB     US$  
     (in thousands)  

Summary Consolidated Balance Sheet Data

  

Cash and cash equivalents

     900,350       957,820       146,792  

Term deposits

     1,151,073       1,092,921       167,497  

Short-term investments

     1,492,180       1,046,000       160,307  

Trade receivables

     245,943       486,046       74,490  

Total current assets

     3,901,952       3,720,166       570,141  

Total assets

     3,984,306       3,761,441       576,467  

Accounts payables and accrued liabilities

     287,041       501,848       76,912  

Salary and welfare payables

     206,840       231,847       35,532  

Total current liabilities

     763,040       1,014,568       155,491  

Total liabilities

     765,933       1,014,568       155,491  

Total mezzanine equity

     7,210,614       7,891,348       1,209,401  

Total shareholders’ deficit

     (3,992,241     (5,144,475     (788,425

Total liabilities, mezzanine equity and shareholders’ deficit

     3,984,306       3,761,441       576,467  

The following table presents our summary consolidated cash flow data for the periods indicated.

 

     For the Year Ended December 31,  
     2019     2020  
     RMB     RMB     US$  
     (in thousands)  

Summary Consolidated Cash Flow Data

      

Net cash used in operating activities

     (715,522     (244,421     (37,461

Net cash (used in)/generated from investing activities

     (2,102,488     430,113       65,918  

Net cash generated from financing activities

     2,997,575       9,286       1,423  

Effect of exchange rate changes on cash and cash equivalents

     7,491       (137,508     (21,073
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     187,056       57,470       8,807  

Cash and cash equivalents at the beginning of the year

     713,294       900,350       137,985  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the year

     900,350       957,820       146,792  
  

 

 

   

 

 

   

 

 

 

The following table presents certain of our operating data for the periods indicated.

 

     For the Three Months
Ended December 31,
 
     2019      2020  

Average MAUs (in millions)

     56.9        75.7  

Average monthly paying members (in thousands)

     1,044.1        3,026.3  

Non-GAAP Financial Measure

In evaluating our business, we consider and use adjusted net loss, a non-GAAP financial measure, to supplement the review and assessment of our operating performance. We believe that the non-GAAP measure facilitates comparisons of operating performance from period to period and company to company by adjusting for potential impacts of items, which our management considers to be indicative of our operating performance. We believe that adjusted net loss provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as it helps our management. Our



 

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presentation of adjusted net loss may not be comparable to similarly titled measures presented by other companies. The use of the non-GAAP financial measure has limitations as an analytical tool, and you should not consider it isolation from, or as substitutes for analysis of, our results of operations as reported under U.S. GAAP.

We define adjusted net loss as net loss adjusted for the impact of share-based compensation expenses. Although share-based compensation is an important aspect of the compensation of our employees, we exclude share-based compensation expenses from adjusted net loss primarily because they are non-cash expenses and are partially discretionary in nature. Further, share-based compensation expenses are based on valuations with many underlying assumptions beyond our control that vary over time and may include modifications that may not occur on a predictable cycle, neither of which is necessarily indicative of our ongoing business performance. We believe that it would be useful to exclude share-based compensation expense for investors to better understand the long-term underlying performance of our core operations and to facilitate comparison of our results to our prior periods and to our peer companies. The following table sets forth the reconciliation of adjusted net loss for the years ended December 31, 2019 and 2020 to net loss, the nearest measure prepared in accordance with U.S. GAAP.

 

     For the Year Ended December 31,  
     2019     2020  
     RMB     RMB     US$  
     (in thousands)  

Net loss

     (1,004,220     (517,550     (79,319

Add:

      

Share-based compensation expenses

     179,690       180,090       27,600  
  

 

 

   

 

 

   

 

 

 

Adjusted net loss

     (824,530     (337,460     (51,719
  

 

 

   

 

 

   

 

 

 


 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition, and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Industry

Our business depends on our ability to offer high-quality content that meets user preferences and demands.

Our success depends on our ability to offer high-quality content. The breadth, depth, and quality of our content is fundamental in maintaining the attractiveness and value of our community. We rely on our experience from past and current operations to offer, manage, and refine our high-quality content, which may not be effective as user preferences and market trends change. If we are unable to expand into new verticals or further develop existing verticals, our ability to keep our content offerings comprehensive and up-to-date may be adversely affected. The quality of our content may be compromised if we are not able to continue to maintain in-depth and meaningful discussions in our community. If we are unable to keep up with evolving user preferences and demands for both the essence and format of content offerings, such as the trend for video and live streaming content, we may experience a decline in the attractiveness of our content community.

Content creators are critical to our content community. We encourage and support content creators in creating high-quality and trustworthy content to enrich our community, and have established a systematic approach to encouraging users to become content creators. We also provide ongoing support to content creators to encourage ongoing and future creation. Any failure in encouraging, supporting, and incentivizing content creators may materially and adversely affect the breadth, depth, and quality of our content offerings.

We also offer and curate premium content for our paying members through our Yan Selection (盐选) membership program. We plan to expand our premium content through offering a wider variety of high-quality premium content. If our premium content fails to attract users or meet their expectations, we may not be able to increase our paying members, which could materially and adversely affect our business and results of operations.

If we are unable to continue to offer high-quality content and enhance our content offerings, the reputation and attractiveness of our content community could be compromised, and we may experience a decline in our user base, which could materially and adversely affect our business and results of operations.

If we fail to maintain and enhance our brand and reputation, our ability to expand our user base and content monetization could be impaired, and our business and results of operations could be materially and adversely affected.

It is important to maintain and enhance our Zhihu brand and reputation for the success of our online community. Maintaining and enhancing our brand and reputation depends largely on our continued ability to provide high-quality and trustworthy content and maintain our community culture. Our community culture, underpinned by sincerity, expertise, and respect (认真、专业、友善), is critical to the attractiveness of our community and user experience. There is no assurance, however, that we can maintain our community culture along with our fast growth, as new users may not fit well into our culture and could disrupt the good order of our community, which could in turn damage other users’ experience and discourage them from joining, engaging or contributing to, our community. If we are unable to maintain our community culture, the attractiveness of our content community could be diminished.

Our brand and reputation may also be adversely affected by the content or user activities in our community that are perceived as inappropriate, hostile, or illegal, or by information that is perceived as misleading. We may

 

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fail to respond expeditiously to such objectionable content or user activity, or otherwise address user concerns. As our community further grows in scale, we may not be able to identify and respond to such content in a timely manner which could erode the trust in our brand and damage our reputation. Any governmental or regulatory inquiry, investigation, or action based on the objectionable content or user activity in our community, our business practices, or failure to comply with laws and regulations, could damage our brand and reputation, regardless of the outcome.

It is also important to maintain a good balance between commercialization and user experience. Our users may find the advertisements or the commercial content in our community irrelevant, unhelpful, or intrusive. If we fail to balance user experience as we further enhance commercialization, our brand and reputation may be adversely affected.

We have experienced, and may continue to experience, governmental, regulatory, investor, media, and other third-party scrutiny of our community, content, copyright, data privacy, or other business practice. Actions of our employees, users, or business partners, or other issues, may also harm our brand and reputation. If we fail to promote and maintain the Zhihu brand or preserve our reputation, or if we incur excessive expenses in this effort, our business, financial condition, and results of operations could be materially and adversely affected.

Our success depends on our ability to attract and maintain an engaged user base.

Our success and continued growth is driven by our fast growing, diverse, and highly engaged user base. We have experienced significant user growth since inception. We had 75.7 million average MAUs in the fourth quarter of 2020, representing a 33.0% increase from the fourth quarter of 2019. Our users also exhibit a high level of engagement through active participation and contribution. We attract and retain users with our high-quality and trustworthy content, and any decline in the breadth, depth, and quality of our content offerings may adversely impact our ability to maintain and further expand a large and engaged user base. We also strategically deploy systematic marketing and user acquisition strategies to complement our natural user acquisition, such as brand marketing, targeted campaigns, and pre-installations on mobile devices, to achieve user growth and increase the engagement of new and existing users. If we experience a decline in the quantity or quality of our content, or our marketing strategies and user growth efforts turn out to be ineffective, we may not be able to acquire more users effectively or may experience a decline in our user base. Furthermore, we benefit from our strong Zhihu brand and reputation as a go-to destination for trustworthy and actionable content, which leads to our low user acquisition costs. Damage to our brand and reputation could materially and adversely affect our user growth and increase our user acquisitions costs.

We have incurred net loss and negative operating cash flow in the past, which we may continue to experience in the future.

We have incurred net loss and negative operating cash flow in the past. In 2019 and 2020, we had net loss of RMB1.0 billion and RMB517.6 million (US$79.3 million) and negative operating cash flow of RMB715.5 million and RMB244.4 million (US$37.5 million), respectively. We cannot assure you that we will be able to generate profits or positive operating cash flow in the future. Our ability to achieve profitability and positive operating cash flow principally depends on our ability to further expand our user base and increase our revenue, but we cannot assure you that our user base will continue to maintain the growth momentum. We also need to continue enhancing our monetization to increase our revenue. We may experience losses and negative operating cash flow in the future due to our continued spending in marketing and cloud services and investments in technology, people, and new initiatives. We incurred in the past and expect to continue to incur in future periods share-based compensation expenses, and we expect our costs and operating expenses to continue to increase in absolute amounts as we expand our business, which may result in future losses. In addition, our ability to achieve and sustain profitability is affected by various factors, some of which are beyond our control, such as changes in macroeconomic conditions or competitive dynamics in the industry. If we cannot effectively maintain or achieve revenue growth at scale, or we are unable to maintain and enhance our profitability and liquidity, our business, financial condition, and results of operations may be materially and adversely affected.

 

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We may not be able to manage our growth effectively, which may compromise the success of our business.

We have experienced rapid growth since our inception. The success of our business largely depends on our ability to effectively maintain our user and revenue growth. We attract and retain users with quality and trustworthy content, and we also strategically deploy marketing and user acquisition strategies to complement our natural user acquisition. As we further expand our business, content offerings, and products and services, we may face challenges in relation to managerial resources, human resources, technological infrastructure, capital resources, and corporate culture arising from our continued growth. Therefore, we need to continually expand and enhance our infrastructure, technological capabilities, operational and financial systems, and other controls and procedures. We also need to expand, train, and manage our growing employee base while maintaining our corporate culture. We cannot assure you that our current infrastructure, systems, procedures, and internal controls will be adequate to support our expanding operations, or that we can continuously manage our relationships with third parties with success. If we fail to manage our expansion effectively, our business, financial condition, results of operations, and prospects may be materially and adversely affected.

If we fail to retain or attract merchants and brands, or increase their spending in our community, our business, financial condition and results of operations may be materially and adversely affected.

We generate revenue primarily from online advertising and content-commerce solutions provided to merchants and brands. In 2019 and 2020, revenue from online advertising and content-commerce solutions accounted for 86.2% and 72.4% of our total revenue, respectively. We cannot assure you that we will be able to retain existing or attract new merchants and brands effectively. If the marketing budgets of merchants and brands decrease, or if they believe that they can achieve better returns elsewhere, we may experience a decline in their spending with us. Our competitors may provide better advertising or content-commerce solutions. If merchants and brands believe that their spending on online content communities do not generate expected returns, they may also switch to other internet channels such as search engines, news platforms, short video platforms, e-commerce platforms, and social media platforms, or other traditional channels such as television, newspapers, and magazines, and reduce or discontinue business with us. Merchants and brands may find online advertising to be ineffective to market their products and services, and competition may lead to a decrease in our fee rates. In addition, our content-commerce solutions, such as Zhi+ solutions, are still at an early stage of development. If the commercial content created through our Zhi+ solutions does not appeal to or is not successfully distributed to the targeted users, this business may not attract sufficient merchants and brands or generate expected revenue. Merchants and brands may have limited experience in content-commerce solutions, and may not be able to utilize our solutions effectively to achieve expected commercial results or otherwise meet their expectation. Furthermore, some of the merchants and brands may have different budget allocation strategies, which may affect their spending on our content-commerce solutions. Failure to retain existing or attract new merchants and brands, develop effective advertising or content-commerce solutions, or increase their spending with us may materially and adversely affect our business, financial condition, and results of operations.

We cannot assure you that our new business initiatives and monetization strategies will be successfully implemented.

Our monetization channels are evolving. In addition to our existing monetization channels, including online advertising, paid membership, and content-commerce solutions, we also plan to further develop other initiatives such as online education and e-commerce. We have a limited track record or experience in generating revenue from content-commerce solutions and other new initiatives. If these monetization strategies fail, we may not be able to maintain or increase our revenue or recover any associated costs, expenses, and expenditures. In addition, we may in the future introduce new services to further diversify our revenue streams, including services with which we have little or no prior operating experience. If these new or enhanced services fail to attract or retain users or to generate sufficient revenue to justify our investments, our business and results of operations may suffer.

 

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We operate in a highly competitive market, and may not be able to compete effectively.

We face significant competition from other online content communities or other players in the market. Some of our competitors have a longer operating history, a lager user base, or greater financial resources than we do. Our competitors may compete with us in a variety of ways, including attracting users and content creators, obtaining or incentivizing the creation of quality content, conducting brand promotions and other marketing activities, and making investments in and acquisitions of our business partners. Except for certain exclusive content in our community, such as Yan Selection (盐选) columns, our content creators are generally free to post their content on our competitors’ communities or platforms, which may divert our user traffic. If any of our competitors achieves greater market acceptance than we do or is able to offer more attractive content, our user base and our market share may decrease, which may materially and adversely affect our business, financial condition, and results of operations.

If we fail to keep up with the technological developments, our business, results of operations, and prospects may be materially and adversely affected.

The online content industry is rapidly evolving with continuous technological changes. Our success will depend on our ability to keep up with the changes in technology. For example, failure to introduce effective content creation utilities to content creators may cause a decline in the volume and quality of our content, which would adversely affect the attractiveness of our community. Moreover, failure to continuously refine our question routing system may lead to difficulties in distributing content to relevant users, which could result in reduced user traffic and user base. We may not be able to execute our technological strategies successfully due to a variety of reasons such as technical difficulties, inaccurate predictions of industry trend and demand, or lack of necessary resources. Failure to keep up with technological development may result in less attractive products and services, which may in turn materially and adversely affect our business, financial condition, results of operations, and prospects.

We have been, and may continue to be, subject to claims and allegations relating to intellectual property and other causes.

Our success depends largely on our ability to operate our business without infringing or otherwise violating third-party rights, including third-party intellectual property rights. Companies in the internet, technology and media industries own, and are seeking to obtain, a large number of patents, copyrights, trademarks, know-how, and trade secrets, and they are frequently involved in litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights, such as trademark and copyrights. There may be patents issued or pending that are held by others that cover significant aspects of our technologies, products, or services, and such third parties may attempt to enforce such rights against us. Although we have set up screening processes to try to filter out content that is subject to claims of copyright or other intellectual property protection, we may not be able to identify, remove, or disable all potentially infringing content that may exist. As a result, third parties may take action and file claims against us if they believe that certain content available in our community violates their copyrights or other intellectual property rights.

We are presently involved in and expect to continue to be subject to legal or administrative actions for defamation, negligence, copyright and trademark infringement, unfair competition, breach of service terms, or other purported injuries resulting from the content we provide or the nature of our services. Such legal and administrative actions, with or without merits, may be expensive and time-consuming and may result in significant diversion of resources and management attention from our business operations. Furthermore, such legal or administrative actions may adversely affect our brand image and reputation.

 

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We may not be able to adequately protect our intellectual property rights, and any failure to protect our intellectual property rights such as unauthorized use of our intellectual properties by third parties and the expenses incurred in protecting our intellectual property could adversely affect our business and competitive position.

We rely on a combination of patent, trademark, copyright, domain name, and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual properties and brand. Protection of intellectual property rights in China may not be as effective as in other jurisdictions, and, as a result, we may not be able to adequately protect our intellectual property rights, which could adversely affect our business and competitive position. These violations of intellectual property rights, whether or not successfully defended, may also discourage content creation. In addition, any unauthorized use of our intellectual properties by third parties may adversely affect our business and our reputation. In particular, our members may abuse their membership privilege or illegally distribute paid content exclusively available to paid members, which could materially and adversely affect our business. Further, we may have difficulty addressing the threats to our business associated with infringement of our copyrighted content, particularly our premium content. Our content may be potentially subject to unauthorized copying and illegal digital dissemination without an economic return to us. We adopt a variety of measures to mitigate such risks, including by litigation and through technology measures. However, we cannot assure you that such measures will be effective.

In addition, while we typically require our employees, consultants, and contractors who may be involved in the development of intellectual properties to execute agreements assigning such intellectual properties to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual properties that we regard as our own. In addition, such agreements may not be self-executing such that the intellectual properties subject to such agreements may not be assigned to us without additional assignments being executed, and we may fail to obtain such assignments. In addition, such agreements may be breached. Accordingly, we may be forced to bring claims against third parties, or defend claims that they may bring against us related to the ownership of such intellectual properties.

Furthermore, managing or preventing unauthorized use of intellectual properties is difficult and expensive, and we may need to resort to legal proceedings to enforce or defend intellectual properties or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation or proceedings and an adverse determination in any such litigation could result in substantial costs and diversion of resources and management attention.

Advertisements in our community may subject us to penalties and other administrative actions.

We monitor the advertising content shown in our community for purposes of ensuring that the content is in compliance with applicable laws and regulations. In addition, where advertisers are required to obtain special government approvals or registrations for specific types of advertisements prior to delivering such advertisements on the internet, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals, and veterinary pharmaceuticals, we take steps to check or verify that the advertisers have fulfilled requisite government requirements. Non-compliance with these laws and regulations may subject us to penalties, including imposition of fines, confiscation of our advertising income, orders to cease dissemination of the advertisements, and orders to publish an announcement correcting the misleading information. In circumstances involving serious violations by us, PRC governmental authorities may force us to terminate our advertising services or revoke our licenses, and we and responsible persons may incur criminal liability.

We cannot assure you that all content contained in the advertisements shown in our community is in compliance with applicable advertising laws and regulations, especially given the uncertainty in the interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRC advertising laws and regulations, we may be subject to penalties and our reputation may be harmed, which may materially and adversely affect our business, financial condition, results of operations, and prospects.

 

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We depend on service providers to provide services that are critical to our business, which exposes us to various risks that may materially and adversely affect our reputation, business, financial condition, and results of operations.

We currently use numerous third-party or related service providers to provide services that are critical to our businesses. We have engaged third-party or related service providers to provide online payment, content distribution, data support, and other services. For example, if any of these service providers breaches its obligations under the contractual arrangements to provide such service to us, or refuses to renew these service agreements on terms acceptable to us, we may not be able to find a suitable alternative service provider. Similarly, any failure of or significant quality deterioration in such service provider’s service platform or system could materially and adversely affect our user perception and may also result in reduced user visits or cancelation of premium content purchases. If any such risks were to materialize, our reputation, business, financial condition, and results of operations could be materially and adversely affected.

Any significant disruption to our technology infrastructure or our failure to maintain the satisfactory performance, security, and integrity of our technology infrastructure would adversely affect user experience and harm our reputation.

Our ability to provide users with high-quality experience depends on the continuous and reliable operation of our IT systems and cloud infrastructure, the failure of which may significantly impair our user experience and decrease the overall attractiveness of our community to both users and advertisers. Disruptions, failures, or unscheduled service interruptions could hurt our reputation and cause our users and advertising clients to choose our competitors’ platforms. Our IT systems are vulnerable to damage or interruption as a result of fires, floods, earthquakes, power losses, telecommunications failures, undetected errors in software, computer viruses, hacking, and other attempts to harm our systems. These interruptions may be due to unforeseen events that are beyond our control or the control of our third-party service providers. We have experienced general intermittent interruptions in the past, and may continue to experience similar interruptions in the future despite our continuous efforts to improve our IT systems. Since we host our servers at third-party internet data centers, any natural disaster or unexpected closure of internet data centers operated by third-party providers may result in lengthy service interruptions.

If we experience frequent or persistent service disruptions, whether caused by failures of our own systems or those of third-party service providers, our users’ experience with us may be negatively affected, which in turn, may materially and adversely affect our reputation. We cannot assure you that we will be successful in minimizing the frequency or duration of service interruptions.

Any compromise of the cybersecurity of our online community could materially and adversely affect our business, operations, and reputation.

Our products and services involve the storage and transmission of users’ and other customers’ information, and security breaches or vulnerabilities affecting our or our vendors’ technology, products, and systems could expose us to a risk of loss of this information, litigation, and potential liability. We experience cyber-attacks of varying degrees from time to time, and we have been able to rectify attacks without significant impact to our operations in the past. We use third-party technology and systems for a variety of reasons, such as data storage and transmission, cloud services, and other functions. Some of such systems have experienced past security breaches, and, although they did not have a material adverse effect on our operating results, we cannot assure you a similar result in the future. Our security measures may also be breached due to employee error, malfeasance, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees, users, or other customers to disclose sensitive information in order to gain access to our data or our users’ or other customers’ data or accounts, or may otherwise obtain access to such data or accounts. Because the techniques used to obtain unauthorized access, disable, or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement

 

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adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose users and other customers, and may be exposed to significant legal and financial risks, including legal claims and regulatory fines and penalties. Any of these actions could materially and adversely affect our business, reputation, and results of operations.

Non-compliance on the part of our employees, business partners, or other third parties involved in our business could adversely affect our business.

Our compliance controls, policies, and procedures may not protect us from acts of our employees, business partners, or other third-parties that violate the laws or regulations of the jurisdictions in which we operate, which may adversely affect our business. In addition, our business partners may be subject to regulatory penalties or punishments because of their regulatory compliance failures, which may, directly or indirectly, disrupt our business. We identify irregularities or non-compliance in the business practices of any parties with whom we pursue existing or future cooperation and we cannot assure you that any of these irregularities will be corrected in a prompt and proper manner. The legal liabilities and regulatory actions on our business partners or other third parties involved in our business may affect our business activities and reputation and in turn, our results of operations.

If content in our online community is found to be objectionable or in violation of any PRC laws or regulations, we may be subject to administrative actions or negative publicity.

Content in our community may draw social attention, which may cause controversies. Moreover, the PRC government and regulatory authorities have adopted regulations governing content and information over the internet. Under these regulations, internet content providers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent, violent, or defamatory. Internet content providers are also prohibited from displaying content that may be deemed by relevant government authorities as “socially destabilizing” or leaking “state secrets” of China. The PRC government and regulatory authorities strengthen the regulation on internet content from time to time. For example, the PRC Cybersecurity Law, which took effect on June 1, 2017, provides that, among other things, a network operator must keep record of and report any instances of public dissemination of prohibited content and failure to do so may result in revocation of its ICP License and termination of business. With respect to audio-visual and live streaming content, the Circular on Issues Concerning Strengthening the Administration of Online Live Streaming of Audio-Visual Programs requires online audio-visual live streaming service providers to monitor the living streaming content, and to have an established emergency reaction plan to replace content that violates PRC laws and regulations. The Administrative Regulations on Online Live Streaming Services require online live streaming service providers to establish review platforms for live streaming content. In addition, the Administrative Provisions on Online Audio-Visual Information Services provide that online audio-visual information service providers are the principals responsible for managing the security of information content, and should establish and improve their internal policies on user registration, scrutiny of information publication, and information security management, and that they must report users’ production, publication, and dissemination of prohibited content. Moreover, the Regulations on Administration of Network Short Video Platforms require that all short videos to be reviewed before being broadcasted. Any failure to comply with the aforementioned regulations may cause negative publicity and subject us to fines or other penalties, which could materially and adversely affect our business, reputation, and results of operations. We have been fined and subject to other penalties imposed by the relevant authorities, including removal or suspension of our apps from mobile app stores, due to illegal content in our community. For example, in March 2018, per order by Beijing Cybersecurity Administration, our Zhihu app was temporarily removed from Apple’s and Android’s app stores for seven days due to dissemination of inappropriate information and mismanagement of the community. In addition, the PRC regulatory authorities may conduct supervisory interviews with internet content providers, including us, regarding content deemed to be inappropriate or objectionable. We have been subject to, and expect to continue to be subject to, supervisory interviews from time to time, which may cause negative publicity and harm our reputation. For more information

 

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on relevant laws and regulations, see “Regulation—Regulations Relating to Internet Audio-Visual Program Services,” and “Regulation—Regulations Relating to Information Security.”

We cannot assure you that we can identify all objectionable or illicit content due to the large amount of content uploaded by our users every day. Failure to identify and prevent illegal or inappropriate content from being uploaded to our community may subject us to negative publicity or liability, such as limiting the dissemination of content, and suspension or removal from app distribution channels.

Laws and rules, governmental or judicial interpretations, and implementations may change in a manner that could render our current efforts insufficient. If government actions or sanctions are brought or pending against us, or if there is publicity that government actions or sanctions have been brought or otherwise are pending against us, our reputation and brand image could be harmed, we may lose users and business partners, and our revenue and results of operation may be materially and adversely affected.

Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

We collect personal data from our users in order to better understand our users and their needs. Concerns about the collection, use, disclosure, or security of personal information or other privacy-related matters, even for those without merit, could damage our reputation, cause us to lose users and adversely affect our business and results of operations. We are required by privacy and data protection laws in China and other jurisdictions, including, without limitation, the PRC Cybersecurity Law, to ensure the confidentiality, integrity and availability of the information of our users, members, advertising customers, and third-party content providers, which is also essential to maintaining their confidence in our services. However, the interpretation and implementation of such laws in China and elsewhere are often uncertain and in flux.

In November 2016, the Standing Committee of the National People’s Congress promulgated the PRC Cybersecurity Law, which provides that network operators must meet their cybersecurity obligations and must take technical measures and other necessary measures to protect the safety and stability of their networks. The PRC Cybersecurity Law is relatively new and subject to interpretation by the regulator. Although we only gain access to user information that is necessary for, and relevant to, the services provided, the data we obtain and use may include information that is deemed as “personal information” under the PRC Cybersecurity Law and related data privacy and protection laws and regulations. See “Regulation—Regulations Relating to Information Security.”

While we take measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of the measures undertaken by us and our business partners. The activities of third parties, such as our users, merchants, brands, and other business partners are beyond our control. If any of these parties violate the PRC Cybersecurity Law and related laws and regulations, or fail to fully comply with the service agreements with us, or if any of our employees fails to comply with our internal control measures and misuses the information, we may be subject to regulatory actions. Any failure or perceived failure to comply with all applicable data privacy and protection laws and regulations, or any failure or perceived failure of our business partners to do so, or any failure or perceived failure of our employees to comply with our internal control measures, may result in negative publicity and legal proceedings or regulatory actions against us, and could damage our reputation, discourage current and potential users and business partners from using our services and subject us to claims, fines, and damages, which could have a material adverse effect on our business and results of operations.

New laws or regulations concerning data protection, or the interpretation and implementation of existing consumer and data protection laws or regulations, which is often uncertain and in flux, may be inconsistent with

 

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our practices. The introduction of new products or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. Complying with new laws and regulations could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.

Many of our products and services utilize open-source software, which may pose particular risks to our proprietary software, products and services in a manner that negatively affects our business.

We use open source software in our products and services and will continue to use open source software in the future. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. Additionally, we may face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated products or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully.

Our success depends on the efforts of our key employees, including our senior management members and other technology talents. If we fail to hire, retain, and motivate our key employees, our business may suffer.

We depend on the continued contributions of our senior management and other key employees, many of whom are difficult to replace. The loss of the services of any of our executive officers or other key employees could harm our business. Competition for qualified talent in China is intense, particularly in the content-related internet and technology industries. Our future success depends on our ability to attract a large number of qualified employees and retain existing key employees. If we are unable to do so, our business and growth may be materially and adversely affected and the trading price of our ADSs could suffer. Our need to significantly increase the number of our qualified employees and retain key employees may cause us to materially increase compensation-related costs, including stock-based compensation.

We have granted, and may continue to grant, options and other types of awards under our share incentive plan, which may result in increased share-based compensation expenses.

We adopted an equity incentive plan in 2012, or the 2012 Plan. For the years ended December 31, 2019 and 2020, we recorded RMB179.7 million and RMB180.1 million (US$27.6 million), respectively, in share-based compensation expenses. Competition for highly skilled personnel is often intense and we may incur significant costs or may not be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs. We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based awards in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

We may incur loss from our investment in wealth management products, and our significant deposits may be at risk if the banks or wealth management agencies where we make our deposits have liquidity issues.

We invest in wealth management products from time to time, which generate investment income. Our investment in wealth management products are associated with various risks. Firstly, under PRC law, banks and wealth management agencies are not allowed to contractually promise that the wealth management products that they offer are principal-guaranteed or will yield interest income. Secondly, we are subject to risks that any of the banks or wealth management agencies that sell us wealth management products may not perform their

 

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contractual obligations, for example, in the event of insolvency. As a result, the income generated from and the market value of the wealth management products that we purchase may be adversely affected. The aforementioned risks are subject to market and economic conditions and may significantly increase in an unstable macroeconomic environment. Government policies affecting wealth management products and our investment policy may also change in ways unfavorable to us. As we may continue to invest in such wealth management products, if any of the above adverse events occur, the products may fail to generate our expected return and we may even incur loss as a result.

We are subject to payment processing risk.

Our members pay for our service using a variety of different online payment methods. We rely on third parties to process such payment. Acceptance and processing of these payment methods are subject to certain rules and regulations and require payment of interchange and other fees. To the extent there are increases in payment processing fees, material changes in the payment ecosystem, such as delays in receiving payments from payment processors and/or changes to rules or regulations concerning payment processing, our revenue, operating expenses and results of operation could be adversely impacted.

We also do not have control over the security measures of our third-party payment service providers, and security breaches of the online payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of all of the online payment systems that we use. If a well-publicized internet security breach were to occur, users concerned about the security of their online payments may become reluctant to purchase our products and services through payment service providers even if the publicized breach did not involve payment systems or methods used by us. If any of the above were to occur and damage our reputation or the perceived security of the payment systems that we use, we may lose paying users as they may be discouraged from purchasing products or services in our community, which may adversely affect our business and results of operations.

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 our ADSs may be materially and adversely affected.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. In the course of auditing our consolidated financial statements as of and for the years ended December 31, 2019 and 2020, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting and other control deficiencies. The material weakness identified relates to our lack of sufficient financial reporting and accounting personnel with appropriate understanding and knowledge of U.S. GAAP to handle complex accounting issues and to establish and implement key controls over period end closing and financial reporting to properly prepare and review financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act of 2002 for purposes of identifying and reporting any weakness in our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional material weaknesses or control deficiencies may have been identified.

Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report from management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2022. In addition, once we cease

 

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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. Our management may conclude that our internal control over financial reporting is not effective. 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 become 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 or more material weaknesses or deficiencies in our internal control over financial reporting. In addition, 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, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our ADSs. 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.

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. According to the HFCAA, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC will prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the PRC authorities, our auditor is currently not inspected by the PCAOB.

The SEC has not yet proposed rules relating to the implementation of the HFCAA. There could be additional regulatory or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

 

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The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCAA and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCAA are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCAA. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.

The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares or ADSs are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China 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 China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in China or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

It may be difficult for overseas regulators to conduct investigations or collect evidence within China.

Shareholder claims or regulatory investigation that are common in jurisdictions outside China are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the 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, such cooperation with the securities regulatory authorities in the United States or other jurisdictions may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigations or evidence collection activities within the PRC territory, and without the consent by the Chinese securities regulatory authorities and the other competent governmental agencies, no entity or individual may provide documents or materials related to securities business to any foreign party. While detailed interpretation of or implementation rules under the article have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigations or evidence collection activities within China and the potential obstacles for information provision may further increase difficulties faced by you in protecting your interests. See also “—Risks Relating to Our ADSs and This Offering—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” for risks associated with investing in us as a Cayman Islands company.

Proceedings instituted by the SEC against PRC-based “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.

Starting in 2011 the PRC-based “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and PRC law. Specifically, for certain U.S.-listed

 

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companies operating and audited in China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. 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 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 Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are 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. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future non-compliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or, in extreme cases, the resumption of the current proceeding against all four firms. If additional remedial measures are imposed on the PRC-based “big four” accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, 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 final 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 China, which could result in financial statements being determined not to be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

If our independent registered public accounting firm was 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 to be not in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.

A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business, financial condition, and results of operations.

The global macroeconomic environment is facing challenges. The growth rate of the Chinese economy has gradually slowed in recent years and the trend may continue. There is considerable uncertainty over the long-term effects of the 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. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns on the relationship among China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. 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

 

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or prolonged slowdown in the global or PRC economy may materially and adversely affect our business, results of operations, and financial condition. In addition, continued turbulence in the international markets may adversely affect our ability to access capital markets to meet liquidity needs.

The defects in certain leased property interests and failure to register certain lease agreements may materially and adversely affect our business, financial condition, results of operations, and prospects.

We lease premises in China in various locations. With respect to certain leased premises, the lessors did not have or provide us with property ownership certificates or other documents evidencing their rights to lease such premises to us. Therefore, we cannot assure that we will not be subject to any challenges, lawsuits, or other actions taken against us with respect to our leased premises for which the relevant lessors do not have valid title or right to lease. If our lessors’ right to lease premises is successfully challenged by any third party, our lease agreements may not be enforceable and we may be forced to vacate the premise and relocate to a different premise.

We have not registered any of our lease agreements with the relevant government authorities. Under the relevant PRC laws and regulations, all lease agreements are required to be registered and filed with the relevant government authority. The failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, but the relevant government authorities may order us to register the lease agreements in a prescribed period of time and impose a fine ranging from RMB1,000 to RMB10,000 for each non-registered lease if we fail to complete the registration within the prescribed timeframe.

Our insurance coverage may not be adequate, which could expose us to costs and business disruption.

We do not have any business liability or disruption insurance coverage for our operations in China. Any material or extended business disruption may result in substantial costs and expenses and the diversion of our resources, financial, managerial, or otherwise, which could have an adverse effect on our business, results of operations, financial condition, and prospects.

We face risks related to natural disasters, health epidemics, and other outbreaks, which could significantly disrupt our operations.

Our business could be adversely affected by the effects of epidemics. The COVID-19 pandemic has caused, and may continue to cause, us and certain of our business partners to implement adjustment of work arrangements enabling employees to work from home and collaborate remotely. We have taken measures to reduce the negative impact of the COVID-19 pandemic, including upgrading our telecommuting system or monitoring our employees’ health on a daily basis. However, we might still be subject to related impact, such as travel restrictions and delay or cancelation in our offline events, which may adversely affect our service quality. As a result, our business, financial condition, and results of operations have been adversely affected. For example, we experienced negative impact on our advertising revenue in the first half of 2020. Although our advertising revenue increased by 22.7% to RMB293.0 million (US$44.9 million) in the first half of 2020 from RMB238.8 million in the first half of 2019, a higher growth rate might have been achieved if the COVID-19 pandemic had not taken place. We may continue to experience negative impact due to the COVID-19 pandemic. The extent to which the COVID-19 pandemic affects our operations and financial performance will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the coronavirus, such as the availability of effective vaccines or cure, among others.

In recent years, there have been other breakouts of epidemics in China and globally. Our operations could be disrupted if one of our employees is suspected of having H1N1 flu, avian flu, or another epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that the outbreak harms the PRC economy in general.

 

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We are also vulnerable to natural disasters and other calamities. Although we have servers that are hosted in an offsite location, our backup system does not capture data on a real-time basis and we may be unable to recover certain data in the event of a server failure. We cannot assure you that any backup systems will be adequate to protect us from the effects of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks, or similar events. Any of the foregoing events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide services.

Any future outbreak of contagious diseases, extreme unexpected bad weather or natural disasters would adversely affect our offline events. If there is a recurrence of an outbreak of certain contagious diseases or natural disasters, the offline events operated by us may be canceled or delayed. Government advices regarding, or restrictions on, holding offline events, in the event of an outbreak of any contagious disease or occurrence of natural disasters may have a material adverse effect on our business and operating results.

The current tensions in international trade and rising political tensions, particularly between the United States and China, may adversely impact our business, financial condition, and results of operations.

Recently there have been heightened tensions in international economic relations, such as the one between the United States and China. The U.S. government has recently imposed, and has recently proposed to impose additional, new, or higher tariffs on certain products imported from China to penalize China for what it characterizes as unfair trade practices. China has responded by imposing, and proposing to impose additional, new, or higher tariffs on certain products imported from the United States. Following mutual retaliatory actions for months, on January 15, 2020, the United States and China entered into the Economic and Trade Agreement Between the United States of America and the People’s Republic of China as a phase one trade deal, effective on February 14, 2020.

In addition, political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the PRC central government and the executive orders issued by the U.S. government in August 2020 that prohibit certain transactions with certain selected leading Chinese internet companies as well as their products. Rising political tensions could reduce levels of trades, investments, technological exchanges, and other economic activities between the two major economies. Such tensions between the United States and China, and any escalation thereof, may have a negative impact on the general, economic, political, and social conditions in China and, in turn, adversely impacting our business, financial condition, and results of operations.

We may be subject to regulatory actions or legal proceedings in the ordinary course of our business. If the outcomes of these regulatory actions or legal proceedings are adverse to us, it could have a material adverse effect on our business, results of operations, and financial condition.

We may be subject to regulatory actions, litigation, disputes or claims of various types brought by relevant regulatory authorities or our competitors, users, content creators, employees, or other third parties against us in the ordinary course of our business. Such regulatory actions, disputes, allegations, complaints, or legal proceedings may damage our reputation, evolve into litigations or otherwise have a material adverse impact on our reputation and business. Litigation is expensive, may subject us to the risk of significant damages, requires significant managerial resources and attention, and could materially and adversely affect our business, financial condition, and results of operations. The outcomes of actions we institute may not be successful or favorable to us. Lawsuits against us may also generate negative publicity that significantly harms our reputation, which may adversely affect our user base.

 

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Risks Relating to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Foreign ownership of internet-based businesses, such as provision of commercial internet information services, commercial internet culture activities, and internet audio-visual program is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication enterprise (except for e-commerce, domestic multi-party communications, storage-forwarding, and call centers) and the main foreign investor of such enterprise must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Special Administrative Measures (Negative List) for Foreign Investment Access (2020 Edition) issued on June 23, 2020 and effective on July 23, 2020, by the National Development and Reform Commission, or the NDRC, and the PRC Ministry of Commerce, and other applicable laws and regulations. In addition, foreign investors are prohibited from investing in enterprises engaging in internet culture activities except for music and providing internet audio-visual program services.

We are a company incorporated under the laws of the Cayman Islands. To comply with PRC laws and regulations, we conduct our internet-related business in China through our VIE incorporated in China. Our VIE is owned by PRC citizens or entities who are our founder, co-founders, or beneficially owned or controlled by our shareholders, with whom we have contractual arrangements. The contractual arrangements give us effective control over our VIE and enable us to obtain substantially all of the economic benefits arising from our VIE as well as consolidate the financial results of our VIE in our results of operations. Although the structure we have adopted is consistent with longstanding industry practice, and is commonly adopted by comparable companies in China, the PRC government may not agree that these arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. Our VIE and its subsidiaries hold the licenses, approvals, and key assets that are essential for the operations of certain of our businesses.

In the opinion of Han Kun Law Offices, our PRC legal counsel, (i) the ownership structures of the Beijing WFOE and our VIE in China, both currently and immediately after giving effect to this offering, do not violate any applicable PRC law, regulations, or rules currently in effect, and (ii) subject to the risks as disclosed in “—Risks Relating to Our Corporate Structure” and “Corporate History and Structure,” each agreement of the contractual arrangements between Beijing WFOE, our VIE and its equity holders governed by PRC law are valid, binding, and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect and does not violate any applicable PRC law currently in effect. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. The relevant PRC regulatory authorities have broad discretion in determining whether a particular contractual structure violates PRC laws and regulations. Thus, we cannot assure you that the PRC government will not ultimately take a view contrary to the opinion of Han Kun Law Offices. If we are found in violation of any PRC laws or regulations or if the contractual arrangements among the Beijing WFOE, our VIE, and its equity holders are determined as illegal or invalid by any PRC court, arbitral tribunal or regulatory authorities, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:

 

   

revoke the agreements constituting the contractual arrangements;

 

   

revoke our business and operating licenses;

 

   

require us to discontinue or restrict operations;

 

   

restrict our right to collect revenue;

 

   

restrict or prohibit our use of the proceeds from our public offering to fund our business and operations in China;

 

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shut down all or part of our websites, apps, or services;

 

   

levy fines on us or confiscate the proceeds that they deem to have been obtained through non-compliant operations;

 

   

require us to restructure the operations in such a way as to compel us to establish a new enterprise, re-apply for the necessary licenses or relocate our businesses, staff, and assets;

 

   

impose additional conditions or requirements with which we may not be able to comply; or

 

   

take other regulatory or enforcement actions that could be harmful to our business.

Furthermore, any of the equity interest in our VIE under the name of any record equity holder of our VIE may be put under court custody in connection with litigation, arbitration, or other judicial or dispute resolution proceedings against that record holder. We cannot be certain that the equity interest will be disposed of in accordance with the contractual arrangements. In addition, new PRC laws, rules, and regulations may be introduced to impose additional requirements that may impose additional challenges to our corporate structure and contractual arrangements. The occurrence of any of these events or the imposition of any of these penalties may materially and adversely affect our ability to conduct internet-related businesses. In addition, if the imposition of any of these penalties causes us to be unable to direct the activities of our VIE and its subsidiaries or the right to receive their economic benefits, we would no longer be able to consolidate our VIE into our financial statements, which could materially and adversely affect our financial condition and results of operations.

Our contractual arrangements may not be as effective in providing operational control as direct ownership and our VIE shareholders may fail to perform their obligations under our contractual arrangements.

Since PRC laws limit foreign equity ownership in certain businesses in China, we operate such businesses in China through our VIE, in which we have no ownership interest and rely on a series of contractual arrangements with our VIE and its respective equity holders to control and operate these businesses. Our revenue and cash flow from our such businesses are attributed to our VIE. The contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. Direct ownership would allow us, for example, to directly or indirectly exercise our rights as a shareholder to effect changes in the boards of directors of our VIE, which, in turn, could effect changes, subject to any applicable fiduciary obligations at the management level. However, under the contractual arrangements, as a legal matter, if our VIE or its equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend significant resources to enforce those arrangements and resort to litigation or arbitration and rely on legal remedies under PRC laws. These remedies may include seeking specific performance or injunctive relief and claiming damages, any of which may not be effective. In the event we are unable to enforce these contractual arrangements or we experience significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIE and may lose control over the assets owned by our VIE. As a result, we may be unable to consolidate our VIE in our consolidated financial statements, which could materially and adversely affect our financial condition and results of operations.

Our current corporate structure and business operations may be affected by the Foreign Investment Law.

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020. Along with the Foreign Investment Law, the Implementing Rules of Foreign Investment Law promulgated by the State Council and the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law promulgated by the Supreme People’s Court became effective on January 1, 2020. Since the Foreign Investment Law and its current implementation and interpretation rules are relatively new, uncertainties still exist in relation to their further application and improvement. According to the Foreign Investment Law, “foreign investment” refers to investment activities carried out directly or indirectly by foreign natural persons, enterprises, or other organizations, or “foreign

 

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investors,” including the following: (i) foreign investors establishing foreign-invested enterprises in China alone or collectively with other investors; (ii) foreign investors acquiring shares, equities, properties, or other similar rights of Chinese domestic enterprises; (iii) foreign investors investing in new projects in China alone or collectively with other investors; and (iv) foreign investors investing through other ways prescribed by laws, regulations, or guidelines of the State Council. The Foreign Investment Law and its current implementation and interpretation rules do not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under the definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations, or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations, or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over our VIE through contractual arrangements will not be deemed as a foreign investment in the future.

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative list.” The Foreign Investment Law provides that foreign-invested entities operating in “restricted” industries will require market entry clearance and other approvals from relevant PRC government authorities. Pursuant to the Special Administrative Measures (Negative List) for Foreign Investment Access (2020 Edition), the value-added telecommunication services we provide fall within the restricted category. It remains unclear that whether the “negative list” to be published pursuant to the Foreign Investment Law will differ from the current Negative List. If our control over our VIE through contractual arrangements is deemed as a foreign investment in the future, and any business of our VIE is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operations.

Furthermore, if future laws, administrative regulations or provisions 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. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

We may lose the ability to use, or otherwise benefit from, the licenses, approvals, and assets held by our VIE, which could, render us unable to conduct some or all of our business operations and constrain our growth.

Our VIE and its subsidiaries hold licenses, approvals, and assets that are necessary for the operation of certain of our businesses, as well as equity interests in a series of our portfolio companies, to which foreign investments are typically restricted or prohibited under applicable PRC law. The contractual arrangements contain terms that specifically obligate the equity holders of our VIE to ensure the valid existence of our VIE and restrict the disposition of material assets or any equity interest of our VIE. However, in the event the equity holders of our VIE breach the terms of these contractual arrangements and voluntarily liquidate our VIE, or our 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 operate some or all of our businesses or otherwise benefit from the assets held by our VIE, which could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, if our VIE undergoes a voluntary or involuntary liquidation proceeding, its equity holders or unrelated third-party creditors may claim rights to some or all of the assets of our VIE, thereby hindering our ability to operate our business as well as constrain our growth.

 

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The contractual arrangements with our VIE may be subject to scrutiny by the tax authorities in China. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated profit and the value of your investment.

The tax regime in China is rapidly evolving, and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or our VIE owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws, rules, and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our VIE, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute a favorable transfer pricing, the PRC tax liabilities of the relevant subsidiaries and/or our VIE could be increased, which could increase our overall tax liabilities. In addition, the PRC tax authorities may impose late payment interest. Our profit may be materially reduced if our tax liabilities increase.

The equity holders, directors, and executive officers of the VIE, as well as our employees who execute other strategic initiatives may have potential conflicts of interest with our company.

The PRC laws provide that a director and an executive officer owes a fiduciary duty to the company he or she directs or manages. The directors and executive officers of our VIE must act in good faith and in the best interests of our VIE and must not use their respective positions for personal gain. On the other hand, directors of our company have a duty of care and loyalty to our company and to our shareholders as a whole under Cayman Islands law. We control our VIE through contractual arrangements, and the business and operations of our VIE are closely integrated with the business and operations of our subsidiaries. Nonetheless, conflicts of interests for these persons may arise due to dual roles both as directors and executive officers of our VIE and as directors or employees of our company, and may also arise due to dual roles both as equity holders of our VIE and as directors or employees of our company.

We cannot assure you that these persons will always act in the best interests of our company should any conflicts of interest arise, or that any conflicts of interest will always be resolved in our favor. We also cannot assure you that these persons will ensure that our VIE will not breach the existing contractual arrangements. If we cannot resolve any such conflicts of interest or any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or take enforcement action under the contractual arrangements. There is substantial uncertainty as to the outcome of any such legal proceedings. See “—We may lose the ability to use, or otherwise benefit from, the licenses, approvals, and assets held by our VIE, which could, render us unable to conduct some or all of our business operations and constrain our growth” above.

If we exercise the option to acquire equity ownership of our VIE, the ownership transfer may subject us to certain limitations and substantial costs.

Pursuant to the Special Administrative Measures (Negative List) for Foreign Investment Access (2020 Edition), foreign investors are not allowed to hold more than 50% of the equity interests of any company providing value-added telecommunications services, including ICP services, with the exception of e-commerce, domestic multi-party communications, storage-forwarding, and call centers businesses. Pursuant to the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises promulgated by the State Council, the main foreign investor who invests in a value-added telecommunications business in China must possess prior experience in operating value-added telecommunications businesses and a proven track record of business operations overseas, or the Qualification Requirements. Currently none of the applicable PRC laws, regulations, or rules provides clear guidance or interpretation on the Qualification Requirements. We face the risk of not satisfying the requirement promptly. In addition, the Special Administrative Measures (Negative List) for Foreign Investment Access (2020 Edition) prohibits foreign investors from investing in internet audio-visual program services and internet culture activities with the exception of music. If the PRC laws were revised to

 

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allow foreign investors to invest in enterprises with internet audio-visual program or internet culture activities businesses in China, or to hold more than 50% of the equity interests of value-added telecommunications enterprises, due to the necessity of ICP services for internet audio-visual program services and internet cultural activities, we might be unable to unwind the contractual arrangements before we were able to comply with the Qualification Requirements, or if we attempt to unwind the contractual arrangements before we are able to comply with the Qualification Requirements we may be ineligible to operate our value-added telecommunication, internet audio-visual program, and internet culture activities businesses and may be forced to suspend their operations, which could materially and adversely affect our business, financial condition, and results of operations.

Pursuant to the contractual arrangements, we have the exclusive right to purchase all or any part of the equity interests in our VIE from the respective equity holders for a nominal price, unless the relevant government authorities or PRC laws request that the equity interests be evaluated upon purchase and in which case the purchase price shall be adjusted based on the evaluation result. Subject to relevant laws and regulations, the respective equity holders shall return any amount of purchase price they have received to Beijing WFOE. If such a return of purchase price takes place, the competent tax authority may require Beijing WFOE to pay enterprise income tax for ownership transfer income, in which case the amount of tax could be substantial.

Risks Relating to Doing Business in China

Changes in China’s economic, political or social conditions, or government policies could materially and adversely affect our business and results of operations.

Substantially all of our operations are conducted in China. Accordingly, our results of operations, financial condition, and prospects are influenced by economic, political, and legal developments in China. 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. 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. While the PRC economy has experienced significant growth over the past decades, that growth has been uneven across different regions and between economic sectors and may not continue. The growth of the Chinese economy may not continue at a rate experienced in the past, and the impact of COVID-19 on the Chinese economy may continue. Any prolonged slowdown in the Chinese economy may reduce the demand for our services and materially and adversely affect our business and results of operations. Furthermore, any adverse changes in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on China’s overall economic growth. Such developments could adversely affect our business and results of operations, lead to reduction in demand for our products and services and adversely affect our competitive position.

The legal system in China embodies uncertainties which could limit the legal protections available to us or impose additional requirements and obligations on our business, which may materially and adversely affect our business, financial condition, and results of operations.

We conduct our business primarily through our PRC subsidiaries and VIE in China. Our operations in China are governed by PRC laws and regulations. The legal system in China is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases may be cited for reference but have less precedential value. The legal system in China evolves rapidly, and the interpretations of laws, regulations, and rules may contain inconsistencies. However, these laws, regulations, and legal requirements are constantly changing and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us. In addition, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to internet-related industries, including the promulgation of new laws,

 

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changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. Such unpredictability towards our contractual, property (including intellectual property) and procedural rights could adversely affect our business and impede our ability to continue our operations. Furthermore, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

In addition, new laws and regulations may be enacted from time to time and substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to our businesses. In particular, the PRC government authorities may continue to promulgate new laws, regulations, rules and guidelines governing internet companies with respect to a wide range of issues, such as intellectual property, competition and antitrust, privacy and data protection, and other matters, which may result in additional obligations imposed on us. Compliance with these laws, regulations, rules, guidelines, and implementations may be costly, and any incompliance or associated inquiries, investigations, and other governmental actions may divert significant management time and attention and our financial resources, bring negative publicity, subject us to liabilities or administrative penalties, or materially and adversely affect our business, financial condition, and results of operations.

If we fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environment applicable to our businesses in China, or if we are required to take compliance actions in this regard, our business, financial condition, and results of operations may be materially and adversely affected.

The internet and mobile internet industries in China are highly regulated. Our VIE and its subsidiaries are required to obtain and maintain applicable licenses and approvals from different regulatory authorities in order to provide their current services. Under the current PRC regulatory regime, a number of regulatory authorities, including, but not limited to, the PRC National Radio and Television Administration, or the NRTA, the PRC Ministry of Culture and Tourism, the MIIT, the PRC State Council Information Office, and the Cyberspace Administration of China, jointly regulate all major aspects of the internet industry, including the mobile internet and online content communities. Operators must obtain various government approvals and licenses for relevant business.

We have obtained Value-Added Telecommunication Business Operating Licenses, or ICP Licenses, for the provision of commercial internet information services, Internet Cultural Business Licenses, or ICB Licenses, for commercial internet culture activities, Radio and TV Programs Production and Operation Licenses, a license for non-commercial internet medicine information services, and a license for publication operation through our VIE and its subsidiaries.

We offer content in various formats, including certain video and live streaming content on our Zhihu app and website operated by our VIE, and we plan to continue to offer video and live streaming content in our community. If such content offerings are considered as online transmission of audio and video programs, we may be required to obtain a Permit for Transmission of Audio-Visual Programs via Information Network, or an Audio-Visual Permit. We have obtained an Audio-Visual Permit through Beijing Leimeng Shengtong Cultural Development Co., Ltd., or Leimeng Shengtong, a subsidiary of our VIE. However, if the PRC regulatory authorities deem that we are not in compliance with the relevant legal requirements to hold a valid Audio-Visual Permit to cover the video and live streaming content in our community, we may be subject to fines, penalties, and/or orders to cease offering video and live streaming content, shut down website or revoke licenses, which may materially and adversely affect our business, financial condition, and results of operations. In addition, certain information posted on our Zhihu app and website by our users may be viewed as news information and the transmission of such information may be deemed as internet news information services, thereby requiring us to obtain an internet news information license. We cannot assure you that we will be able to obtain all the licenses necessary for our business operations if and when we are required to do so. Moreover, as we further develop and expand our business, we may need to obtain additional qualifications, permits, approvals, or licenses. We may be required to obtain additional licenses or approvals if the PRC government adopts more

 

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stringent policies or regulations for our business. There is no assurance that we will be able to obtain such additional qualifications, permits, approvals, or licenses in a timely manner, or at all.

These licenses are essential to the operation of our business and are generally subject to regular government review or renewal. We cannot assure you that we will be able to maintain our existing licenses or permits necessary for our business operations, update information (such as website, apps, or legal representative) on file, or renew any of them when their current term expires. For example, due to a change of legal representative of Leimeng Shengtong, Leimeng Shengtong is in the process of updating the information on file for its Audio-Visual Permit and may be required to update its ICP License and ICB License as well.

In addition, considerable uncertainties exist in relation to the interpretation and implementation of existing and future laws and regulations governing our business activities. We could be found not in compliance with any future laws and regulations or of the laws and regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations. If we fail to complete, obtain, or maintain any of the required licenses or approvals or make the necessary filings, we may be subject to various penalties, such as confiscation of unlawful gains, the imposition of fines, revocation of licenses, and the discontinuation or restriction of our operations. Any such penalties or changes in policies, regulations, or enforcement by government authorities, may disrupt our operations and materially and adversely affect our business, financial condition, and results of operations.

We may be classified as a “PRC resident enterprise” for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.

Under the People’s Republic of China Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, an enterprise established outside China whose “de facto management body” is located in China is considered a “PRC resident enterprise” and will generally be subject to the uniform 25% enterprise income tax rate, or the EIT rate, on its global income. Under the implementation rules of the EIT Law, “de facto management body” is defined as the organization body that effectively exercises full management and control over such aspects as the business operations, personnel, accounting and properties of the enterprise.

On April 22, 2009, State Administration of Taxation, or SAT, released the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as People’s Republic of China Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, that sets out the standards and procedures for determining whether the “de facto management body” of an enterprise registered outside of China and controlled by PRC enterprises or PRC enterprise groups is located within China. Further to SAT Circular 82, on July 27, 2011, SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82; the bulletin became effective on September 1, 2011 and revised on June 15, 2018. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration and competent tax authorities’ procedures.

Under Circular 82, a foreign enterprise controlled by a PRC enterprise or PRC enterprise group is considered a PRC resident enterprise if all of the following apply: (i) the senior management and core management departments in charge of daily operations are located mainly within China; (ii) financial and human resources decisions are subject to determination or approval by persons or bodies in China; (iii) major assets, accounting books, company seals, and minutes and files of board and shareholders’ meetings are located or kept within China; and (iv) at least half of the enterprise’s directors with voting rights or senior management reside within China. SAT Bulletin 45 specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the PRC controlled offshore incorporated enterprise.

 

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Although Circular 82 and SAT Bulletin 45 explicitly provide that the above standards only apply to enterprises which are registered outside of China and controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, Circular 82 and SAT Bulletin 45 may reflect SAT’s criteria for how the “de facto management body” test should be applied in determining the tax residence of foreign enterprises in general, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals. If the PRC tax authorities determine that we were treated as a PRC resident enterprise for PRC enterprise income tax purposes, the 25% PRC enterprise income tax on our global taxable income could materially and adversely affect our ability to satisfy any cash requirements we may have.

PRC laws and regulations establish more complex procedures for some acquisitions of PRC companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

A number of PRC laws and regulations, including the M&A Rules, the Anti-monopoly Law promulgated by the Standing Committee of the National People’s Congress in August 2007, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the Ministry of Commerce in August 2011, and the Measures for the Security Review of Foreign Investment promulgated by the NDRC and the Ministry of Commerce in December 2020 have established procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex. These include requirements in some instances that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions involving an industry that implicates national security to be subject to merger control review or security review.

We have grown and may continue to 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 Ministry of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, the Ministry of Commerce or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in China, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

The heightened scrutiny over acquisition transactions by PRC tax authorities may have a negative impact on our business operations, our acquisition or restructuring strategy or the value of your investment in us.

On February 3, 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, which provided comprehensive guidelines relating to, and also heightened the PRC tax authorities’ scrutiny over, indirect transfers by a non-resident enterprise of PRC taxable assets. Under SAT Bulletin 7, the PRC tax authorities are entitled to reclassify the nature of an indirect transfer of PRC taxable assets, when a non-resident enterprise transfers PRC taxable assets indirectly by disposing of equity interests in an overseas holding company directly or indirectly holding such PRC taxable assets, by disregarding the existence of such overseas holding company and considering the transaction to be a direct transfer of PRC taxable assets and without any other reasonable commercial purpose. However, SAT Bulletin 7 contains certain exemptions, including (i) where a non-resident enterprise derives income from the indirect transfer of PRC taxable assets by acquiring and selling shares of an overseas listed company which holds such PRC taxable assets on a public market; and (ii) where there is an indirect transfer of PRC taxable assets, but if the non-resident enterprise had directly held and disposed of such PRC taxable assets, the income from the transfer would have been exempted from PRC enterprise income tax under an applicable tax treaty or arrangement.

 

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On October 17, 2017, SAT issued the Announcement on Issues Concerning the Withholding of Enterprise Income Tax at Source on Non-PRC Resident Enterprises, or SAT Circular 37, which became effective on December 1, 2017 and abolish certain provisions in SAT Bulletin 7. SAT Circular 37 further clarifies the practice and procedure of withholding non-resident enterprise income tax. Pursuant to SAT Circular 37, where the party responsible to deduct such income tax did not or was unable to make such deduction, or the non-resident enterprise receiving such income failed to declare and pay the taxes that should have been deducted to the relevant tax authority, both parties may be subject to penalties. The taxable gain is calculated as balance of the total income from such transfer net of the net book value of equity interest.

We may conduct acquisitions involving changes in corporate structures. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance for the investigation of PRC tax authorities with respect thereto. Any PRC tax imposed on a transfer of our ADSs or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in us.

Discontinuation of preferential tax treatments we currently enjoy or other unfavorable changes in tax law could result in additional compliance obligations and costs.

A number of our PRC operating entities enjoy various types of preferential tax treatment pursuant to the prevailing PRC tax laws. Our PRC subsidiaries and VIE may, if they meet the relevant requirements, qualify for certain preferential tax treatment.

For a qualified “high and new technology enterprise,” the applicable enterprise income tax rate is 15%. For a qualified “small low-profit enterprise,” the applicable enterprise income tax rate is 20%. Our Beijing WFOE was certified as a “high and new technology enterprise,” and some of our PRC subsidiaries were qualified as “small low-profit enterprises” under the relevant PRC laws and regulations. If these entities fail to maintain their respective qualification under the relevant PRC laws and regulations, their applicable enterprise income tax rates may increase to up to 25%, which could have a material adverse effect on our financial condition.

PRC regulations of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our offshore financing to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We may transfer funds to our PRC subsidiaries or finance our PRC subsidiaries by means of shareholders’ loans or capital contributions after completion of this offering and the concurrent private placements. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed a statutory limit, and shall be filed with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Furthermore, any capital contributions we make to our PRC subsidiaries shall be registered with the PRC State Administration for Market Regulation or its local counterparts, and filed with the Ministry of Commerce or its local counterparts.

On March 30, 2015, SAFE promulgated the Circular on Reforming the Administration Measures on Conversion of Foreign Exchange Registered Capital of Foreign-invested Enterprises, or SAFE Circular 19. SAFE Circular 19, however, allows foreign invested enterprises in China to use their registered capital settled in RMB converted from foreign currencies to make equity investments, but the registered capital of a foreign invested company settled in RMB converted from foreign currencies remains not allowed to be used, among other things, for investment in the security markets, or offering entrustment loans, unless otherwise regulated by other laws and regulations. On June 9, 2016, SAFE further issued the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, which, among other things, amended certain provisions of Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign invested company is regulated such that Renminbi

 

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capital may not be used for purposes beyond its business scope or to provide loans to non-affiliates unless otherwise permitted under its business scope. On October 23, 2019, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-Border Trade and Investment, or SAFE Circular 28, which removes the restrictions on domestic equity investments by non-investment foreign-invested enterprises with their capital funds, provided that certain conditions are met. If our VIE requires financial support from us or our PRC subsidiaries in the future, and we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability to fund our VIE’s operations will be subject to statutory limits and restrictions, including those described above. The applicable foreign exchange circulars and rules may limit our ability to transfer the net proceeds from this offering and the concurrent private placements to our PRC subsidiaries and convert the net proceeds into RMB, which may adversely affect our business, financial condition, and results of operations.

We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiaries and our PRC subsidiaries’ ability to distribute profits to us, if our resident shareholders or beneficial owners in China fail to comply with relevant PRC foreign exchange regulations.

SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Overseas Investment, Financing and Round-Trip Investment via Special Purpose Vehicles, or SAFE Circular 37, effective on July 4, 2014. The SAFE Circular 37 requires PRC residents, including PRC individuals and institutions, to register with SAFE or its local branches in connection with their direct establishment or indirect control of an offshore special purpose vehicle, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents must update their foreign exchange registrations with SAFE or its local branches when the offshore special purpose vehicle in which such residents directly hold the equity interests undergoes material events relating to any change of basic information (including change of such PRC individual shareholder, name and operation term), increases or decreases in investment amount, share transfers or exchanges, or mergers or divisions.

If any shareholder holding interest in an offshore special purpose vehicle, who is a PRC resident as determined by Circular 37, fails to fulfill the required foreign exchange registration with the local SAFE branches, the PRC subsidiaries of that offshore special purpose vehicle may be prohibited from distributing their profits and dividends to their offshore parent company or from carrying out other subsequent cross-border foreign exchange activities, and the offshore special purpose vehicle may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

On February 28, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective June 1, 2015. In accordance with SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under Circular 37, with qualified banks, instead of SAFE or its local branches. The qualified banks, under the supervision of SAFE, directly examine the applications and conduct the registration.

We may not be fully informed of the identities of all our shareholders or beneficial owners who are PRC residents, and therefore, we may not be able to identify all our shareholders or beneficial owners who are PRC residents to ensure their compliance with Circular 37 or other related rules. In addition, we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other requirements required by the Circular 37 or other related rules in a timely manner. Even if our shareholders and beneficial owners who are PRC residents comply with such request, we cannot provide any assurance that they will successfully obtain or update any registration required by the Circular 37 or other related rules in a timely manner due to many factors, including those beyond our and their control. If any of our shareholders who is a PRC resident as determined by

 

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Circular 37 fails to fulfill the required foreign exchange registration, they could be subject to fines or legal sanctions, our PRC subsidiaries may be prohibited from distributing their profits and dividends to us or from carrying out other subsequent cross-border foreign exchange activities, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries, which may adversely affect our business.

We principally rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business or financial condition.

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

Under PRC laws and regulations, wholly foreign-owned enterprises in China, may pay dividends only out of their accumulated after-tax 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. At the discretion of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds, and staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our VIE to make remittance to our wholly-owned PRC subsidiaries 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.

Restrictions on the remittance of Renminbi into and out of China and governmental control of currency conversion may limit our ability to pay dividends and other obligations, and affect the value of your investment.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and the remittance of currency out of China. We receive substantially all of our revenue in Renminbi. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. We may convert a portion of our revenue into other currencies to meet our foreign currency obligations, such as payments of dividends declared in respect of our ADSs, if any. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations.

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 SAFE approval by complying with certain procedural requirements. However, approval from or registration or filings with competent 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. Pursuant to SAFE Circular 19, a foreign-invested enterprise may convert up to 100% of the foreign currency in its capital account into Renminbi on a discretionary basis according to the actual needs. The SAFE Circular 16 provides for an integrated standard for conversion of foreign exchange under capital account items on a discretionary basis, which applies to all enterprises registered in China. In addition, SAFE Circular 16 has narrowed the scope of purposes for which an enterprise must not use the Renminbi funds so converted, which include, among others, (i) payment for expenditure beyond its business

 

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scope or otherwise as prohibited by the applicable laws and regulations, (ii) investment in securities or other financial products other than banks’ principal-secured products, (iii) provision of loans to non-affiliated enterprises, except where it is expressly permitted in the business scope of the enterprise, and (iv) construction or purchase of non-self-used real properties, except for real estate developers. The PRC government may at its discretion further restrict access to foreign currencies for current account transactions or capital account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency needs, we may not be able to pay dividends in foreign currencies to our shareholders. Further, there is no assurance that new regulations will not be promulgated in the future that would have the effect of further restricting the remittance of Renminbi into or out of China.

Fluctuations in exchange rates could result in foreign currency exchange losses.

The value of Renminbi against the U.S. dollar and other currencies fluctuates, is subject to changes resulting from the PRC government’s policies and depends to a large extent on domestic and international economic and political developments as well as supply and demand in the local market. In July 2005, the PRC government changed its decades-old policy of pegging the value of Renminbi to the U.S. dollar, and 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. 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.

The proceeds from this offering and the concurrent private placements will be received in U.S. dollars. As a result, any appreciation of the Renminbi against the U.S. dollar may result in the decrease in the value of our proceeds from this offering and the concurrent private placements. Conversely, any depreciation of the Renminbi may adversely affect the value of, and any dividends payable on, our ADSs in foreign currency. In addition, there are limited instruments available for us to reduce our foreign currency risk exposure at reasonable costs. All of these factors could materially and adversely affect our business, financial condition, results of operations, and prospects, and could reduce the value of, and dividends payable on, our ADSs in foreign currency terms.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in China for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas-listed company upon the completion of this offering. Failure to complete SAFE registrations may subject them to fines of up to RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

 

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In addition, the SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities. See “Regulation—Regulations Relating to Stock Incentive Plans” for further details.

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of their employees up to a maximum amount specified by the local government from time to time at locations where the businesses are operated. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Certain of our PRC operating entities incorporated in various locations in China have not completed necessary registrations, or made adequate contributions to the employee benefit plans, and we have recorded accruals for estimated underpaid amounts in our financial statements. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

Risks Relating to Our ADSs and This Offering

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. Our ADSs have been approved for listing on the New York Stock Exchange. Our shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

Negotiations with the underwriters determined the initial public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

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

The trading price of the 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, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

Actual or anticipated variations in our revenues, earnings, cash flow, and changes or revisions of our expected results;

 

   

fluctuations in operating metrics;

 

   

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

 

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

 

   

changes in financial estimates by securities analysts;

 

   

announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;

 

   

changes in the economic performance or market valuations of other beauty companies;

 

   

conditions in the beauty market;

 

   

detrimental negative publicity about us, our competitors, or our industry;

 

   

additions or departures of key personnel;

 

   

release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

   

regulatory developments affecting us or our industry;

 

   

general economic or political conditions in China or elsewhere in the world;

 

   

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

 

   

potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which the ADSs will trade. Furthermore, the stock market in general experiences price and volume fluctuations that are often unrelated or disproportionate to the operating performance of companies like us. These broad market and industry fluctuations may adversely affect the market price of our ADSs. Volatility or a lack of positive performance in our ADS price may also adversely affect our ability to retain key employees, most of whom have been granted equity incentives.

In the past, shareholders of public companies have often brought securities class action suits against 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 cease to publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

The trading market for the 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 the ADSs, the market price for the 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 the ADSs to decline.

Our 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 the completion of this offering (with certain shares remaining undesignated, with power

 

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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 ten votes per share. We will issue Class A ordinary shares represented by our 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.

Upon the completion of this offering and the concurrent private placements, Mr. Yuan Zhou will beneficially own 19,227,592 Class B ordinary shares. Mr. Yuan Zhou will beneficially own approximately 7.0% of our total issued and outstanding share capital immediately after the completion of this offering and the concurrent private placements and 42.4% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering and the concurrent private placements 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, holders of Class B ordinary shares will have considerable influence over matters such as decisions regarding mergers and consolidations, election of directors, and other significant corporate actions. Such holders may take actions that are not in the best interest of us or our other shareholders. 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.

We currently do not expect to pay dividends in the foreseeable future after this offering and 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 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 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. 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 our 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 and you may even lose your entire investment in our ADSs.

Because our initial public offering price is substantially higher than our 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 your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution, representing the difference between the initial public offering price of per ADS, and our adjusted net tangible book value per ADS as of December 31, 2020, after giving effect to our sale of the ADSs offered in this offering. In addition, you may experience further dilution to the extent that our Class A ordinary

 

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shares are issued upon the exercise of share options. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The remaining ordinary shares issued and outstanding after this offering and the concurrent private placements will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable provided in Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters of this offering. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.

After completion of this offering, certain holders of our Class A ordinary shares may cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of such registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

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 a tenth amended and restated 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 contain provisions to 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, including ordinary shares represented by ADSs. 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 the ADSs may be materially and adversely affected.

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 direct the voting of the underlying ordinary shares represented by your ADSs.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights attached to the ordinary shares underlying your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Where any matter is to be put to a vote at a general meeting, then upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying ordinary shares represented by your ADSs in accordance with your instructions. You will not be able to directly exercise your right to vote with respect to the underlying ordinary shares unless you cancel and withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting.

 

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When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying ordinary shares represented by your ADSs and from becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, upon our instruction 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 the underlying ordinary shares represented by your ADSs.

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 direct how the underlying ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying ordinary shares represented by your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

Further, under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote the Class A ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

   

we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

   

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

   

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

   

the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that you cannot prevent our Class A ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may adversely affect your interests and make it more difficult for shareholders to influence the management of our company. Holders of our Class A ordinary shares are not subject to this discretionary proxy.

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

The depositary will pay cash distributions on the ADSs only to the extent that we decide to distribute dividends on our ordinary shares or other deposited securities, and we do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. To the extent that there is a distribution, the depositary has agreed to pay you the cash dividends or other distributions it or the custodian receives on our shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of 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 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.

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

 

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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 ADS 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 the 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.

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 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.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our seventh amended and restated memorandum and articles of association, the Companies Act (2020 Revision) of the Cayman Islands, and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties 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 duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents 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 the 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 association and any special resolutions passed by such companies, and the registers of mortgages and charges of such companies) or to obtain copies of lists of shareholders of these companies. Under Cayman Islands law, the names of our current directors can be obtained from a search conducted at the Registrar of Companies. Our directors have discretion under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged 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.

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 our 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

 

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differences between the provisions of the Companies Act of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Our Post-Offering Memorandum and Articles of Association—Differences in Corporate Law.”

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

We are a Cayman Islands company and substantially 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. 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 our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

Forum selection provisions in our post-offering memorandum and articles of association and our deposit agreement with the depositary bank could limit the ability of holders of our Class A ordinary shares, ADSs, or other securities to obtain a favorable judicial forum for disputes with us, our directors and officers, the depositary bank, and potentially others.

Our post-offering memorandum and articles of association provide that the federal district courts of the United States are the exclusive forum within the United States (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than us. Our deposit agreement with the depositary bank also provides that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) will have jurisdiction to hear and determine any suit, action, or proceeding and to settle any dispute between the depositary bank and us that does not involve any other person or party that may arise out of or relate in any way to the deposit agreement, including claims under the Securities Act or the Exchange Act. Holders and beneficial owners of our ADSs, by holding an ADS or an interest therein, understand and irrevocably agree that any legal suit, action, or proceeding against or involving us or the depositary bank arising out of or related in any way to the deposit agreement, ADSs, or the transactions contemplated thereby or by virtue of ownership thereof, including without limitation claims under the Securities Act or the Exchange Act, may only be instituted in the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks jurisdiction or such designation of the exclusive forum is, or becomes, invalid, illegal, or unenforceable, in the state courts of New York County, New York). However, the enforceability of similar federal court choice of forum provisions has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such lawsuits. If a court were to find the federal choice of forum provision contained in our post-offering memorandum and articles of association or our deposit agreement with the depositary bank to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection clause in our post-offering memorandum and articles of association, as well as the forum selection provisions in the deposit agreement, may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary bank, and potentially others in his or her preferred judicial forum, and this limitation may discourage such lawsuits. In addition, the Securities Act provides that both federal and state courts have jurisdiction over suits brought to enforce any duty or liability under the Securities Act or the rules and regulations thereunder. Accepting or consent to this forum selection provision does not constitute a waiver by you of compliance with federal securities laws and the rules and regulations thereunder. You may not waive compliance with federal securities laws and the rules and regulations thereunder. The exclusive forum provision

 

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in our post-offering memorandum and articles of association will not operate so as to deprive the courts of the Cayman Islands from having jurisdiction over matters relating to our internal affairs.

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 ordinary shares provides that, to the fullest extent permitted by law, ADS 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 nonexclusive 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 waive 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 such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary, lead to increased costs to bring a claim, limited access to information and other imbalances of resources between such holder and us, or limit such holder’s ability to bring a claim in a judicial forum that such holder finds favorable. If a lawsuit is brought against us 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 shall relieve us or the depositary from our respective obligations to comply with the Securities Act and the Exchange Act nor serve as a waiver by any holder or beneficial owner of ADSs of compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder.

An ADS holder’s right to pursue claims against the depositary is limited by the terms of the deposit agreement.

Under the deposit agreement, the United States District Court of the Southern District of New York (or, if the United States District Court of the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts of New York County, New York) will have jurisdiction to hear and determine any suit, action, or proceeding and to settle any dispute between the depositary bank and us that does not involve any other person or party that may arise out of or relate in any way to the deposit agreement, including claims under the Securities Act or the Exchange Act. Holders and beneficial owners of our ADSs, by holding an ADS or an interest therein, understand and irrevocably agree that any legal suit, action, or proceeding against or involving us or the depositary, arising out of or related in any way to the deposit agreement, ADSs, or the transactions contemplated thereby or by virtue of ownership thereof, including without limitation claims under the Securities Act or the Exchange Act, may only be instituted in the United States District Court for the

 

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Southern District of New York (or, if the Southern District of New York lacks jurisdiction or such designation of the exclusive forum is, or becomes, invalid, illegal, or unenforceable, in the state courts of New York County, New York), and a holder of our ADSs will have irrevocably waived any objection which such holder may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such suit, action, or proceeding. However, the enforceability of similar federal court choice of forum provisions in other companies’ organizational documents has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable or unenforceable. Accepting or consenting to this forum selection provision does not represent you are waiving compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder. Furthermore, investors cannot waive compliance with the U.S. federal securities laws and rules and regulations promulgated thereunder.

The depositary may, in its sole discretion, require that any dispute or difference arising from the relationship created by the deposit agreement, our shares, the ADSs, or the transactions contemplated thereby be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreement, while to the extent there are specific federal securities law violation aspects to any claims against us and/or the depositary brought by any holder or beneficial owner of ADSs, the federal securities law violation aspects of such claims may, at the option of such holders or beneficial owners, remain in the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute or such designation of the exclusive forum is, or becomes, invalid, illegal, or unenforceable, in the state courts of New York County in New York). We believe that a contractual arbitration provision, especially when excluding matters relating to federal securities law violation, is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement.

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

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. Therefore, 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 in the assessment of the emerging growth company’s internal control over financial reporting. As a result, if we elect not to comply with such reporting and other requirements, in particular the 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. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our results of operations and financial statements may not be comparable to the results of operations and financial statements of other companies that have adopted the new or revised accounting standards. If we cease to be an emerging growth company, we will no longer be able to take advantage of these exemptions or the extended transition period for complying with new or revised accounting standards.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York Stock Exchange listing standards.

As a Cayman Islands company listed on the New York Stock Exchange, we are subject to the New York Stock Exchange listing standards, which requires listed companies to have, among other things, a majority of their board members to be independent and independent director oversight of executive compensation and nomination of directors. However, New York Stock Exchange rules permit a foreign private issuer like us to

 

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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 New York Stock Exchange listing standards.

We are permitted to elect to rely on home country practice to be exempted from the corporate governance requirements. If we choose to follow home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy if we complied fully with the New York Stock Exchange listing standards.

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 qualify as 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 with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

   

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 will be 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 as press releases, distributed pursuant to the rules and regulations of the New York Stock Exchange. 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 compared to 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.

We have not determined a specific use for a portion of the net proceeds from this offering and the concurrent private placements, 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 the concurrent private placements, 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 and the concurrent private placements. 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.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our ADSs or Class A ordinary shares to significant adverse United States income tax consequences.

We will be classified as a passive foreign investment company for United States federal income tax purposes for any taxable year if either (a) 75% or more of our gross income for such year consists of certain

 

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types of “passive” income or (b) 50% or more of the value of our assets (generally determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income, or the “asset test.” Although the law in this regard is unclear, we intend to treat our VIE (including its subsidiaries) as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of our VIE (including its subsidiaries) for United States federal income tax purposes, and based upon our current and expected income and assets (taking into account the expected proceeds from this offering), including goodwill and other unbooked intangibles and projections as to the market price of our ADSs following the offering, we do not expect to be a PFIC for the current taxable year or the foreseeable future.

While we do not expect to be or become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets. In addition, the composition of our income and assets will also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of our VIE for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or Class A ordinary shares and on the receipt of distributions on the ADSs or Class A ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules, and such U.S. Holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our ADSs or Class A ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or Class A ordinary shares. For more information see “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations” and “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

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

Upon completion of this offering, we will become 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 New York Stock Exchange, 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 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

 

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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 addition, 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.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. 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,” 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.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue,” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

   

our goals and strategies;

 

   

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

 

   

the expected outlook of the online content market in China;

 

   

our expectations regarding demand for and market acceptance of our products and services;

 

   

our expectations regarding our relationships with our users, clients, business partners, and other stakeholders;

 

   

competition in our industry;

 

   

our proposed use of proceeds; and

 

   

relevant government policies and regulations relating to our industry.

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. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary—Our Challenges,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation,” and other sections in this prospectus. You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus 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 this market to grow at the projected rate may materially and adversely affect our business and the market price of the ADSs. In addition, the rapidly evolving nature of this industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. 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.

 

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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 we will receive net proceeds from this offering and the concurrent private placements of approximately US$739.2 million, or approximately US$813.3 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, obtain additional capital, and retain talented employees by providing them with equity incentives. We plan to use the net proceeds of this offering and the concurrent private placements as follows:

 

   

approximately 35% for the development of product and service, to expand and enhance our current content and service offerings, as well as to develop new content and services;

 

   

approximately 30% for marketing and user growth, including marketing and promotional campaigns and events to strengthen our brand, grow our user base, and enhance our user engagement;

 

   

approximately 25% for research and development, to continue to invest in and develop our technologies, particularly artificial intelligence, big data, and cloud technologies; and

 

   

the balance for general corporate purposes, including potential strategic investments and acquisitions.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering and the concurrent private placements. Our management, however, will have significant discretion and flexibility to apply the net proceeds of this offering and the concurrent private placements. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering and the concurrent private placements differently than as described in this prospectus. See “Risk Factors—Risks Relating to Our ADSs and This Offering—We have not determined a specific use for a portion of the net proceeds from this offering and the concurrent private placements, and we may use these proceeds in ways with which you may not agree.”

In using the proceeds of this offering and the concurrent private placements, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiaries only through loans or capital contributions and to our variable interest entities only through loans, subject to satisfaction of applicable government registration and approval requirements. 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 Relating to Doing Business in China—PRC regulations of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our offshore financing to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

Our board of directors has discretion on whether to distribute 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. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, 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. Even if we decide to pay dividends, the form, frequency, and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions, and other factors that the board of directors may deem relevant.

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 our business operations.

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. See “Regulation—Regulations Relating to Dividend Distribution.”

If we pay any dividends on our Class A ordinary shares, we will pay those dividends that are payable in respect of the Class A ordinary shares underlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to holders of ADSs in proportion to the Class A ordinary shares underlying the ADSs held by such ADS holders, 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, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the automatic conversion of all of our issued and outstanding preferred shares into Class A ordinary shares on a one-for-one basis immediately upon the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect (i) the automatic conversion of all of our issued and outstanding preferred shares into Class A ordinary shares on a one-for-one basis immediately upon the completion of this offering, (ii) the sale of 27,500,000 Class A ordinary shares in the form of ADSs by us in this offering at the initial public offering price of US$9.50 per ADS, and (iii) the sale of 13,157,892 Class A ordinary shares in the concurrent private placements at the initial public offering price of US$9.50 per ADS, or US$19.00 per Class A ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise their option to purchase additional ADSs.

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, 2020  
    Actual     Pro Forma(1)     Pro Forma As
Adjusted(1)(2)
 
    (in thousands)  
    RMB     US$     RMB     US$     RMB     US$  

Mezzanine equity:

           

Series A convertible redeemable preferred shares (US$0.000125 par value; 36,009,602 shares authorized, issued and outstanding ; none issued and outstanding on a pro-forma basis; none issued and outstanding on a pro-forma as adjusted basis)

    89,551       13,724       —         —         —         —    

Series B convertible redeemable preferred shares (US$0.000125 par value; 25,164,697 shares authorized, issued and outstanding ; none issued and outstanding on a pro-forma basis; none issued and outstanding on a pro-forma as adjusted basis)

    220,403       33,778       —         —         —         —    

Series C convertible redeemable preferred shares (US$0.000125 par value; 27,935,316 shares authorized, issued and outstanding ; none issued and outstanding on a pro-forma basis; none issued and outstanding on a pro-forma as adjusted basis)

    556,552       85,295       —         —         —         —    

Series D convertible redeemable preferred shares (US$0.000125 par value; 22,334,525 shares authorized, issued and outstanding ; none issued and outstanding on a pro-forma basis; none issued and outstanding on a pro-forma as adjusted basis)

    943,841       144,650       —         —         —         —    

Series D1 convertible redeemable preferred shares (US$0.000125 par value; 6,947,330 shares authorized, issued and outstanding ; none issued and outstanding on a pro-forma basis; none issued and outstanding on a pro-forma as adjusted basis)

    315,239       48,312       —               —          

Series E convertible redeemable preferred shares (US$0.000125 par value; 27,267,380 shares authorized, issued and outstanding ; none issued and outstanding on a pro-forma basis; none issued and outstanding on a pro-forma as adjusted basis)

    2,244,966       344,056       —         —         —         —    

 

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    As of December 31, 2020  
    Actual     Pro Forma(1)     Pro Forma As
Adjusted(1)(2)
 
    (in thousands)  
    RMB     US$     RMB     US$     RMB     US$  

Series F convertible redeemable preferred shares (US$0.000125 par value; 34,677,873 shares authorized, 34,677,872 shares issued and outstanding ; none issued and outstanding on a pro-forma basis; none issued and outstanding on a pro-forma as adjusted basis)

    3,520,796       539,586       —         —         —         —    

Total mezzanine equity

    7,891,348       1,209,401       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ (deficit)/equity:

 

Class A ordinary shares
(US$0.000125 par value; 200,435,685 shares authorized, 40,080,478 shares issued and outstanding; 220,867,200 shares issued and outstanding on a pro-forma basis; and 261,525,092 shares issued and outstanding on a pro-forma as adjusted basis)

    31       5       178       27       211       32  

Class B ordinary shares
(US$0.000125 par value; 19,227,592 shares authorized, issued and outstanding ; 19,227,592 shares issued and outstanding on a pro-forma basis; and 19,227,592 shares issued and outstanding on a pro-forma adjusted basis)

    15       2       15       2       15       2  

Additional paid-in capital(3)

    —         —         7,897,563       1,210,354       12,720,891       1,949,562  

Accumulated other comprehensive loss

    (195,928     (30,027     (195,928     (30,027     (195,928     (30,027

Accumulated deficit

    (4,948,593     (758,405     (4,954,955     (759,380     (4,954,955     (759,380
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit)/equity(3)

    (5,144,475     (788,425     2,746,873       420,976       7,570,234       1,160,189  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity and shareholders’ (deficit)/equity(3)

    2,746,873       420,976       2,746,873       420,976       7,570,234       1,160,189  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)

The pro forma and pro forma as adjusted information discussed above also reflects the issuance of 450,000 Class A ordinary shares upon vesting of restricted shares on January 4, 2021 and the vesting of options to purchase 6,261,273 Class A ordinary shares granted to our employees that satisfied service condition as of December 31, 2020 immediately upon the completion of this offering.

(2)

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

 

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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 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, 2020 was a deficit of US$792.0 million, representing negative US$13.35 per ordinary share and negative US$6.68 per ADS as of that date, or US$1.74 per ordinary share and US$0.87 per ADS on a pro forma basis. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities and mezzanine equity. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering and the concurrent private placements, from the initial public offering price of US$19.00 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in net tangible book value after December 31, 2020, other than to give effect to (i) our sale of 55,000,000 ADSs offered in this offering at the initial public offering price of US$9.50 per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us; (ii) the automatic conversion of all of our issued and outstanding preferred shares into Class A ordinary shares on a one-for-one basis immediately upon the completion of this offering; and (iii) the sale of 13,157,892 Class A ordinary shares in the concurrent private placements at the initial public offering price of US$19.00 per ordinary share, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been US$1.2 billion, or US$4.12 per ordinary share and US$2.06 per ADS. This represents an immediate increase in net tangible book value of US$2.38 per ordinary share and US$1.19 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$14.88 per ordinary share and US$7.44 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share      Per ADS  

Initial public offering price

   US$ 19.00      US$ 9.50  

Pro forma net tangible book value after giving effect to the conversion of our preferred shares(1)

   US$ 1.74      US$ 0.87  

Pro forma as adjusted net tangible book value after giving effect to the conversion of our preferred shares and this offering and the concurrent private placements(1)

   US$ 4.12      US$ 2.06  

Amount of dilution in net tangible book value to new investors in this offering

   US$ 14.88      US$ 7.44  

 

Note:

(1)

The pro forma and pro forma as adjusted information discussed above also reflect the issuance of 450,000 Class A ordinary shares upon vesting of restricted shares on January 4, 2021 and the vesting of options to purchase 6,261,273 Class A ordinary shares granted to our employees that satisfied service conditions as of December 31, 2020 immediately upon the completion of this offering.

 

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The following table summarizes, on a pro forma as adjusted basis as of December 31, 2020, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or 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. 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      Percent  

Existing shareholders

     240,094,792        85.5   US$ 934,567,091        54.8   US$ 3.89      US$ 1.95  

Concurrent private placement investors

     13,157,892        4.7   US$ 250,000,000        14.6   US$ 19.00      US$ 9.50  

New investors

     27,500,000        9.8   US$ 522,500,000        30.6   US$ 19.00      US$ 9.50  
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

     280,752,684        100.0   US$ 1,707,067,091        100.0     
  

 

 

    

 

 

   

 

 

    

 

 

      

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

The discussion and tables above assume no exercise of any outstanding share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 36,778,071 Class A ordinary shares issuable upon exercise of outstanding share options at an average weighted exercise price of US$0.78 per share. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

   

political and economic stability,

 

   

an effective judicial system,

 

   

a favorable tax system,

 

   

the absence of foreign 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 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 as compared to the United States; and

 

   

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

Our constituent 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.

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and most 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 individuals, or to bring an action against us or these individuals in the United States, 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 42nd 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.

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, or (ii) 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.

Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), 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 that such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given , (iii) is final, (iv) is not in the nature of taxes, a fine, or a penalty; and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public

 

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policy of the Cayman Islands. However, there is uncertainty with regard to Cayman Islands law on whether judgments of courts of the United States predicated upon the civil liability provisions of the securities laws of the United States or any State will be determined by the courts of the Cayman Islands penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. Because such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws has not yet been made by a court of the Cayman Islands, it is uncertain whether such judgments would be enforceable in the Cayman Islands. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

Han Kun Law Offices, our counsel as to PRC law, has advised us that there is uncertainty as to whether PRC courts would (i) 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 (ii) 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.

Han Kun 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 country where the judgment is made or on principles of reciprocity between jurisdictions. There exists no treaty or other forms of reciprocity between China and the United States or the Cayman Islands governing the recognition and enforcement of foreign judgments as of the date of this prospectus. In addition, according to the PRC Civil Procedures Law, PRC courts 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 before a PRC court against a company for disputes relating to contracts or other property interests, and the PRC court may accept a cause of action based on the laws or the parties’ express mutual agreement in contracts choosing PRC courts for dispute resolution if such foreign shareholders can establish sufficient nexus to China for a PRC court to have jurisdiction and meet other procedural requirements, including, among others, that the plaintiff must have a direct interest in the case and that there must be a concrete claim, a factual basis, and a cause for the case. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The foreign shareholder must entrust 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. However, 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 our ADSs or Class A ordinary shares, to establish a connection to China for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

Our founder, Mr. Yuan Zhou, founded Zhihu in late 2010. Between 2010 and 2012, Zhihu was a by-invitation-only, Q&A-focused online content community. We opened up registration to the general public in 2013 and have since then grown into one of the largest comprehensive online content communities in China. We started to offer online advertising in 2016, introduced paid content in 2018 and our paid Yan Selection (盐选) membership program in the first half of 2019, and formally launched our content-commerce solutions in early 2020. We have continued to expand our content-centric monetization channels since 2020, including offering online education and e-commerce related services.

We raised capital through seven rounds of equity financing since our establishment, with the most recent round raising over US$400 million in 2019.

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

 

LOGO

 

Notes:

(1)

Immediately after the completion of this offering and the concurrent private placements, assuming the underwriters do not exercise their option to purchase additional ADSs, (i) Yuan Zhou, our founder, chairman of the board of directors, and chief executive officer, will beneficially own 7.0% of our total issued and outstanding ordinary shares and 42.4% of the aggregate voting power; (ii) the other existing principal shareholders, in aggregate, will beneficially own 52.8% of our total of our total issued and outstanding ordinary shares and 32.7% of the aggregate voting power; and (iii) public investors in this offering, in aggregate, will beneficially own 9.8% of our total issued and outstanding ordinary shares and 6.1% of the aggregate voting power.

(2)

Yuan Zhou holds 21.2% of the equity interests in Zhizhe Tianxia. Seven other individual beneficial owners of our company, namely, Zhong Shao, Liang Zhang, Jixin Huang, Shenshen Li, Jinghua Jin, Jie Bai, and Dahai Li, hold an aggregate of 37.3% of the equity interest in Zhizhe Tianxia. Four other beneficial owners of our company, namely, Beijing Chuangxin Fangzhou Technology Co., Ltd., Xiamen Siyuan Investment Management Co., Ltd., Shenzhen Litong Industry Investment Fund Co., Ltd., and Beijing Sogou Information Services Co., Ltd., hold an aggregate of 41.5% of the equity interest in Zhizhe Tianxia.

We established Zhihu Technology Limited under the laws of the Cayman Islands as our offshore holding company in May 2011, which later changed its name to Zhihu Inc. in October 2020. In June 2011, we established Zhihu Technology (HK) Limited, a wholly-owned subsidiary of our Cayman Islands holding company, in Hong Kong as our intermediary holding company. In the same month, we established Zhizhe Tianxia in China. In January 2012, Zhihu Technology (HK) Limited established Beijing WFOE, a wholly-owned subsidiary in China. We gained control over Zhizhe Tianxia through Beijing WFOE by entering into a series of contractual arrangements with Zhizhe Tianxia and its shareholders. In January 2018, we established Beijing Zhihu Network Technology Co., Ltd., a wholly-owned subsidiary of Zhihu Technology (HK) Limited, in China.

 

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Contractual Arrangements with Our VIE and Its Shareholders

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services and certain other businesses. Zhihu Inc. is an exempted company with limited liability established in the Cayman Islands. Beijing WFOE is a PRC subsidiary and a foreign-invested enterprise under the PRC law. To comply with PRC laws and regulations, we conduct certain of our businesses in China through Zhizhe Tianxia, our VIE, based on a series of contractual arrangements by and among Beijing WFOE, our VIE, and its shareholders.

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

As a result of our direct ownership in Beijing WFOE and the contractual arrangements with our VIE, we are regarded as the primary beneficiary of our VIE, and we treat our VIE and its subsidiaries as our consolidated entities under U.S. GAAP. We 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 Beijing WFOE, our VIE, and its respective shareholders.

Agreements that provide us with effective control over our VIE

Exclusive Business Cooperation Agreement. Pursuant to an Exclusive Business Cooperation Agreement dated November 8, 2011 by and between Beijing WFOE and Zhizhe Tianxia, as amended on December 30, 2015 and July 23, 2018, Beijing WFOE has the exclusive right to provide or designate any third party to provide full technology and business support as well as relevant consulting services to Zhizhe Tianxia. In exchange, Zhizhe Tianxia agrees to pay an agreed service fees to Beijing WFOE or its designated party. Without the prior written consent of Beijing WFOE, Zhizhe Tianxia cannot accept same or similar services provided by, or establish similar cooperation relationship with, any third party. Unless Beijing WFOE terminates this agreement with a thirty (30)-days’ prior notice, this agreement will remain effective. Unless any material negligence or any frauds were committed by Beijing WFOE, Zhizhe Tianxia has no right to terminate this agreement unilaterally.

Shareholders Voting Proxy Agreement. Pursuant to an Shareholders Voting Proxy Agreement dated July 23, 2018 by and among Beijing WFOE, Zhizhe Tianxia, and the shareholders of Zhizhe Tianxia, the shareholders of Zhizhe Tianxia irrevocably authorized Beijing WFOE to act on their respective behalf as proxy attorney, to exercise the voting and management rights of shareholders concerning all the equity interests held by each of them in Zhizhe Tianxia, including but not limited to voting rights, rights of operation and management, and all other rights as shareholders under the articles of association of Zhizhe Tianxia. The Shareholders Voting Proxy Agreement will remain effective as the term of Exclusive Business Cooperation Agreement and its supplemental agreements, Equity Interest Pledge Agreement, and Exclusive Share Option Agreement.

Spousal Consent Letters. Spouses of five shareholders of Zhizhe Tianxia, who collectively hold 43.1% of equity interests in Zhizhe Tianxia, have each signed a spousal consent letter. Each signing spouse of the relevant shareholder unconditionally and irrevocably agreed that the equity interest in Zhizhe Tianxia held by and registered in the name of such shareholder be disposed of in accordance with the Equity Interest Pledge Agreement, the Exclusive Share Option Agreement, the Shareholders Voting Proxy Agreement, and the Exclusive Business Cooperation Agreement, and that such shareholder may perform, amend or terminate such agreements without any additional consent of his spouse. Additionally, the signing spouses agreed not to assert any rights over the equity interest in Zhizhe Tianxia held by the shareholders. In addition, in the event that the signing spouses obtain any equity interest in Zhizhe Tianxia held by the shareholders for any reason, they agree to be bound by and sign any legal documents substantially similar to the contractual arrangements described above, as may be amended from time to time.

 

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Equity Interest Pledge Agreement. Pursuant to an Equity Interest Pledge Agreement dated July 23, 2018 by and between Beijing WFOE, Zhizhe Tianxia and the shareholders of Zhizhe Tianxia, the shareholders of Zhizhe Tianxia have agreed to pledge 100% of equity interests in Zhizhe Tianxia to Beijing WFOE to guarantee the performance by the shareholders of their obligations under the Exclusive Share Option Agreement, the Shareholders Voting Proxy Agreement, and the Exclusive Business Cooperation Agreement, as well as the performance by Zhizhe Tianxia of its obligations under the Exclusive Share Option Agreement, the Shareholders Voting Proxy Agreement, and the Exclusive Business Cooperation Agreement. In the event of a breach by Zhizhe Tianxia or any shareholder of contractual obligations under the Equity Interest Pledge Agreement, Beijing WFOE, as pledgee, will have the right to dispose of the pledged equity interests in Zhizhe Tianxia and will have priority in receiving the proceeds from such disposal. The shareholders of Zhizhe Tianxia also has undertaken that, without prior written consent of Beijing WFOE, they will not dispose of, create, or allow any encumbrance on the pledged equity interests.

We have completed the registration of the equity interest pledge contemplated under the Equity Interest Pledge Agreement relating to Zhizhe Tianxia with the competent office of the SAMR in accordance with the PRC Civil Code.

Agreement that provides us with the option to purchase the equity interests in and assets of our VIE

Exclusive Share Option Agreement. Pursuant to an Exclusive Share Option Agreement dated July 23, 2018 by and between Beijing WFOE, Zhizhe Tianxia, and each of the shareholders of Zhizhe Tianxia, the shareholders of Zhizhe Tianxia have irrevocably granted Beijing WFOE, to the extent permitted by PRC laws, an exclusive option to purchase all or part of their equity interests in Zhizhe Tianxia. Beijing WFOE or its designated person may exercise such option to purchase all of equity interests at the price of RMB10.0. The shareholders of Zhizhe Tianxia have undertaken that, without Beijing WFOE’s prior written consent, they will not, among other things, (i) change Zhizhe Tianxia’s registered capital, (ii) merge Zhizhe Tianxia with any other entity, (iii) sell, transfer, mortgage, or dispose of Zhizhe Tianxia’s assets, or (iv) amend Zhizhe Tianxia’s articles of association. The Exclusive Share Option Agreement will remain effective unless Beijing WFOE terminates this agreement with written request or other circumstances mentioned therein take place.

In the opinion of Han Kun Law Offices, our PRC legal counsel:

 

   

the ownership structures of our VIE in China and Beijing WFOE, both currently and immediately after giving effect to this offering, are not in violation of applicable PRC laws and regulations currently in effect; and

 

   

the contractual arrangements between Beijing WFOE, our VIE, and its shareholders governed by PRC law are valid and binding upon each party to such arrangements, and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect, and will not result in any violation of applicable PRC laws immediately after giving effect to this offering.

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 the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to the VIE structures will be adopted or if adopted, what they would provide. If we or our VIE are 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 Relating to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.” and “Risk Factors—Risks Relating to Our Corporate Structure—Our current corporate structure and business operations may be affected by the Foreign Investment Law.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of operations data and selected consolidated cash flow data for the years ended December 31, 2019 and 2020 and selected consolidated balance sheet data as of December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read this “Selected Consolidated Financial Data” section together with our consolidated financial statements and the related 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. Our historical results of operations are not necessarily indicative of results of operations expected for future periods.

The following table presents our selected consolidated statements of operations data for the periods indicated.

 

    For the Year Ended December 31,  
    2019     2020  
    RMB     %     RMB     US$     %  
    (in thousands, except for percentages, share, and
per share data)
 

Selected Consolidated Statements of Operations Data

         

Revenue

    670,511       100.0       1,352,196       207,233       100.0  

Cost of revenue

    (358,241     (53.4     (594,399     (91,096     (44.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    312,270       46.6       757,797       116,137       56.0  

Selling and marketing expenses

    (766,465     (114.3     (734,753     (112,606     (54.3

Research and development expenses

    (351,012     (52.3     (329,763     (50,538     (24.4

General and administrative expenses

    (253,268     (37.8     (296,162     (45,389     (21.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (1,370,745     (204.4     (1,360,678     (208,533     (100.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (1,058,475     (157.8     (602,881     (92,396     (44.6

Investment income

    25,035       3.7       56,087       8,596       4.2  

Interest income

    28,669       4.3       24,751       3,793       1.8  

Fair value change of financial instrument

    7,132       1.1       (68,818     (10,547     (5.1

Exchange (losses)/gains

    (9,216     (1.4     62,663       9,604       4.6  

Others, net

    2,675       0.4       11,728       1,797       0.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (1,004,180     (149.7     (516,470     (79,153     (38.2

Income tax expense

    (40     (0.0     (1,080     (166     (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (1,004,220     (149.7     (517,550     (79,319     (38.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share

         

Basic

    (22.99       (18.36     (2.81  

Diluted

    (22.99       (18.36     (2.81  

Weighted average shares used in loss per share

         

Basic

    62,249,946         65,279,970       65,279,970    

Diluted

    62,249,946         65,279,970       65,279,970    

Non-GAAP measure:

         

Adjusted net loss(1)

    (824,530     (123.0     (337,460     (51,719     (25.0

 

Note:

(1)

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

 

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The following table presents our selected consolidated balance sheet data as of the dates indicated.

 

     As of December 31,  
     2019     2020  
     RMB     RMB     US$  
     (in thousands)  

Selected Consolidated Balance Sheet Data

      

Cash and cash equivalents

     900,350       957,820       146,792  

Term deposits

     1,151,073       1,092,921       167,497  

Short-term investments

     1,492,180       1,046,000       160,307  

Trade receivables

     245,943       486,046       74,490  

Total current assets

     3,901,952       3,720,166       570,141  

Total assets

     3,984,306       3,761,441       576,467  

Accounts payables and accrued liabilities

     287,041       501,848       76,912  

Salary and welfare payables

     206,840       231,847       35,532  

Total current liabilities

     763,040       1,014,568       155,491  

Total liabilities

     765,933       1,014,568       155,491  

Total mezzanine equity

     7,210,614       7,891,348       1,209,401  

Total shareholders’ deficit

     (3,992,241     (5,144,475     (788,425

Total liabilities, mezzanine equity and shareholders’ deficit

     3,984,306       3,761,441       576,467  

The following table presents our selected consolidated cash flow data for the periods indicated.

 

     For the Year Ended December 31,  
     2019     2020  
     RMB     RMB     US$  
     (in thousands)  

Selected Consolidated Cash Flow Data

  

Net cash used in operating activities

     (715,522     (244,421     (37,461

Net cash (used in)/generated from investing activities

     (2,102,488     430,113       65,918  

Net cash generated from financing activities

     2,997,575       9,286       1,423  

Effect of exchange rate changes on cash and cash equivalents

     7,491       (137,508     (21,073
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     187,056       57,470       8,807  

Cash and cash equivalents at the beginning of the year

     713,294       900,350       137,985  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the year

     900,350       957,820       146,792  
  

 

 

   

 

 

   

 

 

 

 

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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 “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events may 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. See “Special Note Regarding Forward-Looking Statements.”

Overview

Zhihu is the largest Q&A-inspired online community and one of the top five comprehensive online content communities in China, both in terms of average mobile MAUs and revenue in 2020, according to CIC. Zhihu is also recognized as the most trustworthy online content community and widely regarded as offering the highest-quality content in China, according to the CIC Survey. We pride ourselves as a “marketplace of answers,” steadily accumulating trustworthy content through continuous creation and engagement among our users and content creators over a journey of more than ten years. As of December 31, 2020, we had 43.1 million cumulative content creators, who had contributed 315.3 million questions and answers. Our 75.7 million average MAUs in the fourth quarter of 2020 generated 675.7 million average monthly interactions within our vibrant community during the same period.

We are still in an early stage of monetization. Our average MAUs increased from 48.0 million in 2019 to 68.5 million in 2020. Benefiting from our fast-growing user base, we have adopted a content-centric monetization model and currently generate revenue from online advertising, paid membership, content-commerce solutions, and other new services. Our revenue increased from RMB670.5 million in 2019 to RMB1.4 billion (US$207.2 million) in 2020. Our net loss decreased from RMB1.0 billion in 2019 to RMB517.6 million (US$79.3 million) in 2020.

Key Factors Affecting Our Results of Operations

Our results of operations are affected by the following factors.

Our content offerings

As an online content community, the overall scale of our user base, level of user engagement, and content creation all depend on our ability to further enhance the depth, breadth, richness, and quality of our content offerings. As of December 31, 2020, our community had 353.2 million cumulative pieces of content, including 315.3 million questions and answers. We have been diligently curating and expanding our content offerings to satisfy the needs and improve the experience of our increasingly diverse user base as they seek inspiration, find solutions, make decisions, and have fun in our community. In addition, we have been diversifying the breadth of our content coverage and media formats to cater for our users’ constantly evolving preference. We have been deepening the content offerings in our existing products and adding new product categories to cover a wider spectrum of content consumption scenarios in our users’ daily lives. We will continue to motivate and support content creators to create more quality and trustworthy content. Furthermore, we have developed and will continue to develop productivity tools to facilitate the content creation process, including video creation and live streaming tools and other ancillary tools.

Our user base and user engagement

Our business depends on our ability to further grow our user base and increase user engagement. We believe that a strong increase in the size of our user base, coupled with a more vibrant community, could lead to revenue

 

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growth as their commercial value is realized over time. We have experienced rapid user growth since our inception. Our average MAUs increased by 42.7% from 48.0 million in 2019 to 68.5 million in 2020. The level of user engagement in our community is also increasing. The number of our average monthly social interactions in 2020 increased by 42.0% compared to that in 2019, and our daily active users opened the Zhihu app an average of 6.2 times per day in the fourth quarter of 2020. Historically, we benefit from our expanding user base and higher level of user engagement. For example, our average monthly paying members increased significantly from 0.6 million in 2019 to 2.4 million in 2020, and our paying ratio increased from 1.2% to 3.4% for the respective periods. In addition, the growth of our user base and user engagement has attracted more merchants and brands to our community and increased their spending to pursue more effective branding and advertising.

Our content-centric monetization

Our revenue and business scale depend on our ability to further enhance our monetization by increasing the effectiveness of monetization for each revenue stream and expanding our revenue streams.

We have been enhancing our content-centric monetization in each of our revenue streams, including advertising, paid membership, content-commerce solutions, and new services that we introduce from time to time. Our rich content offering and high user engagement attract more merchants and brands to promote their products and services in our community. In addition, our highly effective online advertising and content-commerce solutions encourage more merchants and brands to pay us for these services. The willingness of our users to pay for premium content largely depends on the breadth, depth, and quality of our premium content, and thus better premium content could result in higher value for our paid membership services. We plan to further improve the effectiveness of our monetization channels and increase the spending of our existing merchants and brands as well as paying users.

We have also benefited from exploring additional monetization channels to diversify our revenue streams. In addition to our fast-growing online advertising and paid membership services, we formally launched our innovative content-commerce solutions in early 2020. We have also consistently explored additional content-centric monetization channels and added new revenue streams. For example, in furtherance to our development of education vertical, we have launched our online education service in response to the high demand for education resources of our users. We have added e-commerce service as part of our efforts to expand our vertical service coverage in response to the significant consumption of trustworthy content on product recommendation and evaluation in our community. We plan to further expand monetization of our content community and seek to further diversify our revenue streams.

Our operating efficiency

Our efficiency and margin depend on our ability to strategically increase our scale and manage our costs and expenses. As the majority of our content is UGC and PUGC, we benefit from our organically generated high-quality content as well as efficient and optimized content acquisition. We also deploy resources to strategically acquire high-quality content to enrich our premium content pool.

We seek to continuously optimize our expense structure. For one example, our operating efficiency is significantly affected by our user acquisition strategy. We actively engage in selling and marketing efforts to capture marketing opportunities from which we can effectively increase our user base, while focusing on more precise and effective ways of user acquisition. For another example, we will continue to benefit from economies of scale as we continue to actively manage the level of our general and administrative expenses.

Our people and technology

We focus on investing in our people and technology, which are crucial for us to enrich our content offerings, further grow our user base, and attract merchants and brands. We recruit, retain, and motivate talented employees

 

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to support our growth. In addition, we will continue to develop and apply state-of-the-art technologies to keep pace with the growth of our business, scale our content offerings, and improve operating efficiency. We will continue to invest in people and technology to facilitate our future growth.

Impact of COVID-19 Pandemic on Our Operations and Financial Performance

The COVID-19 pandemic has severely affected China and the rest of the world. In an effort to contain the spread of the COVID-19 pandemic, China and many other countries have taken precautionary measures, such as imposing travel restrictions, quarantining individuals infected with or suspected of being infected with COVID-19, encouraging or requiring people to work remotely, and canceling public activities, among others. These ongoing measures adversely affected our operations and financial performance in 2020.

Specifically, the COVID-19 pandemic adversely affected our advertising revenue in the first half of 2020. For example, in light of the challenging macro-economic conditions in China, some of our merchants and brands generally reduced their expenditures on advertising, including advertising with us, in the first half of 2020. Although our advertising revenue increased by 22.7% to RMB293.0 million (US$44.9 million) in the first half of 2020 from RMB238.8 million in the same period in 2019, a higher growth rate might have been achieved if the COVID-19 pandemic had not taken place.

In addition, the outbreak of COVID-19 pandemic led us to delay the formal launch of our content-commerce solutions.

Furthermore, as many of the regular or scheduled offline events in China were canceled or delayed in 2020 due to the COVID-19 pandemic, we spent less on these marketing events than we would have needed. Our selling and marketing expenses decreased to RMB734.8 million (US$112.6 million) in 2020 from RMB766.5 million in 2019. As we had less flexibility in exploring potential opportunities to seek additional user growth, a higher user growth rate might have been achieved if these events had not been canceled or delayed due to the COVID-19 pandemic.

Starting from the fourth quarter of 2020, a few waves of COVID-19 infections emerged in various regions of China, and varying levels of travel restrictions have been reinstated. The extent to which the COVID-19 pandemic may continue to affect our operations and financial performance will depend on future developments, which are highly uncertain and cannot be predicted. See “Risk Factors—Risks Relating to Our Business and Industry—We face risks related to natural disasters, health epidemics, and other outbreaks, which could significantly disrupt our operations.”

 

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Results of Operations

The following table sets forth our results of operations with line items in absolute amount and as a percentage of our revenue for the periods indicated.

 

     For the Year Ended December 31,  
     2019     2020  
     RMB     %     RMB     US$     %  
     (in thousands, except percentages)  

Revenue

     670,511       100.0       1,352,196       207,233       100.0  

Cost of revenue

     (358,241     (53.4     (594,399     (91,096     (44.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     312,270       46.6       757,797       116,137       56.0  

Selling and marketing expenses

     (766,465     (114.3     (734,753     (112,606     (54.3

Research and development expenses

     (351,012     (52.3     (329,763     (50,538     (24.4

General and administrative expenses

     (253,268     (37.8     (296,162     (45,389     (21.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (1,370,745     (204.4     (1,360,678 )      (208,533 )      (100.6 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (1,058,475     (157.8     (602,881 )       (92,396 )      (44.6 ) 

Investment income

     25,035       3.7       56,087       8,596       4.2  

Interest income

     28,669       4.3       24,751       3,793       1.8  

Fair value change of financial instrument

     7,132       1.1       (68,818     (10,547     (5.1

Exchange (losses)/gains

     (9,216     (1.4     62,663       9,604       4.6  

Others, net

     2,675       0.4       11,728       1,797       0.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (1,004,180     (149.7     (516,470 )       (79,153 )      (38.2 ) 

Income tax expense

     (40     (0.0     (1,080     (166     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (1,004,220     (149.7     (517,550 )      (79,319 )      (38.3 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP measure:

          

Adjusted net loss(1)

     (824,530     (123.0     (337,460     (51,719     (25.0

 

Note:

(1)

We define adjusted net loss as net loss adjusted for the impact of share-based compensation expenses. Adjusted net loss is not a measure required by, or presented in accordance with, U.S. GAAP. The use of the non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for analysis of, our results of operations or financial condition as reported under U.S. GAAP. For further details, see “—Non-GAAP Financial Measure.”

Key Components of Results of Operations

Revenue

We generate revenue primarily through (i) advertising, (ii) paid membership, and (iii) content-commerce solutions. We also generate revenue from other services such as online education and e-commerce. The following table sets forth a breakdown of revenue by type both in absolute amount and as a percentage of our revenue for the periods indicated.

 

    For the Year Ended December 31,  
    2019      2020  
    RMB      %      RMB      US$      %  
    (in thousands, except percentages)  

Revenue

             

Advertising

    577,424        86.1        843,284        129,239        62.4  

Paid membership

    87,997        13.1        320,471        49,114        23.7  

Content-commerce solutions

    641        0.1        135,813        20,814        10.0  

Others

    4,449        0.7        52,628        8,066        3.9  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

    670,511        100.0        1,352,196        207,233        100.0  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Advertising. We generate revenue from advertising services. Our advertising revenue is primarily driven by our MAUs and advertising revenue per MAU. The following table sets forth average MAUs and advertising revenue per MAU for the periods indicated.

 

     For the Year Ended
December 31,
     Year-over-Year
Growth
 
     2019      2020  

Average MAUs (in millions)

     48.0        68.5        42.7

Advertising revenue per MAU (in RMB)

     12.0        12.3        2.3

Despite the negative impact the COVID-19 pandemic had on the expenditure of some of our merchants and brands for advertising services in the first half of 2020, we still experienced a robust growth in our advertising revenue which reflects the significant and continued increase in MAUs, as well as a slight increase in advertising revenue per MAU. We expect that our advertising revenue will continue to increase in the foreseeable future as our advertising services grow.

Paid membership. We generate substantially all of our paid membership revenue from Yan Selection (盐选) membership fees and a limited amount of revenue from on-demand premium content access. The following table sets forth our average MAUs, average monthly paying members, and paying ratio for the periods indicated.

 

     For the Year Ended
December 31,
    Year-over-Year
Growth
 
     2019     2020  

Average MAUs (in millions)

     48.0       68.5       42.7%  

Average monthly paying members (in thousands)

     574.2       2,362.6       311.5%  

Paying ratio

     1.2     3.4     —    

We formally launched our Yan Selection membership program in March 2019, and since then have continued to enhance the volume and quality of our premium content. The increase in paid membership revenue during the periods primarily reflected the increases in our MAUs as well as the paying ratio. In particular, the continued increase in paying ratio reflects the deepening penetration of the paid membership among our community. We expect that our paid membership revenue will continue to increase in absolute amount in the foreseeable future.

Content-commerce solutions. We generate content-commerce solutions revenue primarily from service fees from our Zhi+ solutions. We formally launched our pioneering content-commerce solutions in early 2020 and recognized revenue of RMB135.8 million (US$20.8 million) in 2020. The growth of our content-commerce solutions revenue is primarily driven by the number of our MAUs and average content-commerce solutions revenue per MAU and has demonstrated strong growth momentum since its launch. We realized an average content-commerce solutions revenue of RMB2.0 per MAU in 2020. We expect to continue to develop the content-commerce solutions as we further expand our content portfolio. As a result, we expect that our content-commerce solutions revenue will continue to increase in absolute amount and as a percentage of our revenue in the foreseeable future. We also expect that our average content-commerce solutions revenue per MAU will continue to increase.

Others. Other revenue is primarily generated from our online education and e-commerce services. We have been strategically identifying opportunities for expanding our revenue streams. We offer third-party online education courses, and we are exploring other opportunities, including providing our self-developed online education products and services, to further deepen this monetization channel. Our e-commerce service revenue primarily consists of commissions from sale of merchandise. We expect an increase in revenue from online education and e-commerce services and we will benefit from continued diversification of our content-centric monetization channels in the foreseeable future.

 

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Cost of revenue

Our cost of revenue primarily consists of: (i) cloud service and bandwidth costs, (ii) content and operational costs, (iii) staff costs, and (iv) payment processing costs. Content and operational costs primarily include payments for content creators with respect to content included in our premium content library, third-party content licensing fees, and other business-related execution costs.

The following table sets forth a breakdown of our cost of revenue by nature both in absolute amount and as a percentage of our revenue for the periods indicated:

 

     For the Year Ended December 31,  
     2019      2020  
     RMB      %      RMB      US$      %  
     (in thousands, except percentages)  

Cost of revenue

              

Cloud service and bandwidth costs

     178,353        26.6        226,684        34,741        16.8  

Content and operational costs

     76,713        11.4        204,397        31,325        15.1  

Staff costs

     58,296        8.7        75,412        11,558        5.6  

Payment processing costs

     13,118        2.0        39,536        6,059        2.9  

Others

     31,761        4.7        48,370        7,413        3.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     358,241        53.4        594,399        91,096        44.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit and gross margin

Our gross profit increased from RMB312.3 million in 2019 to RMB757.8 million (US$116.1 million) for the same period in 2020. Our gross margin was 46.6% in 2019 and 56.0% in 2020.

Operating expenses

Our operating expenses consist of (i) selling and marketing expenses, (ii) research and development expenses, and (iii) general and administrative expenses. We expect that our operating expenses will continue to increase in absolute amount in the foreseeable future in line with our business growth.

The following table sets forth a breakdown of our operating expenses both in absolute amount and as a percentage of our revenue for the periods indicated.

 

     For the Year Ended December 31,  
     2019      2020  
     RMB      %      RMB      US$      %  
     (in thousands, except percentages)  

Operating expenses

              

Selling and marketing expenses

     766,465        114.3        734,753        112,606        54.3  

Research and development expenses

     351,012        52.3        329,763        50,538        24.4  

General and administrative expenses

     253,268        37.8        296,162        45,389        21.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,370,745        204.4        1,360,678        208,533        100.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Selling and marketing expenses. Our selling and marketing expenses primarily consist of expenses associated with promotion and advertising and staff costs. We expect to continue to strategically incur selling and marketing expenses in growing our user base and strengthening our brand image.

Research and development expenses. Our research and development expenses primarily consist of research and development related staff costs.

 

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General and administrative expenses. General and administrative expenses primarily consist of staff costs, traveling and general expenses, and professional service fees.

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 brought within the jurisdiction of, the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.

Hong Kong

On March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017, which introduces the two-tiered profits tax rates regime. The bill was signed into law on March 28, 2018 and was gazetted on the following day. Under the two-tiered profits tax rates regime, the first HK$2 million of profits of the qualifying group entity will be taxed at 8.25%, and profits above HK$2 million will be taxed at 16.5%. The profits of group entities not qualifying for the two-tiered profits tax rates regime will continue to be taxed at a flat rate of 16.5%.

Accordingly, the Hong Kong profits tax of the qualifying group entity is calculated at 8.25% on the first HK$2 million of the estimated assessable profits and at 16.5% on the estimated assessable profits above HK$2 million.

China

Under the PRC Enterprise Income Tax Law effective from January 1, 2008, our PRC subsidiaries, and consolidated affiliated entities and their subsidiaries are subject to the statutory rate of 25%, subject to preferential tax treatments available to qualified enterprises in certain encouraged sectors of the economy.

Enterprises that qualify as “high and new technology enterprises” are entitled to a preferential rate of 15% for three years. Enterprises that qualify as “small low-profit enterprises” are entitled to a preferential rate of 20%. Specifically, during the period from January 1, 2019 to December 31, 2021, the portion of annual taxable income amount of a small low-profit enterprise not exceeding RMB1 million is computed at a reduced rate of 25% as taxable income amount, subject to an enterprise income tax rate of 20%, and the portion of annual taxable income amount exceeding RMB1 million and not exceeding RMB3 million is computed at a reduced rate of 50% as taxable income amount, subject to an enterprise income tax rate of 20%.

Our Beijing WFOE, Zhizhe Sihai, was certified as a “high and new technology enterprise” under the relevant PRC laws and regulations, and accordingly was eligible for a preferential tax rate of 15% in each of 2019 and 2020. Some of our subsidiaries were “small low-profit enterprises” under the relevant PRC laws and regulations, and accordingly were eligible for a preferential tax rate of 20% in each of 2019 and 2020. Our other PRC entities were subject to enterprise income tax at a rate of 25% in 2019 and 2020. Pursuant to the PRC Enterprise Income Tax Law, a 5% or 10% withholding tax is levied on dividends declared to foreign investors from China effective from January 1, 2008.

Non-GAAP Financial Measure

In evaluating our business, we consider and use adjusted net loss, a non-GAAP financial measure, to supplement the review and assessment of our operating performance. We believe that the non-GAAP measure

 

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facilitates comparisons of operating performance from period to period and company to company by adjusting for potential impacts of items, which our management considers to be indicative of our operating performance. We believe that adjusted net loss provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as it helps our management. Our presentation of adjusted net loss may not be comparable to similarly titled measures presented by other companies. The use of the non-GAAP financial measure has limitations as an analytical tool, and you should not consider it in isolation from, or as substitutes for analysis of, or our results of operations as reported under U.S. GAAP.

We define adjusted net loss as net loss adjusted for the impact of share-based compensation expenses. Although share-based compensation is an important aspect of the compensation of our employees, we exclude share-based compensation expenses from adjusted net loss primarily because they are non-cash expenses and are partially discretionary in nature. Further, share-based compensation expenses are based on valuations with many underlying assumptions beyond our control that vary over time and may include modifications that may not occur on a predictable cycle, neither of which is necessarily indicative of our ongoing business performance. We believe that it is useful to exclude share-based compensation expense for investors to better understand the long-term underlying performance of our core operations and to facilitate comparison of our results to our prior periods and to our peer companies. The following table sets forth the reconciliation of adjusted net loss for the years ended December 31, 2019 and 2020 to net loss, the nearest measure prepared in accordance with U.S. GAAP.

 

     For the Year Ended December 31,  
     2019     2020  
     RMB     RMB     US$  
     (in thousands)  

Net loss

     (1,004,220     (517,550     (79,319

Add:

      

Share-based compensation expenses

     179,690       180,090       27,600  
  

 

 

   

 

 

   

 

 

 

Adjusted net loss

     (824,530     (337,460     (51,719
  

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Revenue

 

     For the Year Ended December 31,         
     2019      2020      Change  
     RMB      RMB      US$      RMB      US$      %  
     (in thousands, except percentages)  

Revenue

           

Advertising

     577,424        843,284        129,239        265,860        40,745        46.0  

Paid membership

     87,997        320,471        49,114        232,474        35,628        264.2  

Content-commerce solutions

     641        135,813        20,814        135,172        20,716        —    

Others

     4,449        52,628        8,066        48,179        7,384        1,082.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     670,511        1,352,196        207,233        681,685        104,473        101.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our revenue increased substantially from RMB670.5 million in 2019 to RMB1.4 billion (US$207.2 million) in 2020, reflecting growth in all our business lines.

Advertising. Advertising revenue increased by 46.0% from RMB577.4 million in 2019 to RMB843.3 million (US$129.2 million) in 2020. The increase was primarily driven by a 42.7% increase in average MAUs from 48.0 million in 2019 to 68.5 million in 2020 as a result of the continued growth of our user

 

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base, as well as a slight increase of advertising revenue per MAU from RMB12.0 to RMB12.3, despite that the COVID-19 pandemic had a negative impact on the expenditure of some of our merchants and brands in the first half of 2020.

Paid membership. Paid membership revenue increased significantly from RMB88.0 million in 2019 to RMB320.5 million (US$49.1 million) in 2020, primarily due to the increase in our MAUs as well as the paying ratio. The paying ratio increased from 1.2% in 2019 to 3.4% in 2020, reflecting the deepening penetration of the paid membership business among our users.

Content-commerce solutions. We formally launched content-commerce solutions in early 2020 and generated a revenue of RMB135.8 million (US$20.8 million) in 2020, compared to a revenue of RMB0.6 million in 2019.

Others. Other revenue increased substantially from RMB4.4 million in 2019 to RMB52.6 million (US$8.1 million) in 2020, primarily due to the introduction and growth of online education and e-commerce services.

Cost of revenue

 

     For the Year Ended December 31,         
     2019      2020      Change  
     RMB      RMB      US$      RMB      US$      %  
     (in thousands, except percentages)  

Cost of revenue

           

Cloud service and bandwidth costs

     178,353        226,684        34,741        48,331        7,407        27.1  

Content and operational costs

     76,713        204,397        31,325        127,684        19,568        166.4  

Staff costs

     58,296        75,412        11,558        17,116        2,624        29.4  

Payment processing costs

     13,118        39,536        6,059        26,418        4,049        201.4  

Others

     31,761        48,370        7,413        16,609        2,545        52.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     358,241        594,399        91,096        236,158        36,193        65.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our cost of revenue increased by 65.9% from RMB358.2 million in 2019 to RMB594.4 million (US$91.1 million) in 2020. The increase was primarily attributable to (i) an increase in content and operational costs of RMB127.7 million, which mainly includes the content-related cost and execution cost for advertising service incurred due to our expansion in advertising and paid membership services as well as our content offerings, (ii) an increase in cloud service and bandwidth costs of RMB48.3 million due to our growth in user traffic, (iii) an increase in payment processing costs of RMB26.4 million due to the expansion of paid membership business and the corresponding payment made by our paying members, and (iv) an increase in staff costs of RMB17.1 million due to our increased headcount.

Gross profit and gross margin

 

     For the Year Ended December 31,        
     2019     2020     Change  
     RMB     RMB     US$     RMB      US$      %  
     (in thousands, except percentages)  

Gross profit

     312,270       757,797       116,137       445,527        68,280        142.7  

Gross margin

     46.6     56.0     56.0     —          —          —    

As a result of the foregoing, our gross profits in 2019 and 2020 were RMB312.3 million and RMB757.8 million (US$116.1 million), respectively, and our gross margins were 46.6% and 56.0%, respectively.

 

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Operating expenses

 

     For the Year Ended December 31,         
     2019      2020      Change  
     RMB      RMB      US$      RMB     US$     %  
     (in thousands, except percentages)  

Operating expenses

          

Selling and marketing expenses

     766,465        734,753        112,606        (31,712     (4,860     (4.1

Research and development expenses

     351,012        329,763        50,538        (21,249     (3,257     (6.1

General and administrative expenses

     253,268        296,162        45,389        42,894       6,574       16.9  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     1,370,745        1,360,678        208,533        (10,067     (1,543     (0.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Selling and marketing expenses. Our selling and marketing expenses decreased by 4.1% from RMB766.5 million in 2019 to RMB734.8 million (US$112.6 million) in 2020, primarily due to a slight decrease in promotion and advertising expenses of RMB31.2 million.

Research and development expenses. Our research and development expenses decreased by 6.1% from RMB351.0 million in 2019 to RMB329.8 million (US$50.5 million) in 2020, primarily due to a decrease in share-based compensation expenses of RMB13.4 million.

General and administrative expenses. Our general and administrative expenses increased by 16.9% from RMB253.3 million in 2019 to RMB296.2 million (US$45.4 million) in 2020, primarily due to an increase in share-based compensation expenses of RMB15.0 million.

Loss from operations

As a result of the foregoing, we had a loss from operations of RMB602.9 million (US$92.4 million) in 2020, in comparison with a loss from operations of RMB1.1 billion in 2019.

Investment income

Our investment income increased from RMB25.0 million in 2019 to RMB56.1 million (US$8.6 million) in 2020, primarily due to an increase in income from wealth management products that we held for cash management purpose.

Interest income

Our interest income decreased by 13.7% from RMB28.7 million in 2019 to RMB24.8 million (US$3.8 million) in 2020, primarily due to a decrease in the principal amount of our term deposits.

Fair value change of financial instrument

We had a loss of RMB68.8 million (US$10.5 million) from fair value change of financial instrument in 2020, in comparison with an income of RMB7.1 million from fair value change of financial instrument in 2019. This change reflected the effect of foreign exchange fluctuation regarding certain contribution placed onshore by one of our shareholders in connection with our financing activities during the period.

Exchange (losses) / gains

We had exchange gains of RMB62.7 million (US$9.6 million) in 2020, in comparison with exchange losses of RMB9.2 million in 2019, as a result of fluctuations of the exchange rates of Renminbi against U.S. dollars.

 

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Others, net

Our others, net increased from RMB2.7 million in 2019 to RMB11.7 million (US$1.8 million) in 2020 primarily due to increases in non-operating income and government subsidies.

Loss before income tax

Primarily as a result of the foregoing, our loss before income tax in 2020 was RMB516.5 million (US$79.2 million), decreased by 48.6% from RMB1.0 billion in 2019.

Income tax expenses

Our income tax expense increased from RMB40 thousand in 2019 to RMB1.1 million (US$166 thousand) in 2020.

Net loss

As a result of the foregoing, our net loss decreased by 48.5% from RMB1.0 billion in 2019 to RMB517.6 million (US$79.3 million) in 2020.

Selected Quarterly Results of Operations

The following table sets forth our selected unaudited consolidated statements of operations data for each of the eight quarters from January 1, 2019 to December 31, 2020. The selected unaudited quarterly statements of operations data set forth below have been prepared on the same basis as our audited annual consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair statement of our financial position and results of operations for the periods presented. Our historical results of operations are not necessarily indicative of results of operations expected for future periods. The following selected unaudited quarterly financial data are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    For the Three Months Ended  
    March 31,     June 30,     September 30,     December 31,     March 31,     June 30,     September 30,     December 31,  
    2019     2019     2019     2019     2020     2020     2020     2020  
    (RMB in thousands)  

Revenue:

               

Advertising

    102,671       136,143       152,920       185,690       125,629       167,342       231,141       319,172  

Paid Membership

    14,721       17,648       20,031       35,597       55,759       69,284       91,056       104,372  

Content-commerce solutions

    —         —         —         641       1,067       12,731       45,530       76,485  

Others

    619       765       944       2,121       5,706       12,031       15,113       19,778  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    118,011       154,556       173,895       224,049       188,161       261,388       382,840       519,807  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

    (83,149     (84,178     (90,265     (100,649     (109,911     (134,994     (162,773     (186,721

Gross profit

    34,862       70,378       83,630       123,400       78,250       126,394       220,067       333,086  

Selling and marketing expenses

    (146,063     (160,320     (215,535     (244,547     (125,423     (146,746     (219,647     (242,937

Research and development expenses

    (93,566     (84,506     (82,970     (89,970     (86,618     (83,553     (77,233     (82,359

General and administrative expenses

    (52,108     (60,400     (74,702     (66,058     (77,134     (53,746     (52,985     (112,297

Total operating expenses

    (291,737 )      (305,226 )      (373,207 )      (400,575 )      (289,175 )      (284,045 )      (349,865 )      (437,593 ) 

 

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    For the Three Months Ended  
    March 31,     June 30,     September 30,     December 31,     March 31,     June 30,     September 30,     December 31,  
    2019     2019     2019     2019     2020     2020     2020     2020  
    (RMB in thousands)  

Loss from operations

    (256,875 )      (234,848 )      (289,577 )      (277,175 )      (210,925 )      (157,651 )      (129,798 )      (104,507 ) 

Investment income

    2,865       2,579       6,739       12,852       15,382       13,817       14,899       11,989  

Interest income

    4,897       4,397       6,789       12,586       9,870       7,410       3,336       4,135  

Fair value change of financial instrument

    —         —         12,187       (5,055     (381     19,619       (38,810     (49,246

Exchange (losses)/gains

    (3,222     (239     (18,760     13,005       (15,281     (689     36,847       41,786  

Others, net

    (38     (1     1,068       1,646       701       930       3,826       6,271  

Loss before income tax

    (252,373 )      (228,112 )      (281,554 )      (242,141 )      (200,634 )      (116,564 )      (109,700 )      (89,572 ) 

Income tax expense

    (1     (63     46       (22     (703     449       (341     (485
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (252,374 )      (228,175 )      (281,508 )      (242,163 )      (201,337 )      (116,115 )      (110,041 )      (90,057 ) 

Our advertising revenue increased in each quarter of 2020 compared with the same period in 2019, primarily reflecting a significant and continued increase in MAUs, despite of the negative impact the COVID-19 pandemic had on our advertising revenue in the first half of 2020. See “—Impact of COVID-19 Pandemic on Our Operations and Financial Performance.” We have generally experienced lower advertising revenue in the first quarter of each year in connection with the Chinese New Year holidays as merchants and brands generally limit their budget for advertising services during the period. Our paid membership revenue increased continuously during these periods since we formally launched our Yan Selection membership program in March 2019, primarily attributable to the increases in our MAUs as well as paying ratio. Since we formally launched our content-commerce solutions in early 2020, the revenue generated increased significantly every quarter, driven by both the number of our MAUs and average content-commerce solutions revenue per MAU.

Our cost of revenue increased steadily during these periods, primarily attributable to increases in cloud service and bandwidth costs, content and operational costs, and payment processing costs. The selling and marketing expenses decreased in the first and second quarter of 2020 as we spent less on regular or scheduled offline marketing events, which had been canceled or delayed due to the COVID-19 pandemic, than what we would have needed. Our general and administrative expenses increased in the fourth quarter of 2020 due to share-based compensation expenses related to awards to our management.

Liquidity and Capital Resources

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

 

     For the Year Ended December 31,  
     2019     2020  
     RMB     RMB     US$  
     (in thousands)  

Summary Consolidated Cash Flow Data

      

Net cash used in operating activities

     (715,522     (244,421     (37,461

Net cash (used in)/generated from investing activities

     (2,102,488     430,113       65,918  

Net cash generated from financing activities

     2,997,575       9,286       1,423  

Effect of exchange rate changes on cash and cash equivalents

     7,491       (137,508     (21,073
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     187,056       57,470       8,807  

 

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     For the Year Ended December 31,  
     2019      2020  
     RMB      RMB      US$  
     (in thousands)  

Cash and cash equivalents at the beginning of the year

     713,294        900,350        137,985  
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at the end of the year

     900,350        957,820        146,792  
  

 

 

    

 

 

    

 

 

 

To date, we have financed our operations primarily through cash generated by historical equity financing. We had cash and cash equivalents of RMB900.4 million and RMB957.8 million (US$146.8 million) as of December 31, 2019 and 2020, respectively.

We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for at least the next 12 months from the date of this prospectus. After this offering, we may decide to enhance our liquidity position or increase our cash reserve for future operations and investments through additional financing. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increasing fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

As of December 31, 2020, 23.4% of our cash and cash equivalents were held in China, and substantially all of such balance were denominated in Renminbi. As of December 31, 2020, 9.0% of our cash and cash equivalents were held by our VIE and its subsidiaries.

Substantially all of our revenues have been, and we expect will likely to continue to be, denominated in Renminbi. 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 SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the 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. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

Although we consolidate the results of our variable interest entities and their subsidiaries, we only have access to the assets or earnings of our variable interest entities and their subsidiaries through contractual arrangements. See “Corporate History and Structure—Contractual Arrangements with Our VIE and Its Shareholders.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.”

Operating activities

For the year ended December 31, 2020, net cash used in operating activities was RMB244.4 million (US$37.5 million), which was primarily attributable to our net loss of RMB517.6 million, as adjusted by deducting an accrued investment income of short-term investments of RMB2.4 million, adding back other non-cash items of RMB285.5 million, which primarily comprised share-based compensation expenses of RMB180.1 million and fair value change of financial instrument of RMB68.8 million, and deducting RMB10.1 million used for working capital. The cash used for working capital was primarily the result of (i) an increase of RMB257.1 million in trade receivables in relation to the increasing scale of our advertising business and (ii) a decrease of RMB57.9 million in net amount due to related parties, which reflected an increase in

 

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settlement of cloud service fees with service providers who are also our shareholders, which was partially offset by (y) an increase of RMB214.8 million in accounts payables and accrued liabilities and (z) an increase of RMB52.9 million in contract liabilities, both reflecting the increasing scale of our advertising business.

For the year ended December 31, 2019, net cash used in operating activities was RMB715.5 million, which was primarily attributable to our net loss of RMB1.0 billion, as adjusted by deducting an accrued investment income of short-term investments of RMB4.9 million and a gain of RMB7.1 million from unrealized fair value change of financial instrument, adding back other non-cash items of RMB215.3 million, which primarily comprised share-based compensation expenses of RMB179.7 million, and adding another RMB85.4 million released from working capital. The cash released from working capital was primarily the result of (i) an increase of RMB66.0 million in salary and welfare payables to our employees, (ii) an increase of RMB42.0 million in contract liabilities, and (iii) an increase of RMB38.6 million in accounts payables and accrued liabilities, partially offset by an increase of RMB62.6 million in trade receivables. The increase in contract liabilities, accounts payables and accrued liabilities, and trade receivables all reflect the increasing scale of our advertising business.

Investing activities

For the year ended December 31, 2020, net cash generated from investing activities was RMB430.1 million (US$65.9 million), which was mainly attributable to (i) proceeds of maturities of short-term investments of RMB6,594.7 million and (ii) proceeds from disposal of term deposits of RMB2,319.2 million, partially offset by (y) purchases of short-term investments of RMB6,153.1 million and (z) purchases of term deposits of RMB2,328.7 million.

For the year ended December 31, 2019, net cash used in investing activities was RMB2.1 billion, which was mainly attributable to (i) purchase of short-term investments of RMB3.5 billion and (ii) purchase of term deposits of RMB1.2 billion, partially offset by proceeds of maturities of short-term investments of RMB2.3 billion.

Financing activities

For the year ended December 31, 2020, net cash generated from financing activities was RMB9.3 million (US$1.4 million), which primarily comprised proceeds received from employees in relation to share options.

For the year ended December 31, 2019, net cash generated from financing activities was RMB3.0 billion, which primarily comprised net proceeds from issuance of convertible redeemable preferred shares.

Capital expenditures

Our capital expenditures are primarily incurred for purchases of property, plant and equipment and purchases of intangible assets. Our total capital expenditures were RMB5.8 million in 2019 and RMB2.0 million in 2020. We intend to fund our future capital expenditures with our existing cash balance and proceeds from this offering and the concurrent private placements. We will continue to make capital expenditures to meet the expected growth of our business.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2020.

 

     Total      Payment Due by Period  
     Less Than
1 year
     1-3
Years
     3-5
Years
     Over 5
Years
 
     (RMB in thousands)  

Operating lease commitments

     70,258        25,990        31,877        12,391        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     70,258        25,990        31,877        12,391        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Other than as shown above, we did not have any significant capital and other commitments, long-term obligations or guarantees as of December 31, 2020.

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. In addition, 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.

Critical Accounting Policies, Judgments and Estimates

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain and requires significant judgment at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our consolidated financial statements in accordance with U.S. GAAP. Significant accounting policies we follow in the preparation of the accompanying consolidated financial statements are summarized below.

Principles of Consolidation

Our consolidated financial statements include the financial statements of our company, our subsidiaries, our VIE and its subsidiaries for which we are the ultimate primary beneficiary.

Subsidiaries are those entities in which we, directly or indirectly, control more than one half of the voting power, have the power to appoint or remove the majority of the members of the board of directors, or cast a majority of votes at the meeting of the board of directors, or have the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

A VIE is an entity in which we have, or our subsidiary has, through contractual arrangements, the power to direct the activities that most significantly impact the entity’s economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the entity, and therefore is the primary beneficiary of the entity.

All intercompany transactions and balances between ourselves, our subsidiaries, our VIE and subsidiaries of the VIE have been eliminated upon consolidation.

Revenue Recognition

We adopted ASC 606, Revenue from Contracts with Customers, for all periods presented. According to ASC 606, revenue is recognized when or as the control of the goods or services is transferred to a customer. Depending on the terms of the contract and the laws that apply to the contract, control of the goods and services may be transferred over time or at a point in time. Control of the goods and services is transferred over time if our performance: (i) provides all of the benefits received and consumed simultaneously by the customer; (ii) creates and enhances an asset that the customer controls as we perform; or (iii) does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.

 

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If control of the goods and services transfers over time, revenue is recognized over the period of the contract by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognized at a point in time when the customer obtains control of the goods and services.

Contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on the relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers. If the standalone selling price is not directly observable, it is estimated using expected cost plus a margin or adjusted market assessment approach, depending on the availability of observable information. Assumptions and estimations have been made in estimating the relative selling price of each distinct performance obligation, and changes in judgments on these assumptions and estimates may impact the revenue recognition.

When either party to a contract has performed, we present the contract in the balance sheet as a contract asset or a contract liability, depending on the relationship between our performance and the customer’s payment.

A contract asset is our right to consideration in exchange for goods and services that we have transferred to a customer. A receivable is recorded when we have an unconditional right to consideration. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.

If a customer pays consideration or we have a right to an amount of consideration that is unconditional before we transfer a good or service to the customer, we present the contract liability when the payment is made or a receivable is recorded (whichever is earlier). A contract liability is our obligation to transfer goods or services to a customer for which we have received consideration (or an amount of consideration is due) from the customer.

Paid membership

We generate revenue through paid membership services in our community where users pay a membership fee to access premium content library for a fixed time period. We are determined to be the primary obligor and, accordingly, we record revenue on a gross basis, and the revenue sharing to the content providers is recorded as cost of revenues.

We offer membership service which provides subscription members’ access right to premium content. Membership periods range from one month to twelve months. Membership service represents a stand-ready obligation to provide the paid content service and the customer simultaneously receives and consumes the benefits as we provide such services throughout the membership period. The receipt of membership fees is initially recorded as contract liabilities and revenue is recognized ratably over the membership period as services are rendered.

Users who are undecided about or otherwise do not need paid memberships can pay retail prices to access the premium content. This on-demand access option supplements the membership programs as an additional revenue stream and provides flexibility to the users. We determined that the retail purchase consists of two performance obligations: the content and the hosted connection for content online playback, or online hosting. The transaction price is allocated between the two performance obligations based on the relative standalone selling price. The purchased content usually has no expiry period unless otherwise stated. As we do not have further obligation after making the content available to the user for content performance obligation, the revenue from content performance obligation is recognized at the time of purchase for pre-recorded content and at the time of completion of live streaming for live streaming content. The online hosting performance obligation is satisfied over the viewing period of the customers. Accordingly, we recognize the revenue over the estimated benefit periods. The revenue derived from the retail purchase is not significant for the years ended December 31, 2019 and 2020.

 

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We also provide discount coupons to our customers for use in purchasing online paid contents, which are treated as a reduction of revenue upon usage of the coupon.

Advertising

Advertising revenues are derived principally from advertising contracts with customers where the customers pay to place their advertisements in our community over a particular period of time. Such formats generally include but are not limited to launch screen advertisements, in-app bannered advertisements, and feed advertisements. Merchants and brands can choose to compose their advertisements in text, images or videos and decide whether they are display-based or performance-based. We primarily charge display-based advertisements by cost-per-day (“CPD”) model and cost-per-mille (“CPM”) model, and primarily charge performance-based advertisements by cost-by-click (“CPC”) model.

Content-commerce solutions

Content-commerce solution services are online marketing solutions that are seamlessly integrated into our regular content operations. We provide content-commerce solutions services to expose the designated content to more targeted audience. We primarily charge the content-commerce solutions service by CPC model.

For advertising and content-commerce solutions, we recognize revenue on the satisfied performance obligations and defer the recognition of revenue for the estimated value of the undelivered elements until the remaining performance obligations have been satisfied. When all of the elements within arrangement are delivered uniformly over the agreement period, the revenues are recognized on a straight-line basis over the contract period. The services and pricing models of advertising and content-commerce solutions are summarized as below:

CPD model. Under the CPD model, a contract is signed to establish a fixed price for the advertising services to be provided over a period of time. Given the advertisers benefit from the displayed advertising evenly, we recognize revenue on a straight-line basis over the period of display, provided all revenue recognition criteria have been met.

CPM model. Under the CPM model, the unit price for each qualified display is fixed and stated in the contract with advertisers. A qualified display is defined as the appearance of an advertisement, where the advertisement meets the criteria specified in the contract. Given the fees are priced consistently throughout the contract and the unit prices for each qualified display is fixed accordingly, we recognize revenue based on the fixed unit prices and the number of qualified displays upon the occurrence of display, provided all revenue recognition criteria have been met.

CPC model. Under the CPC model, there is no fixed price for advertising services or content-commerce solutions services stated in the contract with the advertiser and the unit price for each click is auction-based. We charge merchants and brands on a per-click basis, when the users click on the advertisements or the designated content. Given that the unit price is fixed, we recognize revenue based on qualifying clicks and unit price upon the occurrence of a click, provided all revenue recognition criteria have been met.

Sales rebate to certain customers. Certain customers may receive sales rebates, which are accounted for as variable consideration. We estimate annual expected revenue volume of each individual customer with reference to their historical results. The sales rebate reduces revenues recognized. We recognize revenue for the amount of fees it receives from its advertisers, after deducting sales rebates and net of value-added tax, or VAT. We believe that there will not be significant changes to its estimates of variable consideration.

Other revenues

Our other revenues are primarily generated from online education, e-commerce, and other services. For the e-commerce service, we direct traffic externally to third-party e-commerce platforms, and charge commissions

 

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based on pre-agreed commission rate. We do not take control of the goods sold. We also offer third-party online education courses to our users, and charge commissions based on pre-agreed commission rate. The commission fee is recognized on a net basis. We recognize other revenues when the effective control of products is transferred, or when the respective services are rendered.

Principal expedients and exemptions

The transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, has not been disclosed, as substantially all of our contracts have a duration of one year or less.

Share-Based Compensation

Share-based compensation benefits are provided to employees under the 2012 Plan. We account for share-based compensation benefits granted to employees in accordance with ASC 718 Stock Compensation. Information relating to the plan is set out in Note 14 to the consolidated financial statements included elsewhere in this prospectus.

The fair value of options granted under the 2012 Plan is recognized as staff cost with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted.

The total expense is recognized over the vesting period, over which all the specified vesting conditions are to be satisfied, using graded vesting method. We account for forfeitures in the period we occur as a reduction to expense.

Fair Value of Ordinary Shares

The following table sets forth the fair value of our ordinary shares estimated at the grant dates of share options from the end of 2018 through December 31, 2020.

 

Valuation Date

   Fair Value per
Share (US$)
     DLOM     Discount
Rate
 

December 20, 2018

     4.68        23.00     22.50

June 20, 2019

     6.27        20.00     20.50

December 20, 2019

     7.08        19.00     20.50

June 20, 2020

     7.42        17.50     20.00

December 20, 2020

     10.32        14.00     20.00

The determined fair value of our ordinary shares increased from US$4.68 per share as of December 20, 2018 to US$6.27 per share as of June 20, 2019. We believe the increase in the fair value of our ordinary shares was primarily attributable to the following factors:

 

   

our revenue grew significantly;

 

   

as we progressed towards an initial public offering, the lead time to an expected liquidity event decreased, resulting in a decrease of discount for lack of marketability, or DLOM, from 23% as of December 20, 2018 to 20% as of June 20, 2019;

 

   

as a result of the growth of our business, the discount rate decreased from 22.5% as of December 20, 2018 to 20.5% as of June 20, 2019; and

 

   

we adjusted our financial forecast to reflect the anticipated higher revenue growth rate and improved financial performance in the future due to the abovementioned developments.

 

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The determined fair value of our ordinary shares increased from US$6.27 per share as of June 20, 2019 to US$7.08 per share as of December 20, 2019. We believe the increase in the fair value of our ordinary shares was primarily attributable to the following factors:

 

   

our revenue grew significantly; and

 

   

as we progressed towards an initial public offering, the lead time to an expected liquidity event decreased, resulting in a decrease of DLOM from 20.0% as of June 20, 2019 to 19.0% as of December 20, 2019.

The determined fair value of our ordinary shares increased from US$7.08 per share as of December 20, 2019 to US$7.42 per share as of June 20, 2020. We believe the increase in the fair value of our ordinary shares was primarily attributable to the following factors:

 

   

our revenue grew significantly;

 

   

as we progressed towards an initial public offering, the lead time to an expected liquidity event decreased, resulting in a decrease of DLOM from 19.0% as of December 20, 2019 to 17.5% as of June 20, 2020; and

 

   

as a result of the growth of our business, the discount rate decreased from 20.5% as of December 20, 2019 to 20.0% as of June 20, 2020.

The determined fair value of our ordinary shares increased from US$7.42 per share as of June 20, 2020 to US$10.32 per share as of December 20, 2020. We believe the increase in the fair value of our ordinary shares was primarily attributable to the following factors:

 

   

our revenue grew significantly; and

 

   

as we progressed towards an initial public offering, the lead time to an expected liquidity event decreased, resulting in a decrease of DLOM from 17.50% as of December 20, 2019 to 14.00% as of December 20, 2020.

Convertible Redeemable Preferred Shares

We have classified the preferred shares in the mezzanine equity of the consolidated balance sheets as they are contingently redeemable at the options of the holders. In addition, we record accretions on the preferred shares to the redemption value from the issuance dates to the earliest redemption dates. The accretions using the effective interest method, are recorded against retained earnings, or in the absence of retained earnings, by charges against additional paid-in capital. Once additional paid-in capital has been exhausted, additional charges are recorded by increasing the accumulated deficit. Each issuance of the preferred shares is recognized at the respective fair value at the date of issuance net of issuance costs.

We have determined that there was no beneficial conversion feature attributable to the preferred shares because the initial effective conversion prices of these preferred shares were higher than the fair value of ordinary shares determined by us taking into account independent valuations.

Pursuant to laws applicable to PRC entities incorporated in China, PRC investors should complete its statutory filings and foreign exchange registrations for outbound investment, before such PRC entities can legally own offshore investments or equity interests in offshore entities. As such, all PRC shareholders of Zhihu Inc. must complete their relevant registrations and statutory filings, as appropriate, before they can, in accordance with applicable PRC laws, hold directly or indirectly any share of Zhihu Inc., which is incorporated under the laws of the Cayman Islands. Certain preferred shareholder who made full payment of the purchase consideration received a warrant and one preferred share in us to reflect such holder’s rights, obligations, and interests in us as if such holder were holding all the preferred shares of us issuable upon exercise of the warrant before such holder

 

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completes its necessary registration for outbound investment to exercise its warrant to purchase our preferred shares. This was a transitional arrangement pending completion of necessary registration process by such holder. Once such holder completes the necessary registration for outbound investment, it is required to exercise the warrant immediately. Accordingly, the one preferred share was accounted for and represented based on the terms on all preferred shares of the Company issuable upon exercise of the warrant. Concurrently, we entered into a foreign exchange forward contract with the investor. We account for the foreign exchange forward contract and the warrant at fair value and the changes in the fair value recorded within other income/(expenses) in the consolidated statements of operations and comprehensive loss. The holder of the warrant completed the relevant registration and filing and exercised the warrant in December 2020, and therefore the one preferred share had been surrendered to us for cancelation. The underlying preferred shares have been legally issued accordingly.

Internal Control Over Financial Reporting

Prior to our initial public offering, we had been a private company with limited reporting and accounting 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 and for the years ended December 31, 2019 and 2020, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, 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 relates to the lack of sufficient financial reporting and accounting personnel with appropriate understanding and knowledge of U.S. GAAP to handle complex accounting issues and to establish and implement key controls over period end closing and financial reporting to properly prepare and review financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements.

To remediate the identified material weakness, we are currently in the process of establishing clear rules and responsibilities for accounting and financial reporting staffs to address complex accounting and financial reporting issues. We plan to:

 

   

hire additional accounting staff with adequate experience and knowledge with U.S. GAAP and SEC reporting requirements to address complex U.S. GAAP technical accounting issues, strengthen the financial reporting function, and set up an internal control framework to prepare and review the financial statements and related disclosures in accordance with U.S. GAAP and SEC financial reporting requirements;

 

   

implement regular U.S. GAAP and SEC financial reporting training programs for the accounting and financial personnel to equip them with sufficient knowledge and practical experience of preparing financial statements under U.S. GAAP and SEC reporting requirements; and

 

   

develop and implement a comprehensive set of period-end financial reporting policies and procedures, especially for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are in compliance with U.S. GAAP and SEC reporting requirements.

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 devote significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligation. However, we cannot assure you that all these measures will be sufficient to remediate our material weakness in time, or at all. See “Risk Factors—Risks Relating to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls to remediate our material weakness over

 

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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 our ADSs may be materially and adversely affected.”

Holding Company Structure

Zhihu Inc. is a holding company with no material operations of its own. We conduct our operations through our PRC subsidiaries and our VIE in China. As a result, our ability to pay dividends depends significantly upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones 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 wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their accumulated after-tax profits, if any, as determined in accordance with PRC accounting standards and regulations. Under the PRC law, each of our PRC subsidiaries and our VIE in China is required to set aside at least 10% of its after-tax profits each year, if any, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds until such reserve funds reach 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 and 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 the 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.

Inflation

To date, inflation in China has not materially affected our results of operations. According to the PRC National Bureau of Statistics, the year-over-year percentage 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. For example, certain operating expenses, such as employee, technology, and office related expenses may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalents and short-term investments, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.

Quantitative and Qualitative Disclosure about Market Risk

Foreign Exchange Risk

Our expenditures are mainly denominated in Renminbi and, therefore, we are exposed to risks related to movements between Renminbi and U.S. dollars. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. In addition, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollars and Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.

The value of Renminbi against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of Renminbi to U.S. dollars. Following the removal of the U.S. dollar peg, Renminbi appreciated over 20% against U.S. dollars over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and U.S. dollars remained within a narrow band. Since June 2010, the PRC government has allowed Renminbi to appreciate slowly against U.S. dollars again, and it has appreciated over 10% since June 2010. On August 11, 2015, the People’s Bank of China, or the PBOC, announced plans to improve the central

 

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parity rate of Renminbi against U.S. dollars by authorizing market-makers to provide parity to the China Foreign Exchange Trading Center operated by the PBOC with reference to the interbank foreign exchange market closing rate of the previous day, the supply and demand for foreign currencies as well as changes in exchange rates of major international currencies. Effective from October 1, 2016, the International Monetary Fund added Renminbi to its Special Drawing Rights currency basket. Such change and additional future changes may increase volatility in the trading value of the Renminbi against foreign currencies. The PRC government may adopt further reforms of its exchange rate system, including making the Renminbi freely convertible 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 Renminbi and U.S. dollars in the future.

To the extent that we need to convert U.S. dollars or other currencies into Renminbi for our operations, appreciation of Renminbi against U.S. dollars 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 or other currency for the purpose of making payments to suppliers or for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of U.S. dollars against 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$739.2 million from this offering and the concurrent private placements, if the underwriters do not exercise their option to purchase additional ADSs, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, based on the initial public offering price of US$9.50 per ADS. Assuming that we convert the full amount of the net proceeds from this offering and the concurrent private placements into Renminbi, a 10% appreciation of U.S. dollars against Renminbi, from the exchange rate of RMB6.5250 for US$1.00 as of December 31, 2020 to a rate of RMB7.1775 to US$1.00, would result in an increase of RMB482.3 million in our net proceeds from this offering and the concurrent private placements. Conversely, a 10% depreciation of U.S. dollars against Renminbi, from the exchange rate of RMB6.5250 for US$1.00 as of December 31, 2020 to a rate of RMB5.8725 to US$1.00 would result in a decrease of RMB482.3 million in our net proceeds from this offering and the concurrent private placements.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits and wealth management products. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.

After completion of this offering and the concurrent private placements, we may invest the net proceeds that we receive from this offering and the concurrent private placements 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.

Recently Issued 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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INDUSTRY

The information presented in this section has been derived from an industry report issued in December 2020 and a user survey, each commissioned by us and prepared by CIC, an independent research firm, to provide information regarding our industry and our market position in China. The survey was conducted in November 2020 with approximately 2,000 randomly sampled users of online content communities in China. We refer to this report as the “CIC Report” and the survey as the “CIC Survey.”

Overview of China’s Online Content Market

China’s online content market size in terms of revenue has reached RMB1.2 trillion in 2019, approximately three times of that in 2015, and is expected to further increase to RMB3.7 trillion in 2025, representing a CAGR of 21.4% from 2019, according to CIC. The consumption of, and willingness to pay for, online content have been increasing in China, creating a massive and fast-growing online content market.

China’s Online Content Market Size (in terms of revenue), 2015-2025E

 

LOGO

 

Source: CIC Report

The user base of China’s online content market reached 814.4 million in 2019, up from 575.1 million in 2015, and is expected to further increase to 1.1 billion in 2025. In 2019, 90.1% of China’s internet population were online content market users, up from 83.6% in 2015, and such percentage is expected to reach 95.8% in 2025.

Overview of China’s Online Content Communities

Online content communities refer to UGC-focused (including PUGC-focused) online content market players where content creators are also users, who are actively engaged within the communities and are therefore better positioned to create content that meets users’ needs and encourages interactions. As a result, content communities generally can stimulate higher level of user engagement, cultivate more vibrant community culture, offer more interactive user experience, and enjoy lower content cost, compared to PGC-focused players. As China’s online content market evolves, users value not only the richness and diversity of content, but also the culture of content communities.

 

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Market Size of China’s Online Content Communities (in terms of revenue), 2015-2025E

 

LOGO

 

Source: CIC Report

The market size of China’s online content communities in terms of revenue increased from RMB38.6 billion in 2015 to RMB275.8 billion in 2019, and is expected to increase to RMB1.3 trillion in 2025, representing a CAGR of 30.3% from 2019, outgrowing the overall online content market. Online content community user base in China has expanded significantly from 516.2 million in 2015 to 773.0 million in 2019, and is expected to further increase to 1.0 billion in 2025.

China’s online content community market is still at early stage of monetization with significant growth potential. Revenue per user of China’s online content communities, calculated as total revenue of online content community market divided by total number of users, was RMB356.7 in 2019, growing fivefold since 2015, but only about one third of that of the U.S. market in 2019, which was RMB1,024.3. In 2025, this value in the China market is expected to further increase to RMB1,292.4, which is still lower than the RMB1,858.6 expected for the U.S. market, showing significant potential for monetization.

Compared with the U.S. market, where monetization is primarily through advertising, China’s online content community market features more diversified monetization channels, including online advertising, paid membership, content-commerce solutions, content e-commerce, virtual gifting in live streaming, online games, IP-based monetization, and online education.

 

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Revenue per User of China’s Online Content Communities, 2015-2025E

 

LOGO

 

Source: CIC Report

China’s online content communities can be further categorized into comprehensive online content communities and vertical online content communities. Comprehensive online content communities refer to content communities covering news, entertainment content, experience sharing, professional expertise, and knowledge, among others. Vertical online content communities refer to communities that provide content in certain content verticals, such as cosmetics and games, among others.

According to CIC, the market size of comprehensive online content communities in China in terms of revenue has expanded rapidly from RMB3.2 billion in 2015 to RMB121.2 billion in 2019, and is expected to reach RMB943.5 billion in 2025, representing a CAGR of 40.8% from 2019, higher than that of the overall online content community market in China. The trend suggests that Chinese users tend to favor one-stop destination for comprehensive set of content offerings, as oppose to vertical online communities. The diversity of content verticals of comprehensive online content communities enables them to satisfy the diverse needs of a broad user base. Users are able to utilize one app for different scenarios to optimize their experience, which enhances user stickiness.

Among online content formats, text and image are usually the origination and foundation of content creation, providing comprehensive content coverage and flexible content consumption scenarios, whereas video has become an increasingly popular form of content creation and consumption. In terms of content products, Q&A form by nature invites a high level of user interaction and inspires sharing of knowledge, experience, and insights. Platforms with multiple content forms can cater to diverse user needs, and therefore have better receptivity among users and higher monetization potential.

Key Growth Drivers of China’s Online Content Communities

Growing and more engaging user base

China’s urbanization rate reached 60.6% in 2019, with a total urban population of 848.4 million, about three times that of the United States. The urbanization rate in China is expected to further increase to 65.5% in 2025, adding over 80 million urban population during the period. Continued urbanization is expected to increase internet penetration, and thus drives user growth for China’s online content communities. Moreover, users, especially the younger generation, have evolved from receivers to disseminators of information. They have

 

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become increasingly willing to express themselves, interact with other users, and become more engaged while spending time in online content communities.

Booming content supply with enhanced quality

The prevalence of smartphones and advancement of content production tools have facilitated content creation and sharing, reducing the barrier for users to share experience and insights and become content creators. Moreover, users are becoming more active in content creation in online content communities. Besides accumulation of rich UGC, the development of PUGC has also helped enhance content quality and enrich content library in content communities. Technology advancements in big data and AI also enable the distribution of right content to targeted audience. These factors have enabled online content communities to expand the breadth, depth, and quality of their content pools, and to offer a wide range of content verticals to satisfy users’ diverse interests and needs for high-quality content.

Strong desire and rising willingness of users to pay for quality content

With the proliferation of online content communities, users are increasingly demanding quality online content and have demonstrated a growing willingness to pay for them. The number of paying users in China’s online content communities, or users who pay for any type of products or services such as membership, education, and virtual gifts in online content communities at least once during a year, is expected to increase at a CAGR of 17.1% between 2019 and 2025, which means an increase of 360.4 million extra paying users of online content communities to 588.2 million in 2025. Over 80% of surveyed users are willing to pay more for high-quality online content in the future, according to the CIC Survey.

Strong needs of merchants and brands to adopt content-based online marketing

As merchants and brands in China become increasingly aware of the growing content consumption, they have strong needs for marketing services to help build a brand narrative that can organically attract customers and drive conversion. A variety of content-based online marketing solutions have thus emerged to meet such demand. Content-based online marketing seamlessly integrates commercial information into the content, allowing it to be more user-focused than traffic-based brand marketing. It creates an active connection between merchants and brands and users, which leads to better user experience, more efficient user conversion, and greater brand loyalty.

More diversified and effective monetization channels

Alongside development of more diversified content, online content communities’ monetization channels have also advanced gradually. Besides online advertising, online content communities are exploring more diversified content-based monetization channels, such as paid membership, content-commerce solutions, content e-commerce, and online education. Some innovative monetization channels, such as content-commerce solutions and content e-commerce, provide a suite of conversion plugins that can be natively embedded into the content to achieve more effective customer acquisition and sales conversion. With more diversified and effective monetization channels, online content communities are expected to achieve significant revenue growth.

Monetization Opportunities of China’s Online Content Communities

Compared to PGC-focused online content market players, online content communities have a higher level of user engagement, providing them an advantage to pursue a wider variety of monetization opportunities, which results in more sustainable business models. Online content communities mainly monetize via online advertising, paid membership, content-commerce solutions, content e-commerce, virtual gifting in live streaming, and online games. As the market matures, other monetization opportunities, such as IP-based monetization and online education, also emerge and grow rapidly.

 

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Online advertising

Compared with PGC-focused online content market players, online content communities attract advertisers with their growing, recurring, and quality user traffic, increasing content consumption time share, technology-enabled high marketing efficiency, and innovative advertising formats. Massive user data generated from user engagement, big data, and AI technologies enables more accurate and personalized distribution of advertising content, thereby driving up advertising efficiency and effectiveness.

As advertisers increasingly value conversion efficiency, communities that can better help users obtain insights and convert such insights into actions and decisions will have a competitive edge. Such communities’ advantages are well aligned with advertisers’ demands in top online advertising verticals such as automobile, real estate and healthcare, where products have relatively high unit price and customers often take longer time to make decisions.

According to CIC, China’s online advertising market size in terms of revenue reached RMB665.8 billion in 2019 and is expected to grow to RMB1.8 trillion in 2025, representing a CAGR of 18.5% from 2019. In this market, online content communities’ online advertising revenue has reached RMB109.5 billion in 2019 and is expected to increase at a CAGR of 29.2% to RMB510.5 billion in 2025, outgrowing the overall market.

China’s Online Advertising Market Size (in terms of revenue), 2015-2025E

 

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Source: CIC Report

Paid membership

Online content communities generate revenue through paid membership services as users pay subscription fee to access premium content for a specific period of time or make one-off payment for specific content. The matching of content with users’ needs through technology, improving content diversity and quality, higher disposable income, and the increasing recognition of premium content have made users more willing and accustomed to paying for quality content. This is evidenced by the increasing number of paying members as a percentage of the online content community user base from 5.8% in 2015 to 17.3% in 2019. According to CIC, China’s paid membership market size in terms of revenue reached RMB105.0 billion in 2019 and is expected to grow to RMB328.3 billion in 2025, among which the revenue generated from online content communities is

 

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expected to increase from RMB17.4 billion in 2019 to RMB90.2 billion in 2025. According to CIC, within China’s paid membership market, online content communities are expected to outgrow other online content market players due to higher potential of membership penetration and lower content cost to ramp up paid membership.

China’s Paid Membership Market Size (in terms of revenue), 2015-2025E

 

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Source: CIC Report

Content-commerce solution

Online content communities have a distinctive ability to offer highly-relatable content to users. Online content communities have thus become destinations for users to learn, interact, and make decisions. Following such user behavior, merchants and brands would carry out marketing activities based on the suitable type of content. In recent years, there are noticeable trends of merchants and brands increasingly shifting from traditional traffic-based marketing to content-based marketing, due to its higher effectiveness and lower cost.

To satisfy merchants’ and brands’ needs for integrated marketing solutions, online content communities provide content-commerce solutions for content creation, content distribution, and content conversion. Content-commerce solutions are highly efficient online marketing solutions that are seamlessly integrated into our regular content operations and have high commercial values. Owing to its UGC or PUGC nature, content-commerce solutions can build brands, enhance commercial effectiveness, and strengthen their connections with users, without compromising users experience.

The accumulation of rich content pool, combined with deep understanding of users’ and client’s needs, naturally result in more efficient match of content and user demands, making comprehensive content communities best positioned and most efficient in providing content-commerce solutions. As a top comprehensive content community in China, Zhihu launched industry-pioneering integrated content-commerce solutions, providing merchants and brands one-stop services for all their sales and marketing needs, from making marketing plans, facilitating content creation, assigning the most relevant content creators, to distributing to the interested users.

According to CIC, China’s content-commerce solution market size in terms of revenue generated from online content communities is expected to grow from RMB11.4 billion in 2019 to RMB112.3 billion in 2025 at a CAGR of 46.4%.

 

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China’s Content-Commerce Solution Market Size (in terms of revenue), 2015-2025E

 

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Source: CIC Report

Content e-commerce

With the vast number of shopping options online, there is an increasing demand for trusted information and advice from online content communities to facilitate users’ decision-making process. E-commerce business within online content communities, namely, content e-commerce, caters for such needs. The GMV of China’s content e-commerce market, including both GMV generated from online content communities and transactions directed from online content communities to other platforms, has reached RMB187.7 billion in 2019 and is expected to grow with a CAGR of 60.0% to reach RMB3.1 trillion in 2025. In comparison, the expected CAGR from 2019 to 2025 for the overall e-commerce market is only 16.3%.

Virtual gifting in live streaming

Virtual gifts are purchased by live streaming users to show their support for live streamers in online content communities. With live streaming growing as one of important content forms in online content communities, the market size of China’s virtual gifting in live streaming in terms of revenue is expected to increase from RMB109.9 billion in 2019 to RMB422.2 billion in 2025 at a CAGR of 25.1%.

Online games

China is the largest online gaming market in the world, with the total gross billings expected to increase from RMB297.0 billion in 2019 to RMB625.6 billion in 2025, representing a CAGR of 13.2%. Some online content communities have started to monetize their large traffic of game fans by offering publishing service for game developers, or launching self-developed games. The revenue of China’s online content communities from online games reached RMB5.4 billion in 2019 and is expected to grow to RMB24.3 billion in 2025, representing a CAGR of 28.5%.

Other monetization channels

Demands of online content community users are constantly evolving and expanding, stimulating the development of other monetization channels, such as IP-based monetization and online education.

 

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Driven by growing consumption power, expanding fan base of content IPs, standardization of copyright regulations, and increasingly mature monetization of IP adaption, China’s IP-based monetization market size in terms of sales grew from RMB189.5 billion in 2015 to RMB393.8 billion in 2019, and is expected to reach RMB913.1 billion in 2025, representing a CAGR of 15.0% from 2019.

There is an increasing demand for education and knowledge as well as receptivity to obtain such content online. China’s online education market size in terms of revenue has been growing rapidly from RMB122.5 billion in 2015 to RMB324.0 billion in 2019, and is expected to further reach RMB1.1 trillion in 2025, representing a CAGR of 22.8% from 2019.

 

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BUSINESS

Overview

“Do you know?”

The question is embedded in Zhihu ( LOGO )’s Chinese meaning.

A question is not only a yearning for the undiscovered, but also the start of a journey to learn, engage, and share. Zhihu is an iconic online content community where people come to seek inspiration, find solutions, make decisions, and have fun. On Zhihu, our users explore and enjoy a variety of content from daily lifestyle and entertainment topics such as selecting the best tech gadgets or discussing the most popular games and videos, to sophisticated knowledge and experience such as understanding high-energy physics or alpine skiing, and to preparation for life events and decisions such as finding the right career, starting a family, or expecting a baby. Zhihu has attracted a wide array of content creators, including individuals giving firsthand accounts of their unique experiences, tutors providing valuable exam preparation tips, and hobbyists sharing their expertise. Zhihu goes beyond that first question, and brings people together through their common interests.

What is our mission?

We believe that everyone has a wealth of knowledge, experience, and insights irrespective of background or education. We also believe that people desire to enrich themselves while pursuing their interests, academics, careers, and passion.

Our mission is to empower people to share knowledge, experience, and insights, and to find their own answers.

What makes Zhihu great?

Zhihu is the largest Q&A-inspired online community and one of the top five comprehensive online content communities in China, both in terms of average mobile MAUs and revenue in 2020, according to CIC. Zhihu is also recognized as the most trustworthy online content community and widely regarded as offering the highest-quality content in China, according to the CIC Survey. We pride ourselves as a “marketplace of answers,” steadily accumulating trustworthy content through continuous creation and engagement among our users and content creators over a journey of more than ten years. As of December 31, 2020, we had 43.1 million cumulative content creators, who had contributed 315.3 million questions and answers. Our 75.7 million average MAUs in the fourth quarter of 2020 generated 675.7 million average monthly interactions within our vibrant community during the same period.

Since our inception, we have worked relentlessly to develop Zhihu into a trustworthy content community. Our users and content creators continuously nurture our community and unique content ecosystem; our ecosystem reinforces our culture and upholds our values; and our culture and values attract and retain more users and content creators. This virtuous cycle allows us to amass the collective intelligence of tens of millions of users and content creators, leading to a “wisdom of the crowd” that delivers a fulfilling Zhihu experience.

Our business is underpinned by the following pillars:

 

   

Our Content and Content Creators. We are content-obsessed. We believe that the quality of our content is fundamental in maintaining the attractiveness and value of our community. The reliability and trustworthiness of our content is constantly enhanced through our AI-powered TopicRank algorithms. The depth and breadth of our community is further enriched by our increasingly diverse content and media formats, from text and image, to audio, video, and live streaming. We have become

 

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a content powerhouse where original ideas serve as the source material for comprehensive content creation in the Chinese internet world. We encourage our users to become content creators, and provide multiple channels for our content creators to monetize their contribution in our community. We pride ourselves on our 43.1 million cumulative content creators who had contributed 315.3 million questions and answers as of December 31, 2020.

 

   

Our Users. We have amassed a large, vibrant, and loyal user base with our attractive content, and are constantly improving our content offerings to enhance user experience. We had 75.7 million average MAUs, 469.0 million average monthly viewers, and 675.7 million average monthly interactions in the fourth quarter of 2020, representing year-over-year increases of 33.0%, 28.2%, and 4.8%, respectively. Our high-quality content has enabled us to expand our user base rapidly at low cost, while maintaining high user engagement and loyalty. For our YanPlus users, the average 12th-month retention rate in 2019 was 72%.

 

   

Our Content-Centric Monetization. Zhihu is a community where tens of millions of people come to seek inspiration, find solutions, make decisions, and have fun. This leads to a natural avenue for our users, content creators, and business partners to interact and fulfill their needs. We monetize through online advertising, paid membership, content-commerce solutions, and other services such as online education and e-commerce related services. Our online advertising helps merchants and brands deliver advertisements effectively to a vast targeted audience. Our Yan Selection (盐选) membership program provides paying members with unlimited access to our premium content library. Our pioneering content-commerce solutions provide merchants and brands with effective content-based online marketing solutions, which seamlessly integrate high-quality commercial content and marketing utilities into our online content community, significantly enhancing marketing efficiency, while benefiting users with valuable commercial information. Through our content-centric monetization approach, we create commercial content that are natural extension and valuable supplement to our content library, collectively contributing to the quality and credibility of our content. Furthermore, we continually identify and introduce new services, such as online education and e-commerce related services, with more to come.

 

   

Our Technology and Data. We leverage advanced artificial intelligence, big data, and cloud technologies to optimize content creation, distribution, and consumption. Our TopicRank algorithms assess the quality of content based on analysis of users’ credentials and engagement in our community. Our question routing system accurately distributes questions to relevant users. Our feed recommendation and search systems efficiently manage content distribution. Our WaLi (瓦力) monitoring system and WuKong (悟空) anti-spamming system help ensure content appropriateness and a healthy community culture. Our technology and data systems are continuously refined by iteration through the deep pool of data accumulated over our ten years of operations.

 

   

Our Culture and Brand. We promote a culture of sincerity, expertise, and respect (认真、专业、友善) developed through years of cultivation, fostering a vibrant online community where users contribute and engage while respecting diversity and valuing constructiveness. Embracing all of these values, our Zhihu brand represents trustworthiness in the Chinese internet world.

What have we accomplished?

We started Zhihu as a Q&A-focused online content community a decade ago. Today, Zhihu is the largest Q&A-inspired online community and one of the top five comprehensive online content communities in China, both in terms of average mobile MAUs and revenue in 2020, according to CIC.

As of December 31, 2020, we had accumulated 315.3 million questions and answers contributed by our 43.1 million content creators. Our average MAUs increased by 33.0% from 56.9 million in the fourth quarter of 2019 to 75.7 million in the fourth quarter of 2020.

 

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We are still in an early stage of monetization, with significant runway for growth across multiple new monetization channels. We started to offer online advertising in 2016, introduced paid content in 2018 and our paid Yan Selection membership program in the first half of 2019, and formally launched our content-commerce solutions in early 2020. We continued to expand our content-centric monetization channels in 2020, including offering online education and e-commerce related services. Our revenue increased from RMB670.5 million in 2019 to RMB1.4 billion (US$207.2 million) in 2020. Our net loss was RMB1.0 billion in 2019 and RMB517.6 million (US$79.3 million) in 2020.

Our Strengths

We believe that the following strengths differentiate us from our competitors.

Iconic and most trustworthy online content community

We are an iconic online community where people come to share knowledge, experience, and insights, and to find their own answers. We are the largest Q&A-inspired online community and one of the top five comprehensive online content communities in China, both in terms of average mobile MAUs and revenue in 2020, according to CIC. Being deeply content-obsessed, we have been relentlessly committed to providing superior user experience with trustworthy content since our inception. Zhihu is recognized as the first choice among all online content communities in China where people look for information to make decisions or find answers, according to the CIC Survey. In our unique community, we have amassed the collective intelligence of tens of millions of users, creating a “marketplace of answers.” As of December 31, 2020, we had 43.1 million cumulative content creators who had contributed 315.3 million questions and answers. Our 75.7 million average MAUs in the fourth quarter of 2020 generated 675.7 million average monthly interactions within our vibrant community during the same period.

Zhihu is recognized as the most trustworthy online content community and the most satisfactory online content community in China in terms of user experience, according to the CIC Survey. In 2020, we were included in the BrandZ Top 100 Most Valuable Chinese Brands, which serves as testimony to our brand value.

Ever-growing high-quality user-generated content

We have amassed an ever-growing supply of user-generated content. As of December 31, 2020, our community had 353.2 million cumulative pieces of content, representing a CAGR of 64.0% over the past two years, including 315.3 million questions and answers. We had 3.3 million average monthly active content creators in the fourth quarter of 2020 and 12.0 million pieces of content generated in December 2020.

We believe that everyone has certain expertise or perspectives that are valuable to others, and we have created a community for our content creators to contribute and exchange their perspectives. Our content creators are rewarded with both community recognition and financial gains. As a result, the depth and breadth of our content library are constantly enriched.

Our vibrant content ecosystem allows our users to conduct in-depth dialog on a wide range of topics. Our diverse content covered over 1,000 verticals and 571,000 topics as of December 31, 2020. Zhihu is widely regarded as offering the highest-quality content in China, according to the CIC Survey.

Fast growing, diverse, and highly engaged user base

High-quality, trustworthy content attracts everyday netizens to our community. As a result, we have a massive user reach and have experienced fast user growth. We had 75.7 million average MAUs in the fourth quarter 2020, representing a 33.0% increase from the fourth quarter of 2019. In the fourth quarter of 2020, we had 469.0 million average monthly viewers and over 2.0 billion average monthly effective page visits directed from social media and search engines, reflecting extensive accessibility of our content community.

 

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We have a diverse, relatively gender-balanced user base with 43.1% of our MAUs in December 2020 being female. We also have a wide geographical coverage with 52.6% of our users in tier 1 and new tier 1 and 21.2% of our MAUs in tier 2 cities in China as of in December 2020. In addition, 78.7% of our MAUs were under 30 years old in December 2020.

Our users’ active participation and contribution are a direct result of our diverse and quality content, proven community governance system, attractive community culture, and trusted brand. In the fourth quarter of 2020, our daily active users opened the Zhihu app an average of 6.2 times per day, and had 675.7 million average monthly interactions.

Innovative and scalable content-centric monetization

Over the years, we have built a high-quality, trustworthy content library, laying a solid foundation for our innovative content monetization.

We are the first Q&A-inspired online community to launch a paid membership program, and the largest in terms of paid membership revenue among Q&A-inspired online communities in 2020, according to CIC. As a result of our high-quality content and its targeted distribution, our paying ratio has increased from 1.8% in the fourth quarter of 2019 to 4.0% in the fourth quarter of 2020, and the number of average monthly paying members increased from 1.0 million in the fourth quarter of 2019 to 3.0 million in the fourth quarter of 2020, demonstrating the success of our content monetization channels and the significant headroom for growth.

We are the first to have launched integrated content-commerce solutions at scale, and are the largest among online content communities in terms of revenue generated from integrated content-commerce solutions in 2020, according to CIC. In early 2020, we formally launched our content-commerce solutions, a more effective and efficient content-centric online marketing approach compared with traffic-based advertising. Our pioneering content-commerce approach provide merchants and brands with effective content-based online marketing solutions, which seamlessly integrate high-quality commercial content and marketing utilities into our online content community. Compared with traffic-based advertising, our content-commerce solutions vastly enhance marketing efficiency, while benefiting users with valuable commercial information.

We have a long runway of further growth from our new monetization channels. We have consistently identified customer demand and have introduced new services focusing on specific verticals including online education and e-commerce, or Recommended Goodies (好物推荐), to diversify our monetization channels. We believe our new services are natural extensions and valuable supplements to our content offerings, which not only satisfy the evolving demand of our users and contribute to our content quality and credibility, but also create a large monetization potential.

Superior technology infrastructure and data insights

We have developed a superior technology infrastructure that empowers all aspects of our business, including content, community, and commercialization. Our TopicRank algorithms assess and arrange our content by taking into account users’ credentials and engagement activities with the aim to provide the most trustworthy and suitable content to users. Our question routing system ensures that questions are answered by the most suitable content creators. Our personalized recommendation system distributes the most desired content to our users, which leads to improved user engagement and belongingness. Our WaLi (瓦力) and WuKong (悟空) systems ensure content appropriateness and a healthy community culture.

Our data insights are our key edge. Massive amount of data accumulated over a decade gives us unparalleled insights to better manage our content and our community. We continuously leverage big data analytics on our user data to refine our content recommendation algorithm, leading to more accurate recommendation to our users and better user experience.

 

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Our data and technology bring value to merchants and brands. User traffic and commercial content are accurately directed and distributed within our community, while user experience is maintained at the highest level. For example, we have been improving the algorithms and structure of our search function to optimize the distribution of traffic and content.

Visionary management team and strong shareholder base

Our founder, chairman, and chief executive officer, Mr. Yuan Zhou, is an entrepreneur with over 15 years of experience in internet and media industries. He has outstanding acumen and vision for online content industry. He also has deep passion for content and is committed to building Zhihu as the most trustworthy online content community in China.

Our management team has fostered a corporate culture that highly values innovation, professionalism, and inclusiveness. Under the leadership of our visionary and experienced management team, everyone in our organization shares the same value of excellence and pursuit to bring superior Zhihu experience to every netizen.

Our shareholders include Tencent, Kuaishou, and Baidu. We believe that the collaboration with our shareholders will continue to strengthen our content ecosystem and market leadership.

Our Strategies

To achieve our mission, we intend to pursue the following growth strategies.

Enhance content offerings and empower content creators

We are committed to enhancing our content offerings by improving the quality, breadth, and depth of our content. To cater to users’ differentiated needs, we intend to continue strengthening our high-quality content library and expanding our selection of verticals and content media formats, such as video. In addition, we will continue to optimize user experience to further enhance organic user growth.

Furthermore, we will continue to leverage our large and unique content ecosystem to attract, convert, and nurture more content creators. We will also keep developing innovative, technology-enabled productivity tools to facilitate content creation, and incentivize content creators through effective content promotion and monetization.

Cultivate our brand

We believe that our brand is important in organically attracting new users and content creators. As such, we will continue to enhance our brand identity and recognition through a variety of efforts, including online and offline promotions. At the same time, the culture of the Zhihu community, underpinned by sincerity, expertise, and respect (认真、专业、友善), continues to serve as a foundation of the Zhihu brand and who we are. We plan to launch more themed campaigns and activities to promote this culture and our values to existing and potential users, while continuing to enhance our community governance to maintain this culture.

Grow our user base

We will continue to focus on organic user growth by enriching content offerings, enhancing user experience, optimizing content algorithms, and promoting our brand and culture. We will further invest in strategic marketing efforts to implement differentiated, cost-effective user acquisition approaches to attract different target user groups, such as campus promotion activities for students, themed events for professionals, and fan events. We believe that these strategies, together with strong organic user growth, allow us to rapidly acquire users with low acquisition costs.

 

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Enhance our monetization capabilities

We plan to further realize the monetization potential of our businesses. We will further promote our innovative content-commerce solutions and online advertising services to address the evolving needs of merchants and brands. We also plan to increase the paying ratio of our expanded user base through offering a wider variety of high-quality paid content. In addition, we plan to capture the significant monetization opportunities in our more developed content domains as natural paths for growth. For instance, through capitalizing on our deep pool of education content and knowledge-oriented user base, we intend to ramp up our online education service through effectively enhancing the penetration of education products among our current user base, and offering a diverse course portfolio that satisfies our users’ growing needs for educational content. We will also continue to explore other innovative monetization channels, such as content e-commerce and IP-based monetization. We have continuously explored new monetization channels, and plan to continue to do so in the future.

Strengthen our technology

We will continue to innovate and strengthen our technological capabilities. We intend to further strengthen our big data analytics, AI, and cloud technologies, and upgrade our content assessment technology, feeds, and search functions. Leveraging our data and technology, we will continue to focus on understanding users’ preference and needs, customizing content and product recommendation, and optimizing user experience. In addition, we plan to invest in technologies that support our new initiatives.

Pursue strategic investments and acquisitions

We plan to selectively pursue strategic investments and acquisitions along the content value chain and to identify opportunities that can create synergies for our content, community, or technology.

Zhihu Content

Our comprehensive, high-quality content offerings are constantly enriched by our content creators with systematic support from our content operations.

Content Offerings

Our content primarily consists of UGC and PUGC, which encompasses a wealth of knowledge, experience, and insights. Our content is organized in various forms and features such as Q&As, articles, columns, videos, live streaming, thoughts, and groups. Our community had 353.2 million cumulative pieces of content as of December 31, 2020, including 315.3 million questions and answers. Our comprehensive content offerings encompass over 1,000 verticals and cover over 571,000 topics. In addition, our Yan Selection (盐选) membership program provides our users with access to 3.4 million pieces of premium content such as Yan Selection columns, e-books, e-magazines, live and recorded lectures, and audio books. We diligently expand our overall content offerings and curate premium content for our paying members to satisfy the demand of our increasingly diverse user base and to improve their experience as they seek inspiration, find solutions, make decisions, and have fun in our community.

Content creators can contribute in the form of texts, images, videos, and live streaming. Users can utilize various distribution channels, such as feeds, searches, and trending topics (热榜) to discover content quickly and efficiently. Content creators across diverse backgrounds create questions and answers of different lengths, styles, and perspectives, which are assessed and presented by our TopicRank algorithms. Our content portfolio is continuously refined over time as content creators contribute new quality content and TopicRank continues to assess the credentials and engagement of content creators. The enhanced content portfolio, coupled with accumulated user engagement data, optimizes TopicRank. These continuous iterations create a virtuous cycle to enhance the trustworthiness and quality of our content. As an illustration, Zhihu highly upvoted (知乎高赞) is a signature badge used by Chinese netizens to refer to high-quality and trustworthy content within the Chinese internet community.

 

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Q&A is an intuitive and efficient way to inspire and facilitate quality discussions and interactions. In addition, we offer features such as articles and columns to facilitate more focused discussions in particular fields and to build systematic knowledge graphs. Users can post thoughts in our community to express their ideas in short, feed-style messages to facilitate interactions and engagement with other users. We also offer features such as groups for discussion of topics of common interests among our users.

As part of our efforts to cater to users’ evolving preferences on content, we encourage content creation in the form of video and live streaming, which we deem as a natural extension to our text- and image-based content portfolio. We actively introduce video creation and live streaming tools to facilitate content creators in their creative efforts so that they can meaningfully deliver and present knowledge, experience, and insights in these forms. We currently focus on videos longer than one minute. We also offer live streaming to facilitate a more interactive content creation and user engagement experience.

Users can easily find content that they are interested in through our feeds and searches. As our search functions have become more popular, we are increasingly recognized by Chinese netizens as a go-to destination to find trustworthy answers to their questions. Our users generated 25.7 million average daily searches in the fourth quarter of 2020, representing a 38.2% increase from the fourth quarter of 2019. Zhihu is recognized as the first choice among all online content communities in China where people look for information to make decisions or find answers, according to the CIC Survey.

Our content covers a wide spectrum of verticals that provide a fulfilling experience to our users. We strive to continue to develop more popular content verticals and include additional niche content verticals, while enhancing the depth of each vertical.

Content Operations

We use an AI-powered question routing system to invite users to answer questions that correspond to their interests and expertise, to incite their desire to create. We also offer productivity tools to help content creators efficiently produce quality content. We use a feed recommendation system and a search system to efficiently distribute content of interest to users. Users can browse their personalized home feeds on the Zhihu app and website based on their profiles and prior behaviors, as well as search keywords to quickly access relevant content. In addition, users can see updates from content creators and topics that they have followed, read trending topics, watch videos, and browse channels to discover content.

Our content is subject to collective assessment by the Zhihu community. We use a technology-driven approach to analyze content, assess user behaviors and interactions, and ultimately enhance the quality of our content portfolio. We leverage TopicRank algorithms to assess the content based on analytical results of users’ credentials and engagement. As a result, users’ behavior ultimately determines the order by which content is presented. Influential, reputable, and well-recognized users generally have more weight in the content assessment process. We use big data analytics to study user interactions and other factors to refine our assessment of the appropriateness of any particular content and determine corresponding reactions. To respond to inappropriate content, we use AI-powered proprietary systems, such as WaLi (瓦力), our content-monitoring system, and WuKong (悟空), our anti-spamming system. Our algorithms factor in the AI-based analysis of tones and attitudes demonstrated by users under complex context and circumstances to assess content quality, and we believe that we are one of the few online content market players with such capability.

Content Creators

We pride ourselves on the 43.1 million content creators who had contributed 353.2 million pieces of content to our community as of December 31, 2020. We strive to continuously to empower them to generate high-quality content and encourage content diversity. Our efforts in discovering, developing, and supporting content creators help realize and enhance the potential of each of our content creators regardless of their background or field of specialty.

 

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The Q&A form sparks creativity. We encourage users to contribute their first piece of content and thereby become content creators in our community. Our technology can help content creators select the right topics for them. For example, our AI-powered question routing system distributes questions suitable for entry-level content creators, and will gradually increase the sophistication of questions as content creators become more experienced. We provide ongoing support and guidance to content creators to increase the frequency of content creation. For example, we offer tailored productivity and monetization tools for different verticals. We also organize online roundtable series on special topics and other events to enhance the frequency and relevance of the content created.

Content creators can benefit economically from their creative works through various channels, such as income for creation of quality commercial and premium content, commission from Recommended Goodies (好物推荐), and paid online consulting. Our content creators also enjoy a fulfilling Zhihu experience through recognition from fellow users. By incentivizing our content creators, we create a win-win situation within our community.

Zhihu Users

We have a large, vibrant, and rapidly growing user base. We had average mobile MAUs of 44.3 million and 64.2 million in 2019 and 2020, respectively. Our users are highly engaged. Our 75.7 million average MAUs in the fourth quarter of 2020 generated 675.7 million average monthly interactions within our vibrant community during the same period. Our users are also highly sticky. For our YanPlus users, the average 12th-month retention rate in 2019 was 72%. We will continue to expand and further diversify our user base, and aim to serve a broader set of internet users.

The following diagram sets forth our key user demographics data for the period indicated.

 

LOGO

Our users can leverage a series of features to engage actively within the community. Users can upvote and downvote answers and comments, which serve an instrumental role in our community interactions. Users can

 

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also identify and invite other users to answer any question in our community. Other social interaction features include comments, private messages, likes, follows, favorites, and sharing.

We organize a variety of online and offline activities for users to socialize with one another. Our roundtable series provide an online venue for discussions on a wide range of topics. Our themed online creativity events offer opportunities for users to share and learn from creative experience of other users.

Our users are instrumental in building and maintaining our community culture—sincerity, expertise, and respect (认真专业友善). In addition to contributing to our content ecosystem through various engagement activities, certain experienced users can assign tags and participate in community reviews to collectively resolve disputes. We have rolled out a set of comprehensive community identity and recognition systems to strengthen users’ sense of community belonging.

Our Monetization

We have adopted a content-centric monetization approach. We derive revenues primarily from online advertising, paid membership, content-commerce solutions, online education, and e-commerce.

Online Advertising

We offer merchants and brands online advertising services to help them deliver advertisements effectively to their targeted audience. Our online advertising services primarily include launch-screen and feed advertisements. Advertisements can be placed at various parts in our Zhihu app and website in different formats. Merchants and brands can place display-based or performance-based advertisements. We primarily charge display-based advertisements by cost-per-mille, and primarily charge performance-based advertisements by cost-per-click.

Paid Membership

We offer Yan Selection (盐选) membership program, which provides our paying members with unlimited access to our premium content library. Our paying members can enjoy 3.4 million pieces of premium content, including Yan Selection columns, live and recorded lectures, audio books, and a wide selection of premium e-books and e-magazines, in addition to certain membership privileges and services. We also offer an on-demand access option to our content library to supplement our Yan Selection membership program. In the fourth quarter of 2020, we had 3.0 million average monthly paying members, representing a paying ratio of 4.0%.

We offer subscription plans for the Yan Selection membership, and offer trials to attract more members. We also collaborate with other leading online platforms to offer joint membership programs in an effort to promote our Yan Selection membership program.

Content-Commerce Solutions

Our fast-growing content-commerce solutions provide merchants and brands with innovative online marketing solutions that are seamlessly integrated into our online content community. As opposed to traffic-based online marketing, our content-commerce solutions assist merchants and brands to generate high-quality commercial content that builds brand and enhances marketing effectiveness. In offering content-commerce solutions, we focus on facilitating content creators, including merchants and brands, to create high-quality commercial content in various forms on Zhihu, and distribute such content to targeted audience.

 

We have a highly productive content creation community that connects content creators with merchants and brands who want to leverage Zhihu for their marketing campaigns. Depending on user demand, content can be

 

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created primarily through (i) content creators in our community, (ii) in-house production by merchants and brands, and (iii) service agents such as MCNs. We also have a content creation task system where content creators are invited to produce commercial content for merchants and brands based on their specified needs. We provide merchants and brands with the flexibility to create new content or revitalize existing content for monetization, which enhances existing content’s value and our content creation efficiency.

We leverage our content distribution system to deliver recommended commercial content to the targeted audience with high precision. We distribute recommended commercial content and marketing utilities in the form of answers and articles based on user profiles, interests, and topics followed, as part of our regular feed recommendation process. In addition, we can set up the recommended commercial content as a “next answer” to be displayed when relevant users have browsed an answer and click to view the next answer.

We provide a suite of marketing utilities to be naturally embedded in various parts of quality content to help merchants and brands realize sales conversion, customer acquisition, or service provision, among others.

Leveraging the volume of high-quality content on Zhihu, our content commerce-solutions have proven to be a highly effective marketing approach for merchants and brands, evidenced by an overall click-through rate multiple times higher than that of traditional advertising. In addition, valuable, high-quality content created for commercial purposes can be distributed by and remain relevant to our users over a long period of time, contributing to a rich content pool that can enhance our clients’ branding. This natural avenue for monetization delivers value to consumers who want to make informed decisions, to merchants and brands who can seek to strengthen their dialog and improve engagement with consumers, and to content creators who can be rewarded financially for contributing commercial content to the online community. We believe that such stakeholders will continue to benefit from such quality commercial content.

Other Services

As part of our efforts to grow our content pool and cater to the evolving trend of our users’ content consumption, we continue to identify and introduce additional products and services. We believe there are significant monetization opportunities in many of our content domains, such as education, where users are highly engaged and we have accumulated a vast depositary of content. To fulfill our users’ strong demand for education services, we launched our online education service in 2020. We offer a diverse course portfolio with a focus on exam preparation and vocational training, which is a natural extension and valuable supplement to our content offerings. While we cooperate with third-party education service providers, we have launched our self-developed education courses as well.

Our e-commerce operations enable content creators to embed actionable utilities in their content to introduce and recommend products to our users. Recommended Goodies (好物推荐) translates proven community knowledge, experience, and insights with respect to products into a strong sales momentum. We currently direct traffic externally to third-party e-commerce platforms, which pay us commissions based on pre-agreed percentages of the relevant GMV realized on these platforms, and we split the commissions with the content creators. Our e-commerce service currently covers digital consumer products, home appliances, and lifestyle products. In 2020, the GMV of our e-commerce operations achieved RMB4.4 billion. We intend to further expand the merchandise categories and explore closed-loop e-commerce operations.

Benefiting from our rich content pool, we are exploring opportunities to further develop the related intellectual property in collaboration with third parties.

Zhihu Community Governance

We maintain sound community culture through our comprehensive community governance system, comprising our users, protocols, and algorithms. These elements interact with one another to build and maintain our culture.

 

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Our community governance team actively utilizes our proprietary know-how and AI-powered content assessment algorithms to identify and respond to content that violates our community guidelines. Through years of experience, we have accumulated a set of community guidelines in addition to our community by-laws and terms of service to help regulate all major aspects of our community’s operations and activities.

People within the Zhihu community value our culture and can help safeguard an environment where everyone is encouraged to share their knowledge, experience, and insights while treating each other with respect. For example, our users can actively participate in community governance by initiating and participating in dispute review process.

Marketing and User Growth Management

Our competitive position benefits significantly from our strong brand recognition and quality content, and our continuous efforts to build our brand. Our unique approach of growth management in turn helps us attract and retain users organically and efficiently. We adopt a systematic approach in regard to our user growth management. In particular, we seamlessly integrate our growth management strategies with all aspects of our operations, including our brand building efforts. Our product, content, community governance, and technology teams collaborate closely with our marketing and growth management team to align and execute our marketing and user growth strategies and ensure optimized user acquisition.

We attract and retain users with increasingly recognized and trustworthy content, which in turn incentivizes more content creators to contribute creative and appealing content, thus forming a self-reinforcing virtuous cycle. In addition, we strategically deploy multidimensional marketing and user acquisition strategies to complement our natural user acquisition, such as brand marketing, targeted campaigns, and mobile device pre-installations, to achieve highly efficient user growth and increase the engagement of new and existing users. To keep up with the dynamic market conditions and competitive landscape, we continuously review and refine our brand strategy. For example, to attract users of a broader and more diverse background, we focus on promoting ourselves as an online community where everyone can find their own answers, and we highlight our strength as the go-to online community for content coverage on trending topics (热榜) with significant social impact. We also combine our marketing efforts with various scenario-oriented campaigns leveraging our rich and deep content portfolio as well as our strong brand image of trustworthy content. For example, each year during the national college matriculation exam (GaoKao) period in China, we prominently distribute content most relevant to GaoKao in an effort to attract new high school seniors as users, whom we consider to be an active user base with high growth potential. Our content-centric approach to boost our brand recognition and user acquisition also include cooperation with celebrities, targeted event campaigns, and fans events, as well as collaboration with major TV stations and online video platforms in China. Because the Zhihu brand itself imparts strong recognition of content quality and trustworthiness, our marketing strategy to combine brand building with user growth enables us to benefit from a low customer acquisition cost and achieve a fast rate of user growth.

Data analytics underlie our growth strategies. We constantly refine our algorithms for accurate identification of trending topics and user demand to better connect the right users with the right content. We also market our community and quality content through popular search engines, social media, trending apps, web navigation portals, and third-party mini-programs. Through these third-party platforms, we are able to further accumulate brand equity, expand content exposure via external channels, and enhance user acquisition capabilities. Moreover, synergies and collaborations between our products, content, technology, governance, and user growth teams enable our community to recommend the most attractive content to users for maximizing user engagement.

Technology

TopicRank algorithms constantly enhance the reliability and trustworthiness of our content. Powered by our AI capabilities, TopicRank dynamically assigns a proper weight to any given user in any given field based on

 

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such user’s knowledge, experience, and insights in such field, and adjusts the weight previously assigned to any given user on a real-time basis over a long period of time. TopicRank assesses a particular piece of content created by a user from multiple dimensions taking into account the weight assigned to that user and the quality of engagement with other users and their respective weights in the field, and determines the quality of such content for distribution. It is continuously refined by machine learning technology and our proprietary know-how and data insights derived from our decade-long operations. As TopicRank improves its accuracy algorithmically over time, it increasingly facilitates the trust and confidence of users in our online community.

We use an intelligent question routing system to accurately invite users to contribute answers. Based on the analysis of a particular question and data insights on users, the question routing system identifies users who have created content (preferably with positive feedback by other users) or shown interest in the relevant field based on user profiles and behaviors, and distributes the question to these users, prompting for a response. The question routing system continues to assess any further engagements by these invited users to further ascertain their level of interest and expertise, which in turn enhances the accuracy of the question routing. In addition, we also supply content creators with a suite of productivity tools to assist in creating content in various forms and easily editing texts, images, and videos.

We also use a feed recommendation system and a search system to efficiently distribute content of interest to users. The feed recommendation system creates personalized home feeds when users access the Zhihu app and website based on user profiles and behaviors. The feed recommendation system enables us to optimize user experience and improve the signal-to-noise ratio. In addition, we have applied a combination of deep learning and traditional models to our search system, enabling an efficient access to their content of interest. We continue to improve both the feed recommendation and search systems through TopicRank and machine learning technology.

We apply multiple technologies based on natural language processing (NLP) to understand and respond to content, users, and their behaviors and interactions, ultimately to maintain the culture of the Zhihu community. We maintain and develop knowledge graphs to arrange content in a structured system, and, with the accumulation of information over years of operations, to organize and present knowledge, experience, and insights for users. We use graph embedding machine learning models to analyze interactions between users and determine user affinity, which together with other factors help refine our assessment of the appropriateness of any particular content and determine corresponding reactions. We also use AI-powered proprietary systems to defend against inappropriate content. For example, the WaLi (瓦力) content monitoring system is able to promptly and accurately identify and fold or remove unfriendly, irrelevant, biased, or other inappropriate content in a matter of milliseconds to reduce interruption to users. The WuKong (悟空) anti-spamming system can accurately identify spam activities such as casting upvotes and downvotes in violation of the community rules, thereby protecting the quality of discussion and interaction in our community. We believe that we are one of the few online content market players that are capable of managing content by recognizing tones and attitudes expressed by users under complex context and circumstances.

User Privacy and Data Security

Data security is crucial to our business operations. We have internal rules and policy to govern how we may use and share personal information, as well as protocols, technologies and systems in place to ensure that such information will not be accessed or disclosed improperly. Users must acknowledge the terms and conditions of the user agreement before accessing our products and services, under which they consent to our collection, use, and disclosure of their data in compliance with applicable laws and regulations.

From an internal policy perspective, we limit access to our servers that store our user and internal data on a “need-to-know” basis. We also adopt a data encryption system intended to ensure the secured storage and transmission of data, and prevent any unauthorized member of the public or third parties from accessing or using our data in any unauthorized manner.

 

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Intellectual Property

We rely on a combination of patent, copyright, trademark, domain name, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. As of December 31, 2020, we had 19 registered patents, 50 pending patent registration applications, 773 registered trademarks, 80 pending trademark registration applications, registered copyrights to 23 pieces o