F-1/A 1 a2239926zf-1a.htm F-1/A

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on October 30, 2019

Registration No. 333-234302


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



AMENDMENT NO. 1
TO

Form F-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933



YX Asset Recovery Limited
(Exact name of Registrant as specified in its charter)

Not Applicable
(Translation of Registrant's name into English)

Cayman Islands
(State or other jurisdiction of
incorporation or organization)
  7320
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification Number)

Xincheng Science and Technology Park Building 7
West Yuelu Road No. 588
Changsha 410205, Hunan Province
People's Republic of China
+86 731-81829999

(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)

C T Corporation System
28 Liberty Street
New York, NY 10055
+1-212-894-8940

(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

Jia Yan, Esq.
Jason T. Kuo, Esq.
Paul Hastings LLP
43/F, Jing An Kerry Center Tower II
1539 Nanjing West Road
Shanghai 200040, China
+86 21-61032900

 

Stephanie Tang, Esq.
Hogan Lovells
11th Floor, One Pacific Place
88 Queensway
Hong Kong, China
+852 2219 0888



Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

           If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

           If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

           If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

           If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

           Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company ý

           If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. o



CALCULATION OF REGISTRATION FEE

       
 

Title of each class of securities to be Registered

  Proposed Maximum
Aggregate Offering
Price (3)
  Amount of
Registration Fee
 

Class A ordinary shares, par value US$0.001 per share (1)(2)

  US$200,000,000   US$25,960 (4)

 

(1)
Includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes Class A ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.

(2)
American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No. 333-          ). Each American depositary share represents                  Class A ordinary shares.

(3)
Estimated solely for the purpose of computing the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

(4)
Previously paid.



           The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

   


The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion) Issued                      , 2019

American Depositary Shares

Representing                  Class A Ordinary Shares

LOGO

YX Asset Recovery Limited

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of YX Asset Recovery Limited.

We are offering             ADSs[, and the selling shareholders are offering             ADSs]. We will not receive any proceeds from the sale of shares by the selling shareholders. Each ADS represents             of our Class A ordinary shares, par value US$0.001 per share.

Prior to this offering, there has been no public market for the ADSs or our shares. The ADSs have been approved for listing on the New York Stock Exchange under the symbol "             ."

Immediately following the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Mr. Man Tan will beneficially own all of our issued Class B ordinary shares and will be able to exercise         % of the total voting power of our issued and outstanding share capital immediately following the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 10 votes and is convertible into one Class A ordinary share. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstance.



PRICE US$             PER ADS



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.

 
  Price to Public
  Underwriting
Discounts
and Commission (1)

  Proceeds to us (1)
  [Proceeds to
Selling
Shareholders]

Per ADS

  US$              US$              US$              US$           

Total

  US$              US$              US$              US$           

(1)
See "Underwriting" for additional disclosure regarding reimbursement arrangement between us and the underwriters.

We [and the selling shareholders] have granted the underwriters the right to purchase up to an additional             ADSs to cover over-allotments at the initial public offering price less the underwriting discount.



The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on                      , 2019.

Deutsche Bank Securities   CMBI   Raymond James   AMTD Global Markets   SunTrust Robinson Humphrey

Everbright Sun Hung Kai   Wedbush Securities   Prime Number Capital   Fortune (HK) Securities Limited



Prospectus dated                      , 2019


Table of Contents

TABLE OF CONTENTS

 
  Page  

Prospectus Summary

    1  

The Offering

    13  

Summary Consolidated Financial and Operating Data

    15  

Risk Factors

    18  

Letter from Our Chairman

    62  

Special Note Regarding Forward-Looking Statements

    64  

Use of Proceeds

    66  

Dividend Policy

    68  

Capitalization

    69  

Dilution

    71  

Exchange Rate Information

    73  

Enforceability of Civil Liabilities

    74  

Corporate History and Structure

    77  

Selected Consolidated Financial Data

    84  

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

    87  

Industry

    116  

Business

    124  

Regulation

    150  

Management

    163  

Principal and Selling Shareholders

    171  

Related Party Transactions

    174  

Description of Share Capital

    180  

Description of American Depositary Shares

    197  

Shares Eligible for Future Sale

    206  

Taxation

    208  

Underwriting

    215  

Expenses Related to this Offering

    225  

Legal Matters

    226  

Experts

    227  

Where You Can Find Additional Information

    228  

        You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free-writing prospectus. We are offering to sell, and seeking offers to buy, the ADSs only under circumstances and in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

        Neither we nor the underwriters has taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus or any filed free writing prospectus outside the United States.

        Until             , 2019 (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.

i


Table of Contents



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 the ADSs discussed under "Risk Factors," before deciding whether to buy the ADSs. You should note that the business described in this prospectus is owned and operated by our variable interest entity in the PRC and the ADSs purchased are of a Cayman Islands holding company that does not directly own our business operations in the PRC. This prospectus contains information from an industry report commissioned by us and prepared by iResearch, a third-party research firm, in October 2018 (and updated by iResearch in [    ·    ] 2019) to provide information regarding our industry and our market position in China.

Our Mission

        To be a pioneer in institutionalizing a transparent Chinese consumer credit recovery industry by helping borrowers rebuild credit, maximizing financial institutions' recovery and nurturing a new generation of talent.

Business Overview

        We are a leading business service provider of delinquent consumer debt collection in China. We believe that delinquent consumer debt collection is crucial to the maintenance of a sound financial environment because debt collection is a mechanism to establish principles and rules governing consumer lending, and facilitates the restoration of credit of the debtors and the establishment of a society built on credit. According to iResearch, we are the largest provider of delinquent credit card receivables recovery service in the PRC in terms of total value of receivables under collection and number of collection specialists employed as of June 30, 2019, and total commission for the six months ended June 30, 2019. We offer nation-wide consumer debt collection services. We collect delinquent consumer receivables such as credit card receivables originated by commercial banks, and online receivables originated by online consumer finance companies. For the six month period ended June 30, 2019, we have serviced seven of the top 10 commercial banks as measured by outstanding balance of credit cards issued in China in 2018, and reputable online consumer finance companies in China. Our clients engage us to collect delinquent consumer receivables and we primarily generate commission-based fees based on our collection success. Our industry expertise, operation scale, innovative approach and IT infrastructure allow us to offer our clients a cost-effective and trustworthy solution to recover delinquent consumer receivables. We intend to continue to leverage our strengths and grow our business through our disciplined approach, which has contributed to our growth and success to-date.

        We focus on the collection of tertiary receivables. According to iResearch, we outperformed by a large margin all other service providers in the PRC tertiary credit card receivables recovery market in terms of total value of receivables under collection and number of collection specialists employed as of June 30, 2019, and total commission for the six months ended June 30, 2019. The commission rate for the collection of tertiary receivables is typically higher than that of fresher receivables, which include primary and secondary receivables, because (i) tertiary receivables are past due for a longer period of time, and thus are more difficult to collect compared to fresher receivables; and (ii) tertiary receivables may also have been charged off by the lender and therefore any amount we collect generates additional income for the clients. In most cases, prior to engaging us, our clients had unsuccessfully attempted to collect these delinquent consumer receivables through their

1


Table of Contents

in-house collection teams and other service providers. In 2017, 2018 and for the six months ended June 30 2019, we derived 96.6%, 80.5% and 72.3% of our revenues from our credit card receivables collection services, respectively, and 3.1%, 19.5% and 27.7% from online receivables, respectively.

        Our remote collection approach and centralized management contribute to our overall success. According to iResearch, we are one of the pioneers in the industry as we provide collection services solely by remote means, such as telephone and text messages, or remote collection, without on-site visit or face-to-face negotiation with debtors. We purposefully do not engage in face-to-face interaction to avoid potential physical confrontation with debtors, control compliance-related risks, streamline and standardize the collection process, and increase collection efficiency. Our quality assurance team leverages our technology and IT system to better monitor the conduct of our collection specialists during the collection process. For example, our operating portal records all telephone conversations with debtors, and our intelligent speech recognition system transcribes these recordings into text for our quality assurance team to review internally in accordance with our quality assurance protocol. In addition, we coordinate and manage all client engagements and collection assignment allocations centrally through our Changsha headquarters as part of an integrated and centralized operation management system, or centralized management. We have 34 operating centers located in 29 cities across China. Our proprietary operating portal automatically and centrally assigns and adjusts collection tasks to collection specialists at headquarters and other operating centers monthly following its pre-set distribution rules considering factors such as the performance and current workload of a particular collection specialist and the value and difficulty of the collection tasks. We believe our centralized management allows us to consolidate marketing efforts, standardize the collection process and monitor quality compliance of thousands of our collection specialists. We believe our centralized management enables us to expand rapidly and efficiently while maintaining our service quality.

        We are committed to maintaining and upgrading our technological advances. We focus on building our technology platform, which is supported by our proprietary customer database. Our integrated platform and information technology ensure efficient data mapping and robust reporting capabilities to generate continuously improving collection results. For example, our proprietary information technology system, or operating portal, supports core processing and analytics functions of our business under a set of integrated databases and is designed to be both replicable and scalable to accommodate our organic growth. Our system is also configured with multiple layers of security modules, as part of our overall data privacy and security program, to protect our database from unauthorized access.

        We believe the expertise of our collection team is critical to the success of our business. Our experience is that the tenure and the productivity of our collection specialists are positively correlated to our performance. Experienced collection specialists are critical in conducting skip tracing and negotiation with debtors. As a result, we place considerable focus on the attracting, nurturing, retaining and motivating of our collection team by providing mentorship, continued education and promotion track based on performance. In addition, we employ a performance monitoring system to monitor our collection specialists' activities and set daily minimum performance standards, which is linked to our compensation structure based on performance. We also adopt a unique team structure with a clear division of labor and close collaboration across different levels for efficient collection process. We expect continued improvement in productivity and profitability as our collection specialists accumulate experience over time. As of June 30, 2019, we had 10,915 full time collection specialists in our operating centers located in 29 cities in China which constituted 95.0% of our employees. The full time collection specialists include 1,109 collection specialists who have years of experience and are qualified to conduct direct negotiation with debtors. Monthly

2


Table of Contents

average amount collected per collection specialist reached RMB27,385 (US$3,989) for the six months ended June 30, 2019, which was 27.5% higher than the corresponding period in 2018.

        Mr. Tan, our founder, has more than 15 years of experience in collecting delinquent consumer receivables. Mr. Tan has utilized his backgrounds in law and entrepreneurship to lead our business operation. Mr. Tan also devoted his expertise and resources to the development of legislation, industry standards, as well as education in the area of delinquent consumer receivables recovery. With the vision of institutionalizing a transparent consumer credit recovery industry in China in mind, Mr. Tan founded our company to focus on collecting delinquent consumer receivables.

Recent Development

        We set forth below certain key updated financial and operating data that we believe are useful to investors and fairly represent our results of operations and financial performance for the two months ended August 31, 2019. These preliminary data may change and those changes may be material. As a result, these preliminary data may not be consistent with our consolidated financial statements for such period when they are completed and publicly disclosed. See "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business" and "Forward-Looking Statements" for additional information.

        The following table presents our key operating data for the periods indicated:

 
  Two months ended August 31  
 
  2018   2019   2019  
 
  RMB   RMB   US$  
 
  (In thousands, except percentage)
 

Total amount collected

    371,773     694,956     101,232  

Tertiary

    365,177     505,407     73,621  

Primary and Secondary

    6,596     189,549     27,611  

Weighted monthly average collection rate

    0.62%     0.95%        

Tertiary

    0.62%     0.86%        

Primary and Secondary

    0.65%     1.34%        

Effective commission rate

    41.0%     33.2%        

Tertiary

    41.5%     41.0%        

Primary and Secondary

    10.8%     12.4%        

Monthly average amount collected per collection specialist

    27.4     31.3     4.6  

Monthly average commission earned per collection specialist

    11.2     12.1     1.8  

        As of September 30, 2019, our balance of delinquent consumer receivables under collection amounts to RMB44.6 billion (US$6.4 billion). The business volume remained largely stable during the two months ended August 31, 2019 while other operating metrics grew significantly. Our operating results and margins for the six months ended June 30, 2019 were impacted by the closing of approximately 20 newly established regional office and one-off comprehensive compliance review in the second quarter of 2019. Our performance and margins have since rebounded from those one-off events; for the two months ended August 31, 2019, most of our operating metrics have returned to normalized level. Our blended effective commission rate for the two months ended August 31, 2019 has decreased by 7.8% compared to the corresponding period in 2018, due to our engagement of relatively more primary and secondary receivables with lower effective commission rates compared to tertiary receivables. The commission rate of our tertiary business has remained stable.

3


Table of Contents

        The following table presents our key financial data for the period indicated:

 
  Two months ended
August 31, 2019
 
 
  RMB   US$  
 
  (In thousands, except
percentage)

 

Revenues

             

Collection of credit card debts

    140,342     20,443  

Collection of other debts

    76,681     11,170  

Others

    91     13  

Revenues

    217,114     31,626  

Cost of revenues

    (142,964 )   (20,825 )

Gross Profit

    74,150     10,801  

Operating Expenses

             

Selling and marketing expenses

    (39 )   (6 )

General and administrative expenses

    (11,644 )   (1,696 )

Income from operations

    62,467     9,099  

Interest expense

    (595 )   (87 )

Government grants

    482     70  

Income before income taxes

    62,354     9,083  

Income tax expense

    (11,249 )   (1,639 )

Net income

    51,105     7,444  

Gross margin

    34.2 %              

 

 
  Two months ended
August 31, 2019
 
 
  RMB   US$  
 
  (in thousands)
 

Summary Consolidated Cash Flow Data:

             

Net cash provided by operating activities

    103,476     15,073  

        Our revenue from debt collection was RMB217.0 million (US$31.6 million) in the two months ended August 31, 2019, which amounted to 91.1% of revenue generated in the three months ended June 30, 2019. Our gross profit was RMB74.2 million (US$10.8 million) in the two months ended August 31, 2019. In addition, our gross margin in the same period returned to a normalized level of 34.2%. Our net income for the two months ended August 31, 2019 was RMB51.1 million (US$7.4 million).

        The improvement in our net cash provided by operating activities is mainly due to the continued growth of our revenue and gross profit, as well as normalized settlement cycle of receivables from our customers.

        We use adjusted net income and adjusted EBITDA, which are non-GAAP financial measures, in evaluating our operating results and for financial and operational decision-making purposes. See "Non-GAAP Financial Measures." The net income for the two months ended August 31, 2019 amounted to 86.9% of the adjusted net income for the six months

4


Table of Contents

ended June 30, 2019. The table below sets forth a reconciliation of our adjusted EBITDA to net income for the period indicated.

 
  Two months
ended
August 31, 2019
 
 
  RMB   US$  
 
  (In thousands)
 

Non-GAAP Financial Measures

             

Net income

    51,105     7,444  

Adjustments:

             

Share-based compensation

         

Adjusted net income

    51,105     7,444  

Adjustments:

             

Interest expense

    595     87  

Income tax

    11,249     1,639  

Depreciation

    4,549     663  

Amortization

    104     15  

Adjusted EBITDA

    67,602     9,847  

Our Industry

        China's consumer credit market has experienced substantial growth in recent years due to a fast growing economy and an evolving consumer base. The government's effort to implement policies promoting consumption and spending consumption upgrades in terms of quantity and quality and increasing popularity of consumer lending has in turn triggered the high growth of consumer lending.

        China's delinquent consumer receivables recovery market is in its early stage of development and has experienced a high rate of growth since 2013, compared to more mature markets such as that of the United States. According to iResearch, total revenue generated by China's delinquent consumer receivables recovery market grew at a CAGR of 48.5% from 2013 to 2017, compared with a CAGR of 2.9% in the U.S. market during the same period. At the same time, market share of the top three service providers measured by total revenue, or market concentration, was 4.3% for China's market, compared with 28.6% for the U.S. market in 2017. iResearch believes that major market participants in China have growth opportunities through consolidation of the fragmented market shares with reputable brand, strong relationships with financial institutions and sufficient resources, such as human and capital resources.

        The key characteristics of the tertiary receivable recovery market are lower collection rate, higher commission rate, high entry barrier and potential for operations expansion.

        The delinquent consumer receivables recovery industry in China is highly fragmented. As of June 30, 2019, there were over 3,000 delinquent receivables collection service providers in the market. YX ranked first in the credit card receivables recovery market in terms of of receivables under collection, number of collection specialists as of June 30, 2019. For the six months ended June 30, 2019, YX also led the credit card receivables recovery market in terms of total commission received.

5


Table of Contents

Our Competitive Strengths

        We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:

    Industry-leading position and strong relationships with major consumer credit originators;

    Advanced know-how and proven track record in an emerging industry;

    Innovative collection process supported by proprietary IT systems and infrastructure;

    Strong team of collection specialists with a unique team structure;

    Visionary and experienced leadership backed by a strong team of talent.

Our Strategies

        We believe the following strategies may contribute to our goal of becoming a market leading full service consumer receivables collection service provider:

    Continue to invest in and upgrade our big data and IT System;

    Broaden our industry participation and service offerings;

    Strengthen cooperation with major credit originators and diversify our business.

Our Challenges

        We face risks and uncertainties in realizing our business objectives and executing our strategies, including those relating to:

    increased regulatory risk resulting from public complaints against our industry;

    unexpected reactions from debtors to our request for payment;

    deterioration of business relationship with major clients;

    obtaining sufficient delinquent consumer receivables for collection;

    retaining efficiency in collecting delinquent consumer receivables;

    changes in fee arrangements with clients;

    violation of compliance policies, collection standards and government rules and regulations;

    retaining existing and attracting new clients;

    retaining experienced employees and attracting talents; and

    our limited operating history.

Corporate History and Structure

        In April 2014, Ms. Xiaofang Zhou, or Ms. Zhou, established Hunan Yong Xiong Investment Management Co., Ltd., or Yong Xiong Investment with other shareholders. In July 2015, Mr. Man Tan, Ms. Zhou's spouse, or Mr. Tan, purchased 94% and 3% equity interests of Yong Xiong Investment from Ms. Zhou and another shareholder, respectively. Upon completion of such share purchase, Mr. Tan and Ms. Zhou held 97% and 3% equity interest of Yong Xiong Investment, respectively. Yong Xiong Investment was renamed the Yong Xiong Group in 2015.

6


Table of Contents

        Beginning in August 2018, we began our restructuring in contemplation of this offering. Under the restructuring:

    Incorporation of the listing entity.    In August 2018, we incorporated YX Asset Recovery Limited under the laws of the Cayman Islands as our offshore holding company to facilitate financing and an offshore listing.

    Incorporation of British Virgin Islands holding company, Hong Kong holding company and WFOE.    In August 2018, YX Asset Recovery Limited established a wholly-owned subsidiary in the British Virgin Islands named YX International Holding Ltd. In September 2018, YX International Holding Ltd established a wholly-owned subsidiary in Hong Kong named YX Services Limited. In November 2018, YX Services Limited established a wholly-owned subsidiary in China named Hunan Yong Xiong Intelligence Technology Co., Ltd., which we refer to as the wholly-foreign-owned enterprise in Hunan, or Hunan WFOE, which we will de-register in                   2019. In January 2019, YX Services Limited established a wholly-owned subsidiary in China named Shanghai Yong Xiong Information Technology Services Co., Ltd., which we refer to as the wholly-foreign-owned enterprise in Shanghai, or Shanghai WFOE in this prospectus. For the avoidance of doubt, we refer to Hunan WFOE as our WFOE from November 8, 2018 to January 11, 2019, and we refer to Shanghai WFOE as our WFOE from January 12, 2019 onwards.

    Contractual arrangements.    Our operations involve value-added telecommunications services. Due to PRC restrictions or prohibitions on foreign ownership of value-added telecommunications businesses in China, we operate our business in China through the Yong Xiong Group, a PRC domestic entity, in which we have no direct ownership interest. In November 2018, we, Hunan WFOE, and other parties entered into a series of contractual arrangements with the Yong Xiong Group, which we refer to as our VIE in this prospectus, and its respective shareholders. These contractual arrangements enable us to exercise effective control over our VIE, receive substantially all of the economic benefits of our VIE, and have the exclusive option to purchase all or part of the equity interests in and assets of our VIE to the extent permitted by PRC law. Due to operational reasons, we entered into a series of contractual arrangements with Shanghai WFOE, our VIE and other parties in January 2019, which superseded those entered into in November 2018. We have further amended and restated the contractual arrangements in March 2019 based on the change of the ownership structure of our VIE. These contractual arrangements contain the same terms and conditions as those entered into in November 2018, and continue to have the same effect on the relationship between our VIE and us.

        As a result of our restructuring and the VIE contractual arrangements, we are the primary beneficiary of our VIE, and we treat the Yong Xiong Group and its subsidiaries as our consolidated variable interest entities under U.S. GAAP. We rely on dividends and other distributions paid to us by our WFOE, which in turn depends on the service fees that our VIE pays to our WFOE. The amount of dividends we will collect from our WFOE depends on our dividend policy. We do not expect to collect any dividend from our WFOE in the foreseeable future because we do not expect to pay any dividend to our shareholders. For more details, please see "Dividend Policy." Our WFOE will collect service fees from our VIE pursuant to the VIE contractual arrangements, according to which our VIE should pay service fees to our WFOE after our VIE reserves funds for reasonable profits and costs. Our WFOE has the right to make discretionary determination on the amount of service fees to be collected from our VIE. We currently, and expect that we will, in the near future, derive substantially all of our revenues from our VIE, subject to future business plans. However, we do not have unfettered

7


Table of Contents

access to our WFOE's and VIE's revenues due to PRC legal restrictions on the payment of dividends by PRC companies, foreign exchange control restrictions, and the restrictions on foreign investment, among others. For more details and risks related to our variable interest entity structure, please see "Risk Factors—Risks Related to Our Corporate Structure." We have consolidated the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

        In August 2018, Mr. Tan, Ms. Zhou, the Yong Xiong Group, and other related parties entered into a framework agreement with Shanghai Zhong Ping Guo Jing M&A Equity Investment Fund Limited Partnership, or Zhong Ping Capital to set forth the commercial arrangements among the parties, pending execution of the definitive agreements. The parties first entered into the framework agreement rather than immediately agreeing to a definitive agreement because, in order for Mr. Tan to receive the deposit payment from Zhong Ping Capital in a timely manner, the principal terms of the transaction had to be agreed to as soon as possible. These principal terms were memorialized in the framework agreement. In addition, we believe that the transaction with Zhong Ping Capital will enable us to utilize Zhong Ping Capital's expertise and experience in the professional investment industry to strengthen our corporate profile and corporate governance as well as to diversify our shareholder composition.

        In January 2019, we, Mr. Tan, Ms. Zhou, the Yong Xiong Group and other parties entered into an amended and restated shares sale and purchase agreement with Zhong Ping Capital and Shanghai Hengxiong Enterprise Management Consulting Limited Partnership, an affiliate of Zhong Ping Capital, or Zhong Ping Vehicle, pursuant to which Zhong Ping Vehicle agreed to acquire 2,000,000 ordinary shares of YX Asset Recovery Limited from Mr. Tan with cash consideration of RMB300,000,000, representing 20% equity interest of YX Asset Recovery Limited immediately prior to the completion of this offering. In November 2018, Zhong Ping Vehicle and Mr. Tan entered into an equity transfer agreement, pursuant to which Zhong Ping Vehicle agreed to purchase a nominal 0.0001% equity interest of the Yong Xiong Group from Mr. Tan immediately prior to the completion of this offering. The purchase of 2,000,000 ordinary shares of YX Asset Recovery Limited and the purchase of nominal 0.0001% equity interest of the Yong Xiong Group by Zhong Ping vehicle are collectively referred to as the Zhong Ping Transactions. At the closing of the Zhong Ping Transactions, 2,000,000 ordinary shares of YX Asset Recovery Limited were re-designated as 2,000,000 series A convertible preferred shares or, Series A preferred shares, to Zhong Ping Vehicle.

        In January 2019, we, YX Management Holding Ltd., an entity wholly-owned by Mr. Tan, the Yong Xiong Group and other parties entered into an amended and restated share sale and purchase agreement with Changsha Lugu Hi-Tech Mobile Internet Venture Capital Co., Ltd., or Lugu, pursuant to which Lugu agreed to purchase, or designate its affiliate to acquire 60,000 ordinary shares of YX Asset Recovery Limited from YX Management Holding Ltd. with cash consideration of RMB9,000,000, representing 0.6% equity interest of YX Asset Recovery Limited immediately prior to the completion of this offering, or the Lugu Transaction. At the closing of the Lugu Transaction in March 2019, 60,000 ordinary shares of YX Asset Recovery Limited were re-designated as 60,000 Series A preferred shares to Lugu.

        In July 2019, we incorporated Zhuhai Yongxiong Information Technology Services Co., Ltd for the purpose of back office management and operation.

        In August 2019, we and Mr. Tan entered into a Series B preferred share purchase agreement with Rainflower Investments Limited, or Rainflower, which was subsequently amended and restated by the parties in October 2019. Pursuant to the Series B preferred share purchase agreement, we agreed to issue and Rainflower agreed to subscribe 100 redeemable convertible Series B preferred shares, or Series B preferred shares, of YX Asset

8


Table of Contents

Recovery Limited with cash consideration of USD15,000,000, which transaction we refer to as the Rainflower Transaction. Rainflower is a subsidiary of Avenue Capital Group, or Avenue. At the closing of the Rainflower Transaction, we issued 100 Series B preferred shares to Rainflower. Avenue is a seasoned strategic investor specialized in dealing in distressed debts. We believe our partnership with Avenue will create synergies through the leveraging of our expertise in collection of delinquent consumer receivables and Avenue's rich market experience in investment in distressed debt.

        In August 2019, we and Mr. Tan entered into a Series C preferred share purchase agreement with EP Next China Fund I, or EP Next China, which was subsequently amended and restated by the parties in October 2019. Pursuant to the Series C preferred share purchase agreement we agreed to issue and EP Next China agreed to subscribe 50 redeemable convertible Series C preferred shares, or Series C preferred shares, of YX Asset Recovery Limited with cash consideration of USD5,000,000 which transaction we refer to as the EP Next China Transaction. EP Next China is affiliated with Earnest Partner LLC, or Earnest. At the closing of the EP Next China Transaction, we issued 50 Series C preferred shares to EP Next China.

        Our founder, chairman and chief executive officer, Mr. Tan, is critical to our success. Therefore, we expect that Mr. Tan will maintain super-majority control over the outcome of matters that require shareholders' vote upon the completion of this offering. We will adopt a dual-class share structure immediately upon the completion of this offering by (i) converting all outstanding Series A preferred shares into 2,060,000 ordinary shares; (ii) re-designating all outstanding ordinary shares (other than ordinary shares held by YX Major Limited) into 8,500,000 Class A ordinary shares; (iii) re-designating all outstanding ordinary shares held by YX Major Limited into 1,500,000 Class B ordinary shares; and (iv) authorizing [    ·    ] Class A ordinary shares for the conversion of Series B preferred shares and Series C preferred shares, for more details regarding Series B and Series C conversion options, please see "Description of Share Capital—Series A, Series B and Series C preferential rights." The dual-class share structure will give disproportionate voting power to the Class B ordinary shares held by YX Major Limited, of which Mr. Tan is the sole shareholder and sole director. As a result, Mr. Tan may exercise          % of our aggregate voting power, and super-majority control over the outcome of matters that require shareholders' vote upon the completion of this offering.

9


Table of Contents

 

        The following diagram illustrates our corporate structure, including our principal subsidiaries and the VIE, upon the closing of this offering:

GRAPHIC


Notes:

(1)
Immediately following the completion of this offering, the shareholders of the Yong Xiong Group will be Mr. Tan, who holds 81.9999% of its equity interest, Hunan Yuxiong Enterprise Management Limited Partnership, which holds 15% of its equity interest, Ms. Zhou, who holds 3% of its equity interest, and Zhong Ping Vehicle, which holds 0.0001% of its equity interest.

(2)
We expect to de-register Hunan Yong Xiong Information Technology Services Co., Ltd. and Hunan Yong Xiong Intelligence Technology Co., Ltd. in due course.

Corporate Information

        Our principal executive offices are located at Xincheng Science and Technology Park Building 7, West Yuelu Road No. 588, Changsha 410205, Hunan Province, People's Republic of China. Our telephone number at this address is +86 731 81829999. Our registered office in the Cayman Islands is located at 4th Floor, Harbour Place, 103 South Church Street,

10


Table of Contents

P.O. Box 10240, Grand Cayman KY1-1002, Cayman Islands. Our agent for service of process in the United States is C T Corporation System, located at 111 Eighth Avenue, New York, NY 10011.

        Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is http://www.hnyongxiong.com/. The information contained on our website is not a part of this prospectus.

Implications of Being an Emerging Growth Company

        As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an "emerging growth company" pursuant to the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America's Surface Transportation Act of 2015), or the JOBS Act. As such, we may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of our internal control over financial reporting. Under the JOBS Act, we also do not need to comply with any new or revised financial accounting standards until the date that private companies are required to do so.

        We will remain an emerging growth company until the earliest of (i) the last day of our 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 completion of this offering; (iii) the date on which we have, during the previous three-year period, issued more than US$1.07 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 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.

Conventions Which Apply to this Prospectus

        Unless we indicate otherwise, all information in this prospectus assumes the underwriters do not exercise its option to purchase up to                   additional ADSs representing                  Class A ordinary shares from us.

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

    "ADSs" refers to American depositary shares, each of which represents                  Class A ordinary shares;

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

    "delinquent consumer receivables" refer to unpaid and past due financial obligations of consumers owed to credit originators, including commercial banks, online consumer finance companies and other financial service providers;

    "IP" refers to intellectual property;

    "IT" refers to information technology;

    "online loan" refers to any consumer credit loan originated by online consumer finance companies, typically the consumer finance departments of the largest internet companies in China with principal value of less than RMB10,000 (US$1,457);

11


Table of Contents

    "online receivables" refer to receivables of online loans;

    "our WFOE" or "our PRC subsidiary" refers to Hunan Yong Xiong Intelligence Technology Co., Ltd. a wholly-owned subsidiary of YX Services Limited in China, from November 8, 2018 to January 11, 2019, and Shanghai Yong Xiong Information Technology Services Co., Ltd., a wholly-owned subsidiary of YX Services Limited in China, from January 12, 2019 onwards;

    "RMB" and "Renminbi" refer to the legal currency of China;

    "shares" or "ordinary shares" prior to this offering refers to our Class A ordinary shares and Class B ordinary shares, par value $0.01 per share;

    "tertiary receivables" refer to credit card receivables that are typically more than 12 months past due or are charged-off and online receivables that are typically more than six months past due or are charged-off;

    "US$," "U.S. dollars," "$," and "dollars" refer to the legal currency of the United States;

    "we," "us," "our company" and "our" refer to YX Asset Recovery Limited, a Cayman Islands company, and its subsidiaries, and, in the context of describing our operations and consolidated financial information, also include its VIE in the PRC; and

    "Yong Xiong Group" refers to Hunan Yong Xiong Asset Management Group Co., Ltd.

        This prospectus contains information and statistics relating to China's economy and the industries in which we operate derived from various publications issued by market research companies and PRC regulatory entities, which have not been independently verified by us, the underwriters or any of their respective affiliates or advisers. The information in such sources may not be consistent with our internal operating data and other information compiled in or outside of China.

        All of our operations are conducted in China and all of our revenues are denominated in RMB. This prospectus contains conversion of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all conversion from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB6.8650 to US$1.00, the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on June 28, 2019. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On                           , 2019, the noon buying rate was RMB             to US$1.00.

12


Table of Contents

 

THE OFFERING

Offering price

  $             per ADS.

ADSs offered by us

 

             ADSs (or             ADSs if the underwriters exercises their option to purchase additional ADSs in full).

ADSs offered by the selling shareholders

 

             ADSs if the underwriters exercise their option to purchase additional ADSs in full.

ADSs to Class A ordinary share ratio

 

Each ADS represents the right to receive             Class A ordinary shares, par value $0.001 per share.

ADSs outstanding immediately after this offering

 

             ADSs (or             ADSs if the underwriters exercise their option to purchase additional ADSs representing Class A ordinary shares in full).

Ordinary shares outstanding immediately after this offering

 

             Class A ordinary shares (or             Class A ordinary shares if the underwriters exercise their option to purchase additional ADSs representing Class A ordinary shares in full) and 1,500,000 Class B ordinary shares.

The ADSs

 

Each ADS represents             Class A ordinary shares. The depositary will hold the Class A ordinary shares underlying your ADSs and you will have rights as provided in the deposit agreement.

 

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

 

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, 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.

Option to purchase additional ADSs

 

We [and the selling shareholders] have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an additional             ADSs.

13


Table of Contents

Use of proceeds

 

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

 

We plan to use 60% of the net proceeds we receive from this offering to enhance our delinquent consumer receivable collection operations and increase the number of our call centers, 30% to upgrade our technology and IT infrastructure, and the balance for working capital and other general corporate purposes. See "Use of Proceeds" for more information.

 

We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

New York Stock Exchange trading symbol

 

 

Depositary

 

The Bank of New York Mellon

Lock-up

 

[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. See "Shares Eligible for Future Sale" 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.

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

    assumes (i) conversion of all outstanding Series A preferred shares into 2,060,000 ordinary shares; (ii) re-designation of all outstanding ordinary shares (other than ordinary shares held by YX Major Limited) into 8,500,000 Class A ordinary shares; and (iii) re-designation of all outstanding ordinary shares held by YX Major Limited into 1,500,000 Class B ordinary shares, in each case immediately upon the completion of this offering;

    assumes no exercise of the underwriters' option to purchase additional ADSs representing Class A ordinary shares;

    excludes             Class A ordinary shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of US$             per share; and

    excludes             Class A ordinary shares reserved for future issuances under our equity incentive plans.

14


Table of Contents



SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

        The following summary consolidated statements of income data (other than US$ data) for the years ended December 31, 2016, 2017 and 2018, summary consolidated balance sheets data (other than US$ data) as of December 31, 2017 and 2018 and summary consolidated statements of cash flows data (other than US$ data) for the years ended December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this registration statement. Our summary consolidated balance sheets data as of December 31, 2016 have been derived from our audited consolidated financial statements not included in this registration statement. Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The following summary consolidated statements of income data (other than US$ data) for the six months ended June 30, 2018 and 2019, summary consolidated balance sheet data (other than US$ data) as of June 30, 2019 and summary consolidated statements of cash flows data (other than US$ data) for the six months ended June 30, 2018 and 2019 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our historical results are not necessarily indicative of results expected for future periods. 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.

 
  Year ended December 31,   Six months ended June 30,  
 
  2016   2017   2018   2018   2019  
 
  RMB   RMB   RMB   US$   RMB   RMB   US$  
 
  (in thousands)
 

Summary Consolidated Statements of Income Data

                                           

Revenues

    435,636     595,279     757,788     110,384     292,964     515,116     75,035  

Cost of revenues

    (244,109 )   (388,106 )   (519,414 )   (75,661 )   (200,056 )   (381,914 )   (55,632 )

Gross Profit

    191,527     207,173     238,374     34,723     92,908     133,202     19,403  

Net income

    97,649     109,569     124,005     18,063     47,444     32,331     4,710  

 

 
  As of December 31,    
   
 
 
  As of June 30,
2019
 
 
  2016   2017   2018  
 
  RMB   RMB   RMB   US$   RMB   US$  
 
  (in thousands)
   
 

Summary Consolidated Balance Sheets Data:

                                     

Cash

    45,003     44,830     61,806     9,003     93,464     13,615  

Accounts receivable

    91,819     105,110     250,591     36,503     247,535     36,058  

Amounts due from related parties

    45,695     117,594     14     2     177     26  

Total assets

    361,458     530,167     586,330     85,409     641,362     93,425  

Short-term bank loans, including current portion of long-term bank loan

    111,466     8,833     4,961     723     29,639     4,317  

Amounts due to related parties

    22,052     77,605                  

Long-term bank loan, excluding current portion

    34,908     30,275     25,314     3,687     22,703     3,307  

Total liabilities

    291,315     320,485     252,643     36,802     248,834     36,247  

Total equity / Total shareholders' equity

    70,143     209,682     333,687     48,607     392,528     57,178  

15


Table of Contents

 
  Year ended December 31,   Six months ended June 30,  
 
  2016   2017   2018   2018   2019  
 
  RMB   RMB   RMB   US$   RMB   RMB   US$  
 
  (in thousands)
 

Summary Consolidated Cash Flow Data:

                                           

Net cash provided by operating activities

    88,801     137,165     63,671     9,275     35,256     37,572     5,473  

Net cash used in investing activities

    (132,081 )   (105,797 )   (102,117 )   (14,875 )   (73,663 )   (23,072 )   (3,361 )

Net cash provided by (used in) financing activities

    80,303     (31,541 )   55,422     8,073     8,729     17,158     2,499  

Net increase (decrease) in cash

    37,023     (173 )   16,976     2,473     (29,678 )   31,658     4,612  

Cash at the beginning of the year/period

    7,980     45,003     44,830     6,530     44,830     61,806     9,003  

Cash at the end of the year/period

    45,003     44,830     61,806     9,003     15,152     93,464     13,615  

Non-GAAP Financial Measures

        We use adjusted net income and adjusted EBITDA, which are non-GAAP financial measures, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net income represents net income excluding share-based compensation expenses, and such adjustment has no impact on income tax.

        We believe that adjusted net income and adjusted EBITDA help identify underlying trends in our business that could otherwise be distorted by the effect of certain expenses that we include in net income. We believe that adjusted net income and adjusted EBITDA provide useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

        Adjusted net income and adjusted EBITDA should not be considered in isolation or construed as an alternative to net income or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measures to the most directly comparable GAAP measures. Adjusted net income and Adjusted EBITDA presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

16


Table of Contents

 
  Year ended December 31,   Six months ended June 30,  
 
  2016   2017   2018   2018   2018   2019   2019  
 
  RMB
  RMB
  RMB
  US$
  RMB
  RMB
  US$
 
 
  (In thousands)
 

Non-GAAP Financial Measures

                                           

Net income

    97,649     109,569     124,005     18,063     47,444     32,331     4,710  

Adjustments:

                                           

Share-based compensation

                        26,510     3,862  

Adjusted net income

    97,649     109,569     124,005     18,063     47,444     58,841     8,571  

Adjustments:

                                           

Interest expense

    8,439     12,609     2,475     361     1,251     1,463     213  

Income tax

    29,123     29,561     46,442     6,765     16,638     29,766     4,336  

Depreciation

    8,838     14,690     17,946     2,614     8,389     13,541     1,972  

Amortization

        416     624     91     312     312     45  

Adjusted EBITDA

    144,049     166,845     191,492     27,894     74,034     103,923     15,137  

Key Operating Data

        The following table presents our key operating data for the periods indicated:

 
  Year ended December 31,   Six months ended June 30,  
 
  2017   2018   2018   2018   2019   2019  
 
  RMB   RMB   US$   RMB   RMB   US$  
 
  (In thousands, except for percentage)
 

Monthly average delinquent consumer receivables under collection (MARC)

    14,951,372     29,634,997     4,316,824     21,408,583     46,253,518     6,737,585  

Total amount collected

    1,435,991     2,053,926     299,188     773,343     1,556,039     226,663  

Monthly average amount collected per collection specialist

    19.7     24.7     3.6     21.5     27.4     4.0  

Monthly average commission earned per collection specialist

    8.7     9.9     1.4     8.9     9.7     1.4  

Monthly weighted average collection rate

    0.69 %   0.60 %         0.54 %   0.56 %      

Effective commission rate

    44.3 %   39.8 %         41.2 %   35.3 %      

17


Table of Contents


RISK FACTORS

        You should carefully consider the risks described below in connection with reviewing this prospectus. If any of the events referred to below actually occurs, our business, financial condition, liquidity and results of operation could suffer. In that case, the trading price of the ADSs could decline and you may lose all or part of your investment. You should also refer to the other information in this prospectus, including our consolidated financial statements and the related notes.


Risks Related to Our Business

We may not be able to collect delinquent consumer receivables efficiently and a decline in our ability to collect delinquent consumer receivables could adversely affect our ability to generate revenues.

        The success of our business depends on our ability to collect delinquent consumer receivables efficiently. Our clients pay us a certain percentage of the total amount of delinquent consumer receivables collected as commission; the commission rates correlate strongly to our collection rates. Our operations have been profitable largely due to the fact that we have been able to collect these delinquent consumer receivables efficiently, and thus receive a relatively high commission rate. Our ability to collect delinquent consumer receivables and generate revenues may be adversely affected by the debtors' inability to repay in a bad economy, the quality of the receivables, or any problem with our operating portal. If we are unable to collect these delinquent consumer receivables efficiently in the future, our business, financial condition and results of operations could be significantly and adversely impacted.

Our operating margin will suffer if we are not able to maintain our commission, utilize our collection specialists and assets efficiently or maintain and improve the current mix of services that we deliver.

        Our operating margin is largely a function of the commission that we receive for our services, the efficient use of our technology, and the utilization of our collection specialists. Our business model is predicated on our ability to objectively quantify the value that we provide to our clients. If we fail to succeed on any of these objectives, we may experience a decline in our current operating margin.

        The commission we receive for our services, and our ability to manage our technology and collection specialists efficiently, are affected by a number of factors, including but not limited to:

    our clients' perceptions of our ability to add value through our services;

    our ability to negotiate on commercial terms with our clients;

    our ability to objectively differentiate and verify the value we offer to our clients;

    competition;

    introduction of new services by us or our competitors;

    cost of communication services;

    our ability to estimate demand for our services;

    our ability to control costs and improve the efficiency of our collection specialists; and

    general economic and political conditions, including Sino-American relations.

18


Table of Contents

        If we are not able to maintain our commission rates or utilize our collection specialists and assets efficiently, our results of operations may be adversely affected.

We operate a socially sensitive business. Public complaints against the delinquent consumer receivables recovery industry generally or against us in particular may result in increased regulatory risk, which may materially and adversely affect our business, financial condition and results of operations.

        The general public may have certain misconceptions about the receivables recovery industry, such as the perceived use of unlawful means to collect debts. Given the growth of collection service providers in China, the contentious nature associated with debt collection, the unpredictability of debtor behavior, and the inflow of small scale market participants with weak compliance protocols, the delinquent consumer receivables recovery industry is subject to potentially higher and unpredictable government scrutiny. Such development could subject our operations to regulatory restrictions, government investigations, administrative fines and increased compliance requirements. As a result, our business and our ability to generate revenues could be materially and adversely affected.

        Furthermore, negative publicity about our industry and business creates the possibility of heightened attention from the public, the media and government regulators. From time to time, complaints or allegations against us, regardless of their veracity, may result in negative publicity, which in turn could result in government inquiry or reputational harm. There is no assurance that we would not become a target for public scrutiny in the future or such scrutiny and public exposure would not severely damage our reputation as well as our business and prospects. Furthermore, we rely heavily on our reputation to develop and maintain client relationships. Commercial banks and online consumer finance companies may refuse to work with us if we suffer from a tarnished reputation, since any perceived or actual violation of laws and regulations by service providers could increase our clients' regulatory risks. As such, our business is particularly vulnerable to negative media coverage and negative publicity.

        In addition, our directors and management may become subject to scrutiny by the media and the public regarding our business, which may result in unverified, inaccurate or misleading information about our directors and management being reported by the press. Negative publicity about our directors or management, even if untrue or inaccurate, may harm our reputation.

        Debtors may file complaints, with or without merits, against our collection services with our clients or government regulatory agencies, in particular, China Banking and Insurance Regulatory Commission, or CBIRC and other commercial regulatory agencies, alleging improper conduct and violations of law. Major complaints may result in clients penalizing us monetarily, or clients suspending collection services of a certain geographic area. Since our inception, there have been three incidents where our collection services of certain geographic areas were suspended by the clients due in part to complaints filed by debtors. We have conducted internal investigations regarding each allegation in accordance with our policy and resume relationship with the clients. As of the date of this prospectus, we have either resumed service or expect to resume service soon in the particular geographic areas for each of the three clients. However, we cannot assure you that we will not be subject to other major complaints in the future, due to the contentious nature associated with debt collection and unpredictable debtor behavior.

19


Table of Contents

We may not be able to obtain sufficient delinquent consumer receivables for collection from our clients to sustain our business operations.

        We provide services to commercial banks and online consumer finance companies to collect the delinquent consumer receivables that our clients are not able to collect on their own or through other collection service providers. The fees that we receive for collecting these delinquent consumer receivables currently represent almost all of our revenues, and we expect this trend to continue in the future. To operate profitably, we must continuously receive a sufficient supply of delinquent consumer receivables for collection from our clients.

        The availability of delinquent consumer receivables for collection depends on a number of factors outside of our control, including the continued growth of consumer debts in China. The growth in consumer debts may be affected by commercial banks and online consumer finance companies underwriting criteria and government regulations with respect to consumer loans. Any slowing of the consumer debt growth could result in less credit being extended. Therefore, there can be no assurance that our existing or potential clients will continue to outsource their delinquent consumer receivables at recent levels or at all, or that we may be able to continue to offer competitive bids or services for delinquent consumer receivable collection.

        If we are unable to maintain, develop and expand our business or adapt to changing market needs as well as our current or future competitors are able to do, or if the amount of outsourced delinquent consumer receivables available in the market for collection decreases, we may not be able to obtain the same amount of delinquent consumer receivables for collection from our clients as we have in the past. As a result, we may not be able to generate the same level of revenues or profits to sustain our operations.

We are heavily dependent on several major clients.

        We provide receivables collection service to a number of commercial banks and online consumer finance companies. Historically our major clients varied from period to period. Our top five clients as measured by revenue generated during each period, in aggregate provided, 99.2%, 90.2% and 79.2% of our revenues in 2017, 2018 and the six months ended June 30, 2019, respectively. If our business relationships with any of these major clients deteriorate or terminate, or if our clients cease to operate due to legal, compliance or any other reasons, the total amount of delinquent consumer receivables that we receive for collection may decrease. As new client relationships are challenging and time-consuming to develop, any termination could significantly and adversely affect our business, financial condition and results of operations.

        As required by our business, we assign or delegate collection assignments to our branch companies, subsidiaries and affiliates from time to time. Such assignment and delegation may not be permissible under our contracts. In addition, we may be required to destroy certain debtor information or return it to our clients within the agreed time period. Our relationships with major clients may deteriorate and we may be involved in lawsuits if we breach contractual terms, such as any unauthorized assignment or delegation to our branch companies, subsidiaries and affiliates, or failure to fully comply with our contractual commitments to timely destroy or return debtor information.

20


Table of Contents

We are highly dependent on our telecommunications and IT systems, and an interruption or error in those systems could have an adverse effect on our business and results of operations.

        Our business is materially dependent on our proprietary operating portal and services provided by various telecommunications companies. Development and maintenance of our proprietary operating portal is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our operating portal from functioning properly and consequently adversely affect our information infrastructure and our business. If our equipment or systems cease to work or become unavailable, or if there is any significant interruption in telephone services, we may be prevented from providing services and collecting on delinquent consumer receivables. Our business also depends on the efficient and uninterrupted operation of our computer and communications systems. All of our computer hardware and our computing services are currently located in China. Although we have prepared for contingencies through redundancy measures and disaster recovery plans, such preparation may not be sufficient, and we currently do not carry business interruption insurance. Despite any precautions we may take, the occurrence of a natural disaster, such as an earthquake, flood or fire, or other unanticipated problems at our offices in China, including power outages, telecommunications delays or failures, break-ins to our systems or computer viruses, could result in delays or interruptions to our marketplaces and platforms, loss of our and debtors' data and business interruption for us. Any of these events could damage our reputation, significantly disrupt our operations and subject us to liability, which could materially and adversely affect our business, financial condition and results of operations.

Changes in fee arrangements in collection assignments upon renewal could adversely affect our ability to generate revenues.

        Our clients may change commercial terms upon the renewal of engagements, which may not be as favorable compared to those of the previous engagements due to reasons that are not in our control, such as new limitations imposed by the clients' internal budgets. The commercial terms subject to change may include the highest commission rate that could be paid under such agreement, or the highest commission rate, payment schedule and requirement for deposit payments. Since clients usually have the stronger bargaining power in negotiating these terms, we tend to accept their proposed terms. For example, in June 2016, we entered into a portfolio collection service agreement with a new client, which set the highest commission rate at 60%. We collected more receivables than the client's projection and the commission we were contracted to receive under such agreement exceeded the client's internal budgets to pay third-party service providers for such assignment. Therefore, the client reduced the highest commission rate in our next assignment from 60% to 45%. As a result, our ability to generate revenues and our profitability may be adversely affected by our clients' actions, which are beyond our control.

Our employees may violate our compliance policies, our clients' collection standards and government rules and regulations during the collection process.

        We have compliance policies to instruct and guide our employees' actions during the course of the collection process to comply with our clients' collection standards and government rules and regulations. However, our employees may not comply with our compliance policies and observe our clients' collection standards, and our employees may make verbal or written threats of physical harm, use vulgar or inappropriate language or

21


Table of Contents

agree to unauthorized repayment arrangements with debtors, among other actions, in order to increase the likelihood of collection.

        Furthermore, our employees may violate laws and regulations in the collection process. Our employees may use illegal tactics such as impersonation of government officials or fabricated documents to exert influence over debtors, and they may solicit debtor's personal information illegally, and sell debtor information to third parties for their personal financial gains.

        Although these are individual acts, violation of our compliance policies or our clients' standards may adversely affect our business, cause reputational damage, or result in monetary penalties or loss of business. If the violations are severe, our clients may terminate our services and cease cooperation with us in the future. For example, in June 2018, one of our major clients suspended our collection services in Anhui province due to alleged improper conduct by our employees. See "Business—Compliance and Quality Control—Complaints Against Our Service." In addition, the government may investigate our operations for potential violations of government rules and regulations, which may interrupt our normal operations, and we may be subject to administrative penalties such as monetary penalties or, in the most severe circumstances, suspension of our business.

We have a limited operating history and our historical financial and operating performance may not be indicative of our future results of operations.

        Our company only commenced our delinquent unsecured consumer receivables recovery business in 2015, although our founder and senior management have accumulated over 15 years of experience in the delinquent consumer receivables recovery industry. As such, we have a limited operating history for you to evaluate our business, financial performance and prospects. We derive substantially all of our revenues from our tertiary receivable collection service, which is a business model that has undergone, and continues to experience, rapid and dramatic changes. For the fiscal years ended December 31, 2017 and 2018 and the six months ended June 30, 2019, we generated revenues of RMB595.3 million, RMB757.8 million (US$110.4 million) and RMB515.1 million (US$75.0 million), respectively. As a result, we have very little operating history for you to evaluate in assessing our future prospects. We may not be able to achieve similar results or growth in future periods. Our business model may become obsolete due to development of other business models or technologies.

        We have primarily focused on the collection of credit card receivables for commercial banks but have started to provide more online receivables collection services since 2018. Although we currently focus our development on the associated consumer finance companies of the largest internet companies and commercial banks in China that provide online loans, this aspect of our business remains in the early stages of its development. Accordingly, we have a limited operating history in the collection of online receivables and we may not have the experience and resources to analyze and collect online receivables as we do with credit card receivables.

        The prospects of our online receivables collection operation must be considered in light of the risks and uncertainties accompanied with early business development. From 2017 to June 30, 2019, we have successfully collected RMB843.3 million of online receivables for our clients. Our limited operating history makes prediction of future performance difficult.

        You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. Our ability to maintain profitability primarily depends on many factors, including our ability to compete effectively in this market, our expertise in the collection of tertiary receivables, volume of

22


Table of Contents

receivables under collection, our clients' willingness to waive deposits, our reputation to collect receivables in a timely fashion, our relationships with clients, our technology and IT infrastructure, our ability to bid on charged-off debt portfolios at appropriate terms, our ability to manage debtor complaints, our successful development of collection business with online consumer finance companies, and our team of collection specialists who provide quality customer service and compliance with applicable laws and regulations. We may not be able to maintain such qualities or sustain profitability on an annual basis. Accordingly, you should not rely on our results of operations for any prior period as an indication of our future performance. We may not be able to effectively assess or address the evolving risks and difficulties present in the market, which could threaten our capacity to continue to operate successfully in the future. We have a very limited operating history and our prospects must be considered in light of the risks and uncertainties that face early-stage companies.

Our revenues would be adversely affected if our clients develop, use or adopt an alternative to our services.

        If our clients decide to develop their own receivables collection solution or platform internally or rely on their in-house collection team and other service providers, our business could be adversely affected. For example, our clients may require our collection specialists to sign into our clients' proprietary receivable collection system to access debtor information, instead of allowing us to use such information in our system. Since our success largely depends on our ability to use our advanced technology system to process successful collections, clients resorting to such alternate systems may eliminate our advantage. In addition, our clients may decide against the use of third party service providers altogether by relying on internal and proprietary resources, which could result in the reduction or loss of substantially all of our revenues.

We may not be able to manage our growth effectively.

        We expanded rapidly since our formation and intend to continue to expand our business in terms of market segment participation, regional presence and strategic partnerships. However, our growth will place significant demands on our resources, and we may not manage our growth effectively in the future. In order to successfully manage our growth, we need to:

    upgrade our administrative infrastructure to effectively oversee and manage the new business operations and regional offices;

    continue to improve our management, financial and information systems and controls to enable nation-wide support to all regional offices;

    provide comparable training and management to our current and new employees to meet the challenges entailed by the growth; and

    provide competitive compensation package, and adjust our operations to support our geographical expansion.

        Continued growth could place a strain on our management, operations and resources. We cannot assure you that our infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. If we cannot manage our growth effectively, our results of operations may be adversely affected.

23


Table of Contents

We may not be able to diversify our operations successfully.

        Our current operations focus on the collection of tertiary receivables. While our business has been profitable, the lack of business diversification makes us vulnerable to market volatility within this particular market segment. We may further expand our operation for the collection of fresh, primary and secondary delinquent consumer receivables as well as acquire delinquent consumer receivables for our own collection to diversify our operations.

        However, the primary and secondary delinquent consumer receivable market segments are highly competitive. As a new market participant, we may not compete successfully with the current market participants who have substantially longer operating histories and greater financial resources. There is no assurance that the strategy and methods we developed in the collection of tertiary receivables will be effective in the collection of fresh, primary and secondary delinquent consumer receivables. If we are not be able to offer competitive services, we may not be able obtain fresh, primary and secondary delinquent consumer receivables from potential clients.

        We have limited experience in the acquisition of delinquent consumer receivables for our own collection. The PRC government has not allowed the trading of credit card receivables. Even if the law changes and allows our entry into such business, there is no assurance that we will receive the required regulatory licenses to purchase credit card receivables. The success of any receivable acquisition business largely depends on the ability to price credit card receivables portfolios, and we may not have the appropriate expertise to price such portfolios. Although delinquent consumer receivables are generally purchased at a significant discount, the actual amount collected will vary. The actual amount collected may be less than the amount expected or may even be less than the purchase price paid for such consumer receivables. In addition, the timing or amounts to be collected on those consumer receivables cannot be assured. If cash flows from operations are less than anticipated as a result of our inability to collect these consumer receivables, we may have difficulties servicing our debt obligations and may not be able to purchase new delinquent consumer receivables for collection.

        Therefore, our efforts to diversify our business and venture into new market segments may prove unsuccessful, which could adversely affect our business, financial condition and results of operations.

We may not be successful in implementing our growth expansion strategy

        We had 34 offices in China as of June 30, 2019. We open new offices in order to attract local talent and to engage potential local clients.

        However, we had limited experience operating in cities and counties outside of Hunan province. We may face significant challenges to maintain our established standards, controls and policies in these regional offices, and we may not be able to integrate these regional offices into our established operations. In addition, there is no assurance that we will successfully hire local talent or obtain receivable collection service contracts from local clients. We also cannot predict the financial performance of these regional offices. Our management efficiency, business, financial condition and results of operations may be adversely impacted if our geographical expansion is unsuccessful, because of the upfront investments for our regional offices.

24


Table of Contents

Our senior management team is important to our continued success and the loss of one or more members of senior management could negatively affect our operations.

        Our success depends substantially on the expertise and experience of our executive officers, who have extensive skills in and knowledge about the consumer receivables management industry in China. They also have established relationships with our major clients and government regulators. We do not maintain key-man life insurance for any of our executive officers. The loss of services of any or all of our executive officers in the absence of suitable replacements could have a material adverse effect on our operations and future profitability.

        In addition, if any of our executive officers joins a competitor or forms a competing company, we may lose clients, research and development expertise and employees. We have employment agreements with Mr. Tan, our founder, chief executive officer and chairman of the board; Mr. Xiong Zhou, our executive vice president and Mr. Lei Li, our executive vice president, and most of our other senior executives. The current agreements contain covenants against competition that survive termination of employment. However, these agreements do not and will not assure the continued services of these senior executives, and we cannot assure you that covenants against competition will be enforceable. Our success depends on the continued service and performance of our executive officers, and we cannot guarantee that we will be able to retain those individuals. The loss of the services of Mr. Tan, Mr. Xiong Zhou, Mr. Lei Li or one or more of our other executive officers could seriously impair our ability to continue to collect delinquent consumer receivables efficiently and to manage and expand our business.

We may require additional financing in the future, and our operations could be curtailed if we are unable to obtain required additional financing when needed.

        We may need to obtain additional debt or equity financing to fund future business expansion and capital expenditures. While we do not anticipate seeking additional financing in the immediate future, the holders of our Series B preferred shares and Series C preferred shares may at any time prior to the 180th day after the effective date of this registration statement convert all or part of their outstanding preferred shares into Class A ordinary shares, and we may seek additional equity financing in the future, which may result in dilution to the holders of our outstanding shares of capital stock.

        The 100 Series B preferred shares owned by Rainflower may be converted to 389,610 Class A ordinary shares and the 50 Series C preferred shares owned by EP Next China may be converted to 129,870 Class A ordinary shares if our 2019 audited net earnings multiplied by 15 is more than US$385,000,000 at the time of the conversion or under certain other circumstances. If our 2019 audited net earnings multiplied by 15 is less than US$385,000,000 at the time of the conversion, holders of our Series B preferred shares and Series C preferred shares may be entitled to more Class A ordinary shares, but in no event will the total post-conversion shareholding percentage of the Series B preferred shareholder exceed 11.25% of the Company's pre-IPO total equity on a fully-diluted and as-converted basis and in no event will the total post-conversion shareholding percentage of the Series C preferred shareholder exceed 3.75% of the Company's pre-IPO total equity on a fully-diluted and as-converted basis. For more details regarding Series B and Series C conversion options, please see "Description of Share Capital—Series A, Series B and Series C preferential rights".

        Additional debt financing may restrict our business operations, including the following:

    limiting our ability to pay dividends or requiring us to seek consent for the payment of dividends;

25


Table of Contents

    increasing our vulnerability to general adverse economic and industry conditions;

    requiring us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and

    limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

        We cannot guarantee that we will be able to obtain additional financing on terms that are acceptable to us, or any financing at all.

Our failure to comply with government regulations could result in the suspension or termination of our business operations.

        The business scope indicated in the business licenses of the Yong Xiong Group and almost all our subsidiaries include, among others, activities in relation to the receivable collection business, such as services in relation to receivables management, and the collection business engaged by commercial banks and online consumer finance companies in connection with delinquent consumer receivables. We are required to operate within our registered business scope. As of the date of this prospectus, two of our subsidiaries engage in activities in relation to the receivable collection business, while their registered business scope do not cover corresponding items. These two subsidiaries may be deemed as operating beyond their registered business scope, which may subject us to fines or the suspension or even the cessation of operations. We do not directly derive any external revenue from the two subsidiaries, which mainly operate as our local operating centers. As of August 31, 2019, the two subsidiaries employed 208 full time collection specialists, which accounted for 2.1% among the total number of full time collection specialists employed by us. Relevant regulatory agencies may have the authority to recommend enforcement actions, confiscate illegal gains and impose monetary penalties on us if these agencies view our operations as exceeding such business scope. The regulatory agencies have the authority to investigate consumer complaints against debt collection companies like us and to recommend enforcement actions and impose monetary penalties. We may be routinely subjected regulatory investigations incidental to our business. Failure to comply with applicable laws and regulations could result in warnings, fines, confiscation of earnings, as well as the suspension or termination of our ability to conduct collections, which would materially adversely affect our business, financial condition and results of operations.

        See "Regulation—Regulation on Delinquent Consumer Receivables Recovery Service Providers". As of the date of this prospectus, we did not received any notice of administrative penalty decision from relevant government authorities in connection with such potential non-compliance. Currently, we are in the process of applying for the relevant alteration registration with the relevant local regulatory agencies in relation to the business scope of each of such two subsidiaries to cover receivables management services. we are also in the process to acquire a company engaging in similar business in the same place of which the business scope is in full compliance with the relevant laws and regulations, to replace such subsidiary.

We experience high employee turnover rates and we may not be able to hire and retain a sufficient number of well-trained employees to support our operations.

        The delinquent consumer receivables recovery industry in China is very labor intensive, and we typically experience a relatively high rate of employee turnover. Competition for talent in the recovery industry is intense, and the availability of suitable and qualified candidates in

26


Table of Contents

China is limited. We will need to continue to attract and retain experienced and capable personnel at all levels as we expand our business and operations. We compete for qualified personnel with companies in our industry and in other industries. Competition for these individuals could cause us to offer higher compensation and other benefits to attract and retain them. Even if we were to offer higher compensation and other benefits, there is no assurance that these individuals will choose to join or continue to work for us. Our growth requires that we continually hire and train new collection specialists. A higher turnover rate among our collection specialists will increase our recruiting and training costs and limit the number of experienced collection specialists available to service our delinquent consumer receivables. If this occurs, we would not be able to service our delinquent consumer receivables effectively, which could reduce our ability to continue our growth and maintain or improve profitability.

If we are not able to respond to technological advances in a timely manner, we may not remain competitive.

        Our success depends in a large part on our technology and IT infrastructure. We use these systems to identify, locate and contact large numbers of debtors and record the results of our collection efforts, as well as to provide customer service to our clients. If we are not able to respond to advances in telecommunications and computer technologies in a timely manner, we may not be able to remain competitive. We have made significant investments in technology to remain competitive and we anticipate that it will be necessary to continue to do so in the future. Telecommunications and computer technologies are changing rapidly and are characterized by short product life cycles, so we must anticipate technological developments. If we are not successful in anticipating, managing, or adopting technological changes on a timely basis or if we do not have the capital resources available to invest in new technologies, our business could be materially adversely affected.

Security and privacy breaches, and failure to comply with personal information protection laws and regulations could adversely affect our business, results of operations and financial condition.

        We collect, generate and process a large amount of personal data. Our databases contain our clients' customer data, including credit card information and other personal information. Any security or privacy breach of these databases could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our service. We face risks inherent in handling large volumes of data and in securing and protecting such data. For example, we face challenges protecting the data in our systems, including attacks on our system by external parties or fraudulent behavior by our employees.

        In addition, we are subject to various personal information protection laws and regulations in China, which regulate the data collection, storage, use, processing, disclosure and transfer of personal information. While we take measures to comply with all applicable personal information protection laws and regulations, we cannot guarantee the effectiveness of these measures. For example, during our skip tracing process, our collection specialist may utilize a series of online/offline search channels, and they may use illegal methods to solicit and collect debtor's personal information. Any failure or perceived failure to comply with any applicable personal information protection laws and regulations, or any failure or perceived failure of our employees to comply with our internal control measures may result in negative publicity, legal proceedings or regulatory actions against us. These results could damage our reputation, discourage current and potential clients from engaging our services and subject us to fines and government investigations, which could have a material adverse effect on our

27


Table of Contents

business, results of operations and financial condition. See "RegulationsRegulations on Personal Information Protection."

        Furthermore, the interpretation and application of personal information protection laws and regulations are uncertain and evolving. We cannot assure you that relevant governmental authorities will not interpret or implement the laws or regulations in ways that negatively affect us. In addition, we may become subject to additional laws and regulations that come into effect regarding the protection of personal information in connection with debtor information to which we have access. Compliance with these additional regulatory requirements could force us to incur substantial costs or require us to change our business practices. Any occurrence of the foregoing circumstances may negatively affect our business, results of operations and financial condition.

If we fail to maintain the requisite licenses or comply with the regulatory requirements under the complex regulatory environment applicable to our businesses in China, our business, financial condition and results of operations may be materially and adversely affected.

        We have obtained value-added telecommunications service licenses, or VATS licenses, for the provision of value-added telecommunication services. These licenses are generally subject to alteration registration and regular government review or renewal. Due to the change of ownership structure of our VIE, we are currently applying for alteration registration of the VATS license held by our VIE. If we fail to maintain or renew our VAT licenses, we may be unable to continue some of our business operations, which could materially and adversely affect our business, financial condition and results of operations. We cannot assure you that we can successfully maintain or renew these licenses in a timely manner in the future or that these licenses are sufficient to conduct all of our present or future business.

        In addition, the outsourced delinquent consumer receivables recovery industry is still at an early stage of development in China, compared to more mature markets such as that of the United States. The regulatory framework of our industry is unclear since the PRC government has not adopted regulations specifically regulating independent delinquent consumer receivables recovery service providers. See "—Regulation on Delinquent Consumer Receivables Recovery Service Providers." Our failure to comply with any new rules or regulations introduced may materially and adversely affect our business, financial condition, and results of operations.

We may be unable to protect our proprietary intellectual property rights from unauthorized use, such that our brand, reputation and business may be negatively impacted.

        Our protection of our intellectual property is crucial to our success and future growth, as we rely on a combination of patents, copyrights, trademarks and other rights to protect our know-how, proprietary technology, processes and other intellectual property. The protective measures we take may not be sufficient to prevent theft and unauthorized use. We may have to bring lengthy and costly litigation and take time-consuming measures in order to protect our intellectual property rights, diverting our management's attention from our business operation. Our brand, reputation and business may be negatively impacted by such measures and risks.

28


Table of Contents

Our senior management lacks experience in managing a public company and complying with laws applicable to operating as a U.S. public company domiciled in the Cayman Islands and failure to comply with such obligations could have a material adverse effect on our business.

        Prior to the completion of this offering, we operated as a private company located in the PRC. In the process of taking steps to prepare us for this offering, the Yong Xiong Group's senior management became the senior management of YX Asset Recovery Limited. Most of the senior management of YX Asset Recovery Limited does not have experience managing a publicly listed company or managing a Cayman Islands exempted company.

        As a result of this offering, we will become subject to laws, regulations and obligations that do not currently apply to us, and most of our senior management currently do not have experience in complying with such laws, regulations and obligations. The senior management is only experienced in operating the business of the Yong Xiong Group in compliance with Chinese laws. Similarly, by virtue of this offering, YX Asset Recovery Limited will be required to file reports in compliance with U.S. securities and other laws. These obligations can be burdensome and complicated, and failure to comply with such obligations could have a material adverse effect on us. In addition, we expect that the process of learning about such new obligations as a public company in the United States will require our senior management to devote time and resources to such efforts that might otherwise be spent on the operation of our business.

We have limited business insurance coverage. Any future business liability, disruption or litigation we experience might divert management focus from our business and could significantly impact our financial results.

        Availability of business insurance products and coverage in the PRC is limited, and most business insurance products are expensive in relation to the coverage offered. We have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurances on commercially reasonable terms make it impractical for us to maintain such insurance policies. As a result, we do not have any business liability, disruption or litigation insurance coverage for our operations in the PRC, and we have not made any reserve for these purposes. Accordingly, a business disruption, litigation or natural disaster may result in substantial costs and divert management's attention from our business, which would have an adverse effect on our results of operations and financial condition.

Certain data and information in this prospectus was obtained from external third parties and we have not independently verified such data and information.

        In this prospectus we have utilized data and information from external sources including various third parties comprising government sources and private entities such as industry consultant iResearch. Such external sources of statistical data include projections based on numerous assumptions. The performance of the overall industry and segment affects our business and the market price of our ADSs, especially if they fail to grow at the projected rate. Further, the new and constantly evolving environment of the industry and market results in significant uncertainties, and the projections or estimates about the growth of the market in which we operate in should be considered in this context. If any of the assumptions underlying the market data prove to be incorrect, discrepancies between the projections and actual results may emerge.

        We have not independently verified data and information obtained from third party external sources, and the method of collection and methodologies employed by such third parties may differ from ours. In addition, these industry reports and publications generally include a disclaimer that the information therein is believed to be reliable but which accuracy and completeness cannot be guaranteed.

29


Table of Contents

We rely on assumptions and estimates to calculate certain key operating metrics and inaccuracies in such metrics may harm our reputation and adversely affect our business.

        Certain key operating metrics in this prospectus are calculated using our internal data that have not been independently verified by third parties. While these numbers are based on what we believe to be reasonable calculations for the applicable periods of measurement, there are some challenges in measuring those metrics. In addition, our key operating metrics are derived and calculated based on different assumptions and estimates, and you should be cautious of such assumptions and estimates when assessing our operating performance.

        Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by our competitors due to differences in data availability, sources and methodology. If we discover material inaccuracies in our operating metrics, our reputation may be harmed and third parties may be less willing to allocate their resources or spending to us, which could adversely affect our business and operating results.

We may from time to time become party to litigation, other legal or administrative disputes, proceedings and investigations that may materially and adversely affect us.

        In the course of our ordinary business operations, we may become a party to litigation, legal proceedings, claims, disputes or arbitration proceedings from time to time. Any ongoing litigation, legal proceedings, claims, disputes or arbitration proceedings may distract our senior management's attention and consume our time and other resources. In addition, even if we ultimately succeed in such litigation, legal proceedings, claims, disputes or arbitration proceedings, there may be negative publicity attached to such litigation, legal proceedings, claims, disputes or arbitration proceedings, which may materially and adversely affect our reputation and brand names. In the case of an adverse verdict, we may be required to pay significant monetary damages, assume significant liabilities or suspend or terminate parts of our operations. As a result, our business, financial condition, results of operations and prospects may be materially and adversely affected.

        We are unable to predict all the risks and uncertainties that we face as a result of current economic, political, social and regulatory developments and many of these risks are beyond our control. All such factors may adversely affect our business and operations as well as our financial performance. For example, while China has a comprehensive set of laws, rules and regulations, the administration of economic affairs is also highly dependent on changes in national and regional policy, including the implementation of laws, rules and regulations. From time to time, particularly when certain activities are the target of greater policy scrutiny, key personnel of affected enterprises have had to respond to inquiries from Chinese regulatory authorities. The time and energy needed to respond to such inquiries may affect such persons' ability to devote full attention to their enterprises or, in extreme cases, step down from their roles. Resulting negative publicity from such inquiries, whether or not justified, may also have a negative effect on the results of operations of such enterprises.

Risks Related to Our Industry

Debtors may respond to our request for payment with unexpected reactions.

        Our primary method of collecting delinquent consumer receivables is to contact debtors by telephone, inform debtors about the disadvantages and potential consequences of having delinquent debts, and negotiate a payment plan with these debtors. However, debtors may not react to our requests for payments rationally. In certain extreme cases, debtors have threatened us with self-inflicted harm in an attempt to dissuade us from collection.

30


Table of Contents

        In addition, debtors have formed groups to strategize against collection service providers, including entrapment arrangements to induce collection specialists to violate compliance policies and laws and regulations. We are aware of the existence of certain online social media groups organized by debtors to strategize against collection activities, such as inducing collection specialists to use inappropriate language during the collection process and then recording such conversations as evidence against collection service providers in order to claim monetary damages or request reduction or cancellation of their debts.

        Debtors' actions are beyond our control. If any of their threats materializes, such threats may cause significant reputational damage to our operations and/or instigate a government investigation. Our clients may be discouraged from working with us due to the negative publicity caused by debtors' actions, which could result in an increase in staff turnover rates, a decrease in revenues and an adverse impact on our business, financial condition and results of operations. Government agencies may also initiate formal investigations as result of any materialized threats. Government agencies may detain our executives and employees and/or temporarily suspend or permanently shut down our business as part of the investigation. As of the date of this prospectus, government agencies have not initiated any investigation against us for violations during collection.

We operate in a highly competitive and fragmented market, and market competition could materially and adversely affect our business, financial condition and results of operations, and limit our ability to increase market share.

        We operate in a highly competitive and fragmented market and expect competition to persist or intensify in the future. We compete with other collection service providers primarily on industry reputation and expertise in the collection of tertiary receivables, technology and IT infrastructure, relationships with clients, the services of well-trained collection specialists and compliance with applicable collections laws. Some of our competitors may have greater financial, human and other resources, longer operating histories, greater technological expertise, more recognizable brand names and more established relationships than we do in the industries that we currently serve or may serve in the future. Some of our competitors may enter into strategic or commercial relationships among themselves or with larger, more established companies through cooperation, mergers or acquisitions, in order to increase their ability to address client needs. Increased competition, pricing pressure or loss of market share could reduce our operating margin, which could harm our business, results of operations and financial condition. Furthermore, our competitors may be able to develop or adopt new technologies faster than we can, or offer a broader range of services than we are presently able to offer.

        In addition, due to intense competition in our industry, we have been and may be the target of incomplete, inaccurate and false statements about our company that could damage our and our management's reputation and materially deter clients from working with us. Our ability to respond to our competitors' misleading marketing efforts may be limited by legal prohibitions on permissible public communications by us during our initial public offering process or during future periods.

31


Table of Contents


Risks Related to Our Corporate Structure

If the agreements that establish the structure for certain of our operations in China do not comply with PRC regulations, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

        Our operations involve value-added telecommunications services and, due to PRC restrictions or prohibitions on foreign ownership of value-added telecommunications businesses in China, we operate our business in China through the Yong Xiong Group, a PRC domestic entity, in which we have no direct ownership interest. See "Corporate History and Structure—Regulation on Foreign Investment in Value—Added Telecommunications Businesses." In November 2018, we, Hunan WFOE and other parties entered into a series of contractual arrangements with our VIE and its shareholders, which enable us to (i) exercise effective control over our VIE; (ii) receive substantially all of the economic benefits of our VIE; and (iii) hold an exclusive option to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC law. Due to operational reasons, we entered into a series of contractual arrangements with Shanghai WFOE, our VIE and other parties in January 2019, which superseded those entered into in November 2018. We have further amended and restated the contractual arrangements in March 2019 based on the change of the ownership structure of our VIE. These contractual arrangements contain the same terms and conditions as those entered into in November 2018, and continue to have the same effect on the relationship between our VIE and us. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIE and hence consolidate its financial results into our consolidated financial statements under U.S. GAAP. See "Corporate History and Structure" for further details.

        In the opinion of Zhong Lun Law Firm, our PRC legal counsel, (i) the ownership structure of our VIE in China and Shanghai WFOE, both currently and immediately after giving effect to this offering, complies with all existing PRC laws and regulations; and (ii) the contractual arrangements among our company, Shanghai WFOE, our VIE and each of the shareholders of our VIE, governed by PRC law, are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. Zhong Lung Law Firm is also of the opinion that (a) the ownership structure of our VIE in China and Hunan WFOE complied with all PRC laws and regulations then in effect from November 2018 to January 2019; and (b) the contractual arrangements among our company, Hunan WFOE, our VIE and each of the shareholders of our VIE, governed by PRC law, were valid, binding and enforceable, and did not result in any violation of PRC laws or regulations currently in effect. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or, if adopted, what they would provide. If we or our VIE 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, including:

    discontinuing or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIE;

    imposing fines, confiscating the income from our WFOE or our VIE, or imposing other requirements with which we or our VIE may not be able to comply;

32


Table of Contents

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

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

        The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our VIE in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIE or our right to receive substantially all the economic benefits and residual returns from our VIE and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us, would have a material adverse effect on our financial condition and results of operations.

We rely on contractual arrangements with our VIE and its shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect on our business and results of operations.

        We will rely on contractual arrangements with our VIE and its shareholders to conduct our businesses. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. For example, our VIE and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct its operations in an acceptable manner or taking other actions that are detrimental to our interests.

        If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIE, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we will rely on the performance by our VIE and its shareholders of their obligations under the contracts to exercise control over our VIE. However, the shareholders of our VIE may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with our VIE. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See "—Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business." Therefore, our contractual arrangements with our VIE may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

        In addition, we executed a financial support undertaking letter addressed to our VIE, pursuant to which we irrevocably undertake to provide unlimited financial support to our VIE to the extent permissible under the applicable PRC laws and regulations, regardless of

33


Table of Contents

whether our VIE has incurred an operational loss. We will not request repayment of any outstanding loans or borrowings from our VIE under any circumstances. See "Corporate History and Structure—Contractual Arrangements with the VIE and Its Shareholders—Financial Support Undertaking Letter". If our VIE continuously incurs operational loss, and if, consequently, our VIE continuously requires financial support from us, such financial support would have a material and adverse effect on our business.

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

        We refer to the shareholders of our VIE as its nominee shareholders because although they remain the holders of equity interests on record in our VIE, pursuant to the terms of the relevant power of attorney executed by them, each such shareholder will irrevocably authorize our WFOE to exercise his, her or its rights as a shareholder of the VIE. However, if our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may be limited in our ability to enforce the contractual arrangements that give us effective control, and if we are unable to maintain effective control, we may not be able to continue to consolidate the VIE's financial results with our financial results. Furthermore, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be granted under PRC law. For example, if the shareholders of our VIE refuse to transfer their equity interest in our VIE to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

        All of the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. See "—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us." Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer 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 our ability to conduct our business may be negatively affected.

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

        The shareholders of our VIE may have potential conflicts of interest with us. These shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing

34


Table of Contents

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

Contractual arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC VIE owe additional taxes, which could negatively affect our financial condition and the value of your investment.

        Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm's length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our WFOE's tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIE's tax liabilities increase or if it is required to pay late payment fees and other penalties.

We may lose the ability to use and enjoy assets held by our VIE that are material to the operation of a certain portion of our business if our VIE enters bankruptcy or becomes subject to a dissolution or liquidation proceeding.

        As part of our contractual arrangements with our VIE, our VIE and its subsidiaries hold certain assets that are material to the operation of certain portion of our business, including intellectual property and premise. If our VIE enters bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIE may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

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

        On March 15, 2019, the National People's Congress promulgated the Foreign Investment Law (the 'FIL'), which will come into effect on January 1, 2020 and replace the existing laws

35


Table of Contents

regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. See 'Regulation-Regulation on Foreign Investment.' However, since it is relatively new, uncertainties still exist in relation to interpretation and implementation of the FIL, especially with respect to, among other things, the nature of variable interest entities contractual arrangements, the promulgation schedule of both the "negative list" under the FIL, and specific rlues regulating the organization form of foreign-invested enterprises within the five-year transition period.

        The FIL does not explicitly classify whether variable interest entities controlled through contractual arrangements would be deemed as foreign-invested enterprises. Yet 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 rules of the State Council, which leaves leeway for future laws, administrative regulations or provisions of the State Council to stipulate 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 foreign investment in the future. In the event that any possible implementing regulations of the FIL, any other future laws, administrative regulations or provisions deem contractual arrangements as a way of foreign investment, or if any of our operations through contractual arrangements is classified in the 'restricted' or 'prohibited' industry in the future 'negative list' under the FIL, our contractual arrangements may be deemed invalid and illegal, and we may be required to unwind the variable interest entity contractual arrangements and/or dispose of any affected business, any of which may have a material adverse effect on our business and operations.

        Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. In addition, under FIL, foreign investors and foreign-invested enterprises will be subject to legal liabilities if they fail to report investment information in accordance with the FIL. The FIL also provides that foreign-invested enterprises established according to the existing laws regulating foreign investment may maintain their structure and corporate governance within a five-year transition period. We may be required to adjust the structure and corporate governance of certain of our PRC subsidiaries in such transition period. 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, corporate governance and business operations.


Risks Related to doing Business in China

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

        All of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures

36


Table of Contents

emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China's economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

        Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results. In addition to adverse changes in economic policies and conditions, the Chinese government may implement policies and regulations to address prevalent social issues especially during critical times (such as important national anniversaries, major holidays and other dates of cultural importance). Such policy changes and campaigns may adversely affect our business operations and financial performance.

Our revenues may be materially and adversely affected by any economic slowdown in China as well as globally.

        The success of our business ultimately depends on consumer spending. We derive all of our revenues from China. As a result, our revenues and net income are impacted to a significant extent by economic conditions in China and globally. The global economy, markets and levels of consumer spending are influenced by many factors beyond our control, including consumer perception of current and future economic conditions, political uncertainty, levels of employment, inflation or deflation, real disposable income, interest rates, taxation and currency exchange rates.

        The PRC government has in recent years implemented a number of measures to control the rate of economic growth, including by raising interest rates and adjusting deposit reserve ratios for commercial banks as well as by implementing other measures designed to tighten credit and liquidity. These measures have contributed to a slowdown of the PRC economy. According to the National Bureau of Statistics of China, in the second quarter of 2018, China's GDP growth rate was 6.7%. Any continuing or worsening slowdown could significantly reduce domestic commerce in China. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China or any other market in which we may operate could have a material adverse effect on our business, financial condition and results of operations.

        Recently, the United States imposed significant tariffs on certain Chinese-made products. The PRC has in turn imposed tariffs against certain U.S. products in response to U.S. tariffs. Continued trade tensions between the U.S. and China may ultimately have an adverse effect on the global or Chinese economy, which in turn may affect our business.

37


Table of Contents

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

        The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules involves uncertainties.

        In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this annual report based on foreign laws.

        We are an exempted company incorporated under the laws of the Cayman Islands, and we conduct all of our operations in China and all of our assets are located in China. In addition, most of our senior executive officers reside within China for a significant portion of the time, and most are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who reside and whose assets are located outside the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

        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. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. 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 laws 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.

38


Table of Contents

We may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us and any tax we are required to pay could have a material and adverse effect on our ability to conduct our business.

        We are a Cayman Islands holding company, and we may rely on dividends and other distributions on equity from our PRC subsidiary, which in turn depend on the service fees paid to our PRC subsidiary, for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and for services of any debt we may incur. We currently, and expect that we will, in the near future, derive substantially all of our revenues from our VIE, subject to future business plans. However, this does not mean that we are able to have unfettered access to our PRC subsidiary's and VIE's revenues due to PRC legal restrictions on the payment of dividends by PRC companies, foreign exchange control restrictions, and restrictions on foreign investment, among others. Our subsidiaries' ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiary to pay dividends to its shareholders only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, both of our PRC subsidiary and our VIE are required to set aside at least 10% of their after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entities in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. These reserves are not distributable as cash dividends. If our PRC subsidiary incurs debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiary to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

        In response to the persistent capital outflow and RMB's depreciation against U.S. dollar in the fourth quarter of 2016, the People's Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the People's Bank of China issued the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB Loans Provided by Domestic Enterprises, or the PBOC Circular 306, on November 29, 2016, which provides that offshore RMB loans provided by a domestic enterprise to its offshore holding enterprises cannot exceed 30% of the domestic enterprise's ownership interest in the offshore enterprise. The PBOC Circular 306 may constrain our PRC subsidiary's ability to provide offshore loans to us. The PRC government may continue to strengthen its capital controls and our PRC subsidiary's dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also "—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders."

        Under the Enterprise Income Tax Law of the PRC and related regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise, such as our PRC subsidiary, to any of its foreign non-resident enterprise investors, and proceeds from any such foreign enterprise investor's disposition of assets (after deducting the net value of such assets)

39


Table of Contents

are subject to a 10% withholding tax, unless the foreign enterprise investor's jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Undistributed profits earned by foreign-invested enterprises prior to January 1, 2008 are exempted from any withholding tax. Hong Kong has a tax arrangement with China that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and be a "beneficial owner" of the dividends. For example, YX Services Limited, which directly owns our PRC subsidiary is incorporated in Hong Kong. However, if YX Services Limited is not considered to be the beneficial owner of dividends paid to it by our PRC subsidiary under the tax circulars promulgated in April, 2018, such dividends would be subject to withholding tax at a rate of 10%. If our PRC subsidiary declares and distributes profits to us, such payments will be subject to withholding tax, which will increase our tax liability and reduce the amount of cash available to our company.

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

        Any funds we transfer to our PRC subsidiary, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration or filing with relevant governmental authorities in China. According to the relevant PRC regulations on FIEs, in China, capital contributions to our PRC subsidiary are subject to filing with the Ministry of Commerce, or ("the MOFCOM") in its foreign investment comprehensive management information system and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by our PRC subsidiary and VIE is required to be registered with the SAFE or its local branches or filed with SAFE in its information system, and (b) each of our PRC subsidiary and VIE may not procure loans which exceed the difference between its registered capital and its total investment amount as recorded in the foreign investment comprehensive management information system or, as an alternative, only procure loans subject to the Risk-Weighted Approach and the Net Asset Limits. See "Regulation—Regulations on Foreign Exchange." Any medium or long term loan to be provided by us to our VIE must also be approved by the National Department and Reform Commission, or ("NDRC"). We may not obtain these government approvals or complete such registrations or filings on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiary and VIE. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there is no statutory limit on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for their initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant filing and registration procedures. With respect to loans to the PRC subsidiary by us, (i) if the relevant PRC subsidiary adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt mechanism, the outstanding amount of the loans cannot exceed the difference between the total investment and the registered capital of the PRC subsidiary and there is, in effect, no statutory limit on the amount of loans that we can

40


Table of Contents

make to our PRC subsidiary under this circumstance because we can increase the registered capital of our PRC subsidiary by making capital contributions to them, subject to the completion of the required registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiary adopt the foreign exchange administration mechanism as provided in the PBOC Notice No. 9, or the Notice No. 9 Foreign Debt mechanism, the risk-weighted outstanding amount of the loans, which is calculated based on the formula provided in the PBOC Notice No. 9, cannot exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiary. Currently, our PRC subsidiary has the flexibility to choose between the Current Foreign Debt mechanism and the Notice No. 9 Foreign Debt mechanism before it submits information on the conclusion of the cross-border financing contract for record-filing for the first time. However, if the Notice No. 9 Foreign Debt Mechanism, or a more stringent foreign debt mechanism becomes mandatory and our PRC subsidiary is no longer able to choose the Current Foreign Debt mechanism, our ability to provide loans to our PRC subsidiary or our VIE may be significantly limited, which may adversely affect our business, financial condition and results of operations.

        In 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142. SAFE Circular 142 regulates the conversion by FIEs of foreign currency into Renminbi by restricting the usage of converted Renminbi. SAFE Circular 142 provides that any Renminbi capital converted from registered capitals in foreign currency of FIEs may only be used for purposes within the business scopes approved by PRC governmental authority and such Renminbi capital may not be used for equity investments within China unless otherwise permitted by the PRC law. In addition, the SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from registered capital in foreign currency of FIEs. The use of such Renminbi capital may not be changed without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. On April 8, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date. SAFE further promulgated Circular 16, effective on June 9, 2016, which, among other things, amended certain provisions of Circular 19. SAFE Circulars 19 and 16 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from this offering within the business scopes of our PRC subsidiary. SAFE Circular 19 and 16 may significantly limit our ability to transfer to and use in China the net proceeds from this offering, which may adversely affect our business, financial condition and results of operations.

41


Table of Contents

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

        The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China's foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund, or IMF, completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. As of August 23, 2019, the RMB was valued at RMB7.0928 against the U.S. dollar.

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

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

Our use of some leased properties could be challenged by third parties or governmental authorities, which may cause interruptions to our business operations.

        As of the date of this prospectus, some of the lessors of our properties leased by us in China have not provided us with their property ownership certificates or any other documentation proving their right to lease those properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the relevant governmental authorities, our leases could be invalidated. If this occurs, we may have to renegotiate the leases with the owners or other parties who have the right to lease the properties, and the terms of the new leases may be less favorable

42


Table of Contents

to us. Although we may seek damages from such lessors, such leases may be void and we may be forced to relocate. We can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties' challenges on our use of such properties. As a result, our business, financial condition and results of operations may be materially and adversely affected.

        In addition, a substantial portion of our leasehold interests in leased properties have not been registered with the relevant PRC governmental authorities as required by relevant PRC laws. The failure to register leasehold interests may expose us to potential warnings and penalties up to RMB10,000 per unregistered leased property.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of operations.

        Under the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees or separately, to pay the social insurance premiums and housing funds for their employees. If we fail to make adequate social insurance and housing fund contributions, we may be subject to fines and legal sanctions, and our business, financial condition and results of operations may be adversely affected.

        These laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.

Our failure to make sufficient statutory social welfare payments for our employees could materially and adversely affect our business, financial condition, results of operations and prospects.

        PRC laws and regulations require us to pay several statutory social welfare benefits for our employees, including medical care insurance, occupational injury insurance, unemployment insurance, maternity insurance, pension benefits and housing fund contributions. While we believe we have made adequate provision in our audited consolidated financial statements for any outstanding amounts that are not paid or withheld, our failure to make payments may be in violation of the applicable PRC laws and regulations and we may be subject to fines and penalties. According to the applicable PRC laws and regulations, employers failing to make any of these social welfare benefit payments may be ordered by the government to rectify the noncompliance and make the required payments. Failure to make social insurance premium payments may also subject employers to a late fee of up to 0.2% or 0.05%, as the case may be, of the amount overdue per day from the original due date, by a stipulated deadline after they receive written notice from the authorities. If the payment is not made by the stipulated deadline after the employer receives written notice from the authorities in the case of any of the insurance and pension benefit premium described above, the employer may be assessed by the relevant government authority for fines of up to three times the amount of any under-reported obligation of the employer. An application may be made to the relevant government authority for deduction of the overdue amount from the employer's bank account or to a local court for compulsory enforcement of any of these payment obligations and an employee is entitled to compensation if the

43


Table of Contents

employer fails to make payments due for social welfare benefits. Late charges, penalties or legal or administrative proceedings to which we may be subject could materially and adversely affect our reputation, financial condition, results of operations and prospects.

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

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

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

        The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident's Investment and Financing and Round-trip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents or entities' legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. In February 2015, the SAFE promulgated the Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound direct investments, including those required under SAFE Circular 37, must be filed with qualified banks instead of the SAFE. Qualified banks should examine the applications and accept registrations under the supervision of the SAFE.

44


Table of Contents

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

        We have notified all PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange registrations. In November 2018, Mr. Tan, our chief executive officer and chairman of the board, and Ms. Zhou, our shareholder, both PRC residents, completed the foreign exchange registrations under the relevant PRC laws.

        However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary's ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

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.

        Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who will be granted share-based awards by us, may follow the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company or the 2012 SAFE Notices, promulgated by the SAFE in 2012. Pursuant to the 2012 SAFE Notices, 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 subsidiary 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, our directors, our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who will be granted share-based awards will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines 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

45


Table of Contents

our directors, executive officers and employees under PRC law. See "Regulation—Regulations on Employee Share Options."

        The State Administration of Taxation, or 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 subsidiary has 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 governmental authorities. See "Regulation—Regulations on Employee Share Options."

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

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

        We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body." If the PRC tax authorities determine that YX Asset Recovery Limited is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares at a rate of 10%, if such income is treated as sourced from within the PRC. Furthermore, if PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, dividends

46


Table of Contents

paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us), if such gains are deemed to be from PRC sources. These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of YX Asset Recovery Limited would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that YX Asset Recovery Limited is treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.

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

        On December 10, 2009, the SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, with retroactive effect from January 1, 2008, to December 1, 2017. Pursuant to SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, should report to the relevant tax authority of the PRC resident enterprise this Indirect Transfer.

        On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a "substance over form" principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

        On October 17, 2017, the SAT released Public Notice Regarding Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, with effect from December 1, 2017. SAT Public Notice 37 replaced a series of important circulars, including but not limited to SAT Circular 698, and revised the rules governing the administration of withholding tax on China-source income derived by the non-resident enterprise. SAT Public Notice 37 provided certain key changes to the current withholding regime, such as (i) the withholding obligation for non-resident enterprise deriving dividend

47


Table of Contents

arises on the day the payment is actually made rather than on the day of the resolution to declare the dividends; (ii) the provision that non-resident enterprise should self-report tax within seven days if their withholding agents fail to withhold any or sufficient tax is removed.

        We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring and sale of the shares in our offshore subsidiaries and investments. Our company may be subject to withholding obligations if our company is a transferee in such transactions under SAT Public Notice 37 and SAT Public Notice 7. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be required to expend valuable resources to comply with SAT Public Notice 37 and SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars. Our expending of such resources may affect our ability to deploy adequate resources to the operation of our business, which may have an adverse effect on our financial condition and results of operations.

Several of our business premises are not in full compliance with the PRC fire safety regulations.

        According to the PRC fire safety laws and regulations, construction projects are generally required to complete fire safety filings or inspections. See "Regulation—Regulation on Fire Safety." As of the date of this prospectus, several of our business premises have not completed the required fire safety filings and may not be in full compliance with relevant laws and regulations. Based on our discussion with the relevant goverment authorities, we believe that the risk that we will be subjected to material administrative penalties imposed by local fire control authorities for our failure to comply with the fire safety laws and regulations is relatively low. However, we cannot assure you that we may be able to complete the fire safety filings, rectify our non-compliance or otherwise fully comply with the relevant fire safety laws and regulations at all of our current premises in a timely manner or at all, and we may be subject to fines and orders to rectify within a specified period of time or to suspend operations for our non-compliance. As a result, we may not be able to occupy certain of our current premises and may be ordered to relocate our operations to other locations that comply with the relevant fire safety laws and regulations, and we cannot assure you that such alternative locations will be available on commercially reasonable terms or at all, which could materially and adversely affect our business, results of operations and financial conditions.

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

        Our independent registered public accounting firm that issues the audit report included in our prospectus filed with the U.S. Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

        Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of

48


Table of Contents

PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

        The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted by the SEC against five PRC-based 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 Chinese affiliates of the "big four" accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland 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 China Securities Regulatory Commission, or CSRC.

        In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against five Chinese-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC's rules and regulations thereunder by failing to provide to the SEC the firms' work papers related to their audits of certain China-based companies that are publicly traded in the U.S. Rule 102(e)(1)(iii) grants the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. Four of these China-based accounting firms appealed to the SEC against this decision and, on February 6, 2015, each of the four China-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The firms' ability to continue to serve all their respective customers is not affected by the settlement. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms' audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The settlement did not require the firms to admit to any violation of law and preserves the firms' legal defenses in the event the administrative proceeding is restarted.

        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 the PRC, which could result in financial statements being determined to not 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 ordinary shares may be adversely affected.

49


Table of Contents

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

Our failure to comply with the U.S. Foreign Corrupt Practices Act, or the FCPA, and other anticorruption laws could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects.

        After the completion of this offering, we will be subject to the FCPA, which prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anticorruption laws. We are in the process of implementing policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject. Such policies or procedures may not work effectively or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. As we market and offer our services to increasing numbers of state-owned enterprises, we will have frequent contact with persons who may be considered "foreign officials" under the FCPA, resulting in an elevated risk of potential FCPA violations. Any investigation of a potential violation of the FCPA or other anticorruption laws by the United States or foreign authorities could have an adverse impact on our reputation, and if we are not in compliance with the FCPA and other laws governing the conduct of business with government entities, we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our reputation, business, financial condition, results of operations and prospects.

        Our extensive and growing operations in the PRC may give rise to elevated compliance risks on anti-bribery. In recent years, commercial bribery has increasingly been identified as a key risk in doing business in the PRC. If PRC regulatory authorities determine that our marketing or other activity violates the anti-bribery or anti-corruption laws, we may be penalized or ordered to cease such activity, which could have an adverse impact on our business.


Risks Related to the ADSs and this Offering

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

        The ADSs have been approved for listing on the New York Stock Exchange. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for the ADSs or our ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for the ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected. The initial public offering price for the ADSs will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of the ADSs after this offering will not decline below the initial public offering price. As a

50


Table of Contents

result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading price of 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 multiple factors, some of which are 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:

    regulatory developments affecting us or our industry;

    variations in our revenues, operating costs and expenses, earnings and cash flow;

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

    announcements of new offerings, solutions and expansions by us or our competitors;

    changes in financial estimates by securities analysts;

    detrimental adverse publicity about us, our services, our employees, our content offerings, our business model or our industry;

    additions or departures of key personnel;

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

    potential litigation or regulatory investigations.

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

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

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding 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 our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose

51


Table of Contents

visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline.

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

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

Our proposed dual-class voting structure will enable Mr. Tan to exercise decisive control over matters requiring a super-majority of shareholders' vote, 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 the ADSs may view as beneficial.

        Our authorized and issued ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering (with a third class of undesignated shares authorized but not issued). 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 10 votes per share. We will issue Class A ordinary shares represented by ADSs in this offering. All of the outstanding ordinary shares, either directly or indirectly, held by YX Major Limited or its affiliates as of the date of this prospectus will be automatically converted into Class B ordinary shares immediately prior to the completion of this offering. All other ordinary shares or Series A preferred shares that are outstanding as of the date of this prospectus will be automatically re-designated or converted into Class A ordinary shares immediately prior to the completion of this offering. We intend to maintain the dual-class voting structure after the completion of this offering.

        Due to the disparate voting powers attached to these two classes of ordinary shares, Mr. Tan will beneficially own approximately         % of our total issued and outstanding ordinary shares on an as-converted basis and         % of the voting power of our outstanding shares immediately after this offering, assuming no exercise of the underwriters' option to purchase additional ADSs. Therefore, immediately following the completion of this offering and as long as YX Major Limited maintains Class B ordinary shares representing no less than          

52


Table of Contents

% of our outstanding shares, Mr. Tan will control the outcome of matters requiring a super-majority of shareholders' vote, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. In addition, Mr. Tan will have the ability to unilaterally amend our organizational and corporate governance documents. 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.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of 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 ADSs as a source for any future dividend income.

        Our board of directors has complete discretion as to whether to distribute dividends. 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 ADSs. There is no guarantee that 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 ADSs and you may even lose your entire investment in ADSs.

The approval of the CSRC may be required in connection with this offering under PRC law.

        The M&A Rules, which were adopted in 2006 by six PRC regulatory agencies, including the CSRC, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

        Our PRC counsel, Zhong Lun Law Firm, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on New York Stock Exchange because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation, (ii) our wholly owned PRC subsidiary were established by foreign direct investment, rather than through a merger or acquisition of a domestic company as defined under the M&A Rules and (iii) no explicit provision in the M&A Rules classifies the respective contractual arrangements among our PRC subsidiary, the VIE and their shareholders as a type of acquisition transaction falling under the M&A Rules.

        However, we cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel, and hence we may face

53


Table of Contents

regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

Our 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 the fourth amended and restated memorandum and articles of association that will become effective upon the completion of this offering. Our new 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, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

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

        We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Cayman Islands Companies Law (as amended) and the common law. The Cayman Islands has not codified the common law duties of directors. The general authority of our directors to conduct the business of the company is set out in our memorandum and articles of association. In addition the Cayman Islands Courts have also generally adopted the English common law principles relating to directors' duties. Where loss has been suffered by the company, the general principle is that the directors' duties are owed to the company and not to its individual shareholders. As a matter of Cayman Islands' law, a shareholder may commence a derivative action in the name of the company against the director(s) in breach of duties. If that claim is defended, the shareholder would then need to make an application to the Cayman Islands Court for leave to continue the action. There are material differences between the

54


Table of Contents

rights available to shareholders under Cayman Islands laws as opposed to the laws of jurisdictions in the United States. By way of example, the Cayman Islands has a less developed body of securities laws than the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States although a derivative action may be available to shareholders in the Cayman Islands Court.

        Under the laws of some jurisdictions in the United States, such as Delaware corporate law, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and void. Therefore, conduct that may give rise to an oppression claim in other jurisdictions may give rise to a breach of fiduciary duty claim in Delaware.

        On the contrary, a controlling shareholder does not owe any fiduciary duties to a company and its minority shareholders under Cayman Islands law. Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies, which are protections available for shareholders of a Delaware company. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not 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, your ability to protect your interest as a minority shareholder may be limited compared to that of a shareholder of a Delaware company.

        Certain corporate governance practices in the Cayman Islands, which is our home jurisdiction, differ from requirements for companies incorporated in other jurisdictions such as the United States. For a discussion of differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see "Description of Share Capital—Differences in Corporate Law."

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

        We are a Cayman Islands company and all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. 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."

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

        As a holder of ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the

55


Table of Contents

depositary. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days' prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

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

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

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

        Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary should 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 our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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 United States domestic public companies.

        Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are

56


Table of Contents

applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) 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 (iv) 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 through press releases, distributed pursuant to the rules and regulations of 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, which would be made available to you, were you investing in a U.S. domestic issuer.

        In addition, as a foreign private issuer whose securities are listed on the New York Stock Exchange, we are permitted to follow certain home country corporate governance practices in lieu of the requirements of the New York Stock Exchange Rules pursuant to New York Stock Exchange Rule 303A.00, which provides for such exemption to compliance with the provisions of New York Stock Exchange Rule 303A. We intend to rely on the exemption available to foreign private issuers for the requirement that an audit committee be comprised of at least three members under New York Stock Exchange Rule 303A.07. We are not required to and will not voluntarily meet this requirement. As a result of our use of the "foreign private issuer" exemptions, our investors will not have the same protection afforded to shareholders of companies that are subject to all of New York Stock Exchange's corporate governance requirements.

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

        We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

We are a controlled company within the meaning of the New York Stock Exchange Rules and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

        We are a "controlled company" as defined under the New York Stock Exchange Rule because Mr. Tan beneficially owns more than 50% of our total voting power. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including:

    an exemption from the rule that a majority of our board of directors must be independent directors;

57


Table of Contents

    an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and

    an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.

        As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.

        Before this offering, we were a private company of limited resources. Our internal controls and procedures, especially over financial reporting, may not be able to sufficiently identify any material weaknesses and control deficiencies that could lead to inaccuracies in our financial statements. Our ability to comply with applicable financial reporting requirements and regulatory filings in a timely manner may be impaired. Our independent registered public accounting firm has not conducted an attestation of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of and for the fiscal years ended December 31, 2017 and 2018, we and our independent registered public accounting firm identified one material weakness as of December 31, 2018. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

        The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel to formalize and implement key controls over financial reporting process and to prepare, review and report financial information 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. We and they are required to do so only after we become a public company. 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 control weaknesses may have been identified.

        Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act. Section 404 of this Act will require that we include a report of 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, 2020. However, as an emerging growth company as defined in the JOBS Act, we may choose to not comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act as to the effectiveness of our internal controls over financial reporting until such time that we cease to be an emerging growth company, although we will still be required to implement and maintain internal control over financial reporting and include the management assessment in our annual reports under Section 404. To comply with Section 404, we may incur substantial costs, expend significant management time on compliance-related issues and hire additional accounting, financial and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with

58


Table of Contents

the requirements of Section 404 in a timely manner or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results, and cause a decline in the price of our ADSs.

        During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. 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. 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. We may also be required to restate our financial statements from prior periods.

We will incur additional costs as a result of being a public company.

        Upon completion of this offering, we will become a public company and expect to incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and New York Stock Exchange, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. We expect these rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

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

        A non-U.S. corporation, such as our company, will be considered a passive foreign investment company, or "PFIC," for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. The value of our assets may be determined by reference to the market price of the ADSs and ordinary shares, which may fluctuate considerably. In addition, because there are uncertainties in the application of the relevant rules and because PFIC status is a fact-intensive determination made on an annual basis, no

59


Table of Contents

assurance can be given with respect to our PFIC status for the current or any future taxable year.

        Based on our current and expected income and assets (taking into account the expected cash proceeds and our anticipated market capitalization following this offering), we do not presently expect to be a PFIC for the current taxable year or the foreseeable future. However, given the lack of authority and the highly factual nature of the analyses, no assurance can be given in this regard. Fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of our ADSs. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. In addition, because there are uncertainties in the application of the relevant rules, it is possible that the Internal Revenue Service, or IRS, may challenge our classification of certain income and assets as non-passive or our valuation of our tangible and intangible assets, each of which may result in our becoming a PFIC for the current or subsequent taxable years. Furthermore, we may also be a PFIC if we were not treated as the owner of our VIE for U.S. tax purposes.

        If we were treated as a PFIC for any taxable year during which a U.S. investor held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply to the U.S. Holder. See "Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations."

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

        The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, 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 non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.

        If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought

60


Table of Contents

against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

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

61


Table of Contents


LETTER FROM OUR CHAIRMAN

Bridging Borrowers and Lenders with Reclaimed Credibility

        Ever since our establishment, it has been our mission to institutionalize a transparent consumer credit recovery industry by helping borrowers regain their credit. We also complement established financial institutions in China in the recovery of credit risks. As the biggest consumer debt restructuring specialist in China, we focus on long-dated consumer delinquencies which are often charged off from our customers' balance sheets. While we represent seven of the 10 largest banks in China, and some of the most prominent online lenders by China's largest internet giants, we are no adversary to delinquent borrowers as we help them substantially. Our work assists these borrowers in reducing their debt loads, improving their credit profiles, and restoring their access to credit, and, as a result, regaining their lost confidence. We essentially act as debt restructuring advisors between credit originators and their borrowers to provide debt solutions, including debt reductions, installment plans, and deferred repayments. We have run an agency model and do not purchase the underlying assets.

        Consumer debt restructuring is a relatively new industry in China. Over the past five years, our biggest achievement has been infrastructure establishment. Through many trials and errors, we have built a proprietary IT analytics and a workflow system, and attracted, nurtured, and retained a team of expert negotiators who understand the delicate balance between debt collection while demonstrating knowledge and willingness to work with the debtors for a win-win outcome.

        Additionally, we have built, and continued to strengthen our relationships and trust with major lenders. Our track record in providing quality customer service and compliance with applicable laws, regulations, and our clients' internal policies is among the best in the industry. We have the largest market share and outstanding collection performance compared to our peers in the industry, especially in the long-dated segment.

        Our scalability lies in three factors. First, the accumulation of debt collection expertise. Second, the optimization of our proprietary IT analytics and workflows, and, finally, in the improvement in the infrastructure of our industry, such as data availability and quality. China's Central Bank's Credit Bureau will continue to grow in size and sophistication, while the newly established Baihang Credit Bureau (with the participation of e-commerce giants such as Alibaba and Tencent) will capture non-bank financial activities to further encourage a sound credit system. Meanwhile, with the anticipated gradual opening up of China's banking and credit card industry to foreign players, YX, being an industry leader and a US-listed company, will be poised to reap the benefits, and become the partner of choice for both domestic and foreign financial institutions.

        We aim to further increase our market share in the next five years. We believe that banks, under pressure to minimize loan losses in an efficient and compliant manner, must optimize their debt collection process by means of, among others, limiting the number of their mass debt collection agents. We expect YX to benefit from these trends.

        Last but not least, I have made a personal donation to set up the Credit Risk Management Institute of Xiangtan University, the first institution of its kind in the country. I also provide scholarships to Chinese students in a partnership program with Tulane University. We took the lead by working with our peers, clients, and industry experts to facilitate the establishment of an industry association. We hope to yield results through conducting academic research, learning lessons from the best global practices, and training more professional talent.

62


Table of Contents

Through these efforts, we strive to contribute in our mission to institutionalize and professionalize the industry, as well as China's social construction of credibility.

 

By:

 

GRAPHIC

      Name:   Man Tan

      Title:   Chief Executive Officer and Chairman of the Board

63


Table of Contents


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that 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 these forward-looking statements by words or phrases such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe," "likely to" or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

    our goals and strategies;

    relevant government policies and regulations relating to our industry;

    our ability to retain and increase the amount of receivables for collection and our clients, and expand our service offerings;

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

    expected changes in our revenues, costs or expenditures;

    our expectation regarding the use of proceeds from this offering;

    competition in our industry;

    general economic and business conditions globally and in China; and

    assumptions underlying or related to any of the foregoing.

        You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

        You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

        This prospectus contains certain data and information that we obtained from various government and private publications, including certain statistical data and estimates from an industry report commissioned by us and prepared by iResearch, an independent market research firm. This information involves a number of assumptions, estimates and limitations. These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Nothing in such data should be construed as advice. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The delinquent consumer receivable

64


Table of Contents

recovery market in China may not grow at the rate projected by market data, or at all. Failure to grow at the projected rate may have a material and adverse effect on our business and the market price of our ADSs. In addition, the rapid evolution of technology, and constantly changing environment in China may result in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of the delinquent consumer receivable recovery industry. 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.

65


Table of Contents


USE OF PROCEEDS

        We estimate that we will receive net proceeds from this offering of approximately US$              million, or approximately US$              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 of US$              million.

        The primary purposes of this offering are to expand our operations, attract, retain and motivate talented employees by providing them with equity incentives, and obtain additional capital. We intend to use the proceeds we receive from this offering as follows:

    approximately US$              million, or 60% of the net proceeds to expand our operations and the capacity of our operating centers;

    approximately US$              million, or 30% of the net proceeds to upgrade our technology and IT infrastructure; and

    the balance, approximately US$              million, or 10% of the net proceeds, for working capital and other general corporate purposes.

        The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. The amounts and timing of any expenditure will vary depending on the amount of cash generated by our operations, and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds differently than as described in this prospectus.

        In utilizing the proceeds of this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiary only through loans or capital contributions. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiary or make additional capital contributions to our PRC subsidiary to fund its capital expenditures or working capital. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there is no statutory limit on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for its initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant filing and registration procedures.

        With respect to loans to the PRC subsidiary we may provide, PRC law provides two mechanisms that regulate the maximum amount of loans we may make to our PRC subsidiary. We believe the maximum amount of loans that we are currently allowed to make to our WFOE could be the higher amount calculated pursuant to such mechanisms. Under the traditional foreign exchange administration mechanism, the outstanding amount of the loans should not exceed the difference between the total investment and the registered capital of the PRC subsidiary, while under the foreign exchange administration mechanism as provided in the PBOC Notice No. 9, the risk-weighted outstanding amount of the loans should not exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. Currently, the maximum amount of loans we may make to our WFOE under the traditional foreign exchange administration mechanism is US$5 million, being the difference between the total investment

66


Table of Contents

and registered capital of our PRC subsidiary as of                   2019. However, such maximum amount and the difference may increase as the total investment and the registered capital of our PRC subsidiary increase, subject to the completion of relevant registrations. Under the foreign exchange administration mechanism, the maximum amount of loans we may make to our WFOE as of                    2019 is US$             , being 200% of the net asset of our WFOE. Comparing the results under these two mechanisms, we believe all of the net offering proceeds currently would be available for use in our PRC operations via loans to our PRC subsidiary. However, it is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiary, 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 regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business." It is likely that we will need to convert some of our net proceeds in U.S. dollars into Renminbi in order to use as proceeds as contemplated in this section. For details of PRC regulations governing foreign currency conversion, see "Regulation—Regulations on Foreign Exchange."

        Pending use of the net proceeds, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.

        We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

67


Table of Contents


DIVIDEND POLICY

        Our board of directors has complete discretion on whether to distribute dividends. Even if our board of directors decides 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 to operate and expand our business.

        We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiary in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See "Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us and any tax we are required to pay could have a material and adverse effect on our ability to conduct our business."

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

68


Table of Contents


CAPITALIZATION

        The following table sets forth our capitalization, defined as our long-term bank loan, excluding current portion and total equity, as of June 30, 2019:

    on an actual basis;

    on a pro forma basis to reflect (i) the automatic conversion of Series A preferred shares into 2,060,000 ordinary shares; (ii) the re-designation of ordinary shares held by holders other than YX Major Limited into 8,500,000 Class A ordinary shares; and (iii) the re-designation of ordinary shares held by YX Major Limited into 1,500,000 Class B ordinary shares, in each case immediately prior to the completion of this offering; and

    a pro forma as adjusted basis to reflect (i) the automatic conversion of Series A preferred shares into 2,060,000 ordinary shares; (ii) the re-designation of ordinary shares held by holders other than YX Major Limited into 8,500,000 Class A ordinary shares; and (iii) the re-designation of ordinary shares held by YX Major Limited into 1,500,000 Class B ordinary shares, in each case immediately prior to the completion of this offering; and (iv) the issuance and sale of                   Class A ordinary shares in the form of ADSs by us in this offering at the initial public offering price of US$             per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses of RMB                  (US$             ) payable by us, assuming the underwriters do not exercise the 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." In addition, the holders of our Series B preferred shares and Series C preferred shares may at any time prior to the the 180th day after the effective date of this registration statement convert all or part of their outstanding preferred shares into Class A ordinary shares. For more details, please see

69


Table of Contents

"Description of Share Capital—Series A, Series B and Series C Preferential Rights—Conversion Options."

 
  As of June 30, 2019,  
 
  Actual   Pro forma   Pro forma
as adjusted
 
 
  (RMB in thousands)
 

Non-Current Liabilities

                   

Long-term bank loan, excluding current portion

    22,703     22,703        

Equity:

                   

Class A ordinary shares (US$0.001 par value; [·] shares authorized, 8,500,000 shares issued and outstanding)

        59        

Class B ordinary shares (US$0.001 par value; 1,500,000 shares authorized, 1,500,000 shares issued and outstanding)

        10        

Ordinary Shares (US$0.001 par value; 97,940,000 shares authorized, 7,940,000 shares issued and outstanding as of June 30, 2019, respectively)

    55            

Series A Convertible Preferred shares ("Series A preferred shares") (US$0.001 par value; 2,060,000 shares authorized, issued and outstanding as of June 30, 2019, respectively)

    14            

Subscription receivable

    (69 )   (69 )      

Additional paid-in capital

    104,436     104,436        

Retained earnings

    288,092     288,092        

Total shareholders' equity

    392,528     392,528        

Total capitalization (1)

    415,231     415,231        

(1)
Total capitalization equals the sum of long-term bank loan, excluding current portion, and total shareholders' equity.

70


Table of Contents


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 June 30, 2019 was US$57.2 million, or US$             per ordinary share and US$             per ADS. We did not have intangible assets as of                  , therefore, our net tangible book value represents the amount of our total assets, less the amount of our total liabilities. 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, from the initial public offering price of US$             per ordinary share, which is set forth on the cover page of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all ordinary shares.

        Without taking into account any other changes in net tangible book value after                  , other than to give effect to (i) the automatic conversion of Series A preferred shares into 2,060,000 ordinary shares; (ii) the re-designation of ordinary shares held by holders other than YX Major Limited into 8,500,000 Class A ordinary shares; (iii) the re-designation of ordinary shares held by YX Major Limited into 1,500,000 Class B ordinary shares, in each case immediately prior to the completion of this offering, and (iv) our issuance and sale of                  ADSs, representing                  Class A ordinary shares, offered in this offering at the initial public offering price of US$             per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of                   would have been US$              million, or US$             per ordinary share and US$             per ADS. This represents an immediate increase in net tangible book value of US$              per ordinary share and US$             per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             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$             US$            

Net tangible book value as of

  US$             US$            

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

  US$             US$            

Pro forma as adjusted net tangible book value after giving effect to the conversion of our preferred shares and this offering

  US$             US$            

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

  US$             US$            

71


Table of Contents

        The following table summarizes, on a pro forma as adjusted basis as of         , the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us in this offering, 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 granted to the underwriters to purchase additional ADSs.

 
  Ordinary Shares
Purchased
  Total
Consideration
   
   
 
 
  Average
Price Per
Ordinary
Share
   
 
 
  Average
Price Per
ADS
 
 
  Number   %   Amount   %  
 
  (in millions of US$, except number of shares and percentages)
 

Existing shareholders

                          US$     US$    

New investors

                          US$     US$    

Total

          100.0           100.0              

        The pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing. In addition, the holders of our Series B preferred shares and Series C preferred shares may at any time prior to the 180th day after the effective date of this registration statement convert all or part of their outstanding preferred shares into Class A ordinary shares, which may further dilute our net tangible value. For more details, please see "Description of Share Capital—Series A, Series B and Series C Preferential Rights—Conversion Options."

72


Table of Contents


EXCHANGE RATE INFORMATION

        All of our operations are conducted in China and all of our revenues are denominated in RMB. This prospectus contains conversion of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all conversion from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB6.8650 to US$1.00, the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on June 28, 2019. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On                           , 2019, the noon buying rate was RMB             to US$1.00.

        The following table sets forth, for the periods indicated, information concerning exchange rates between the Renminbi and the U.S. dollar based on the noon buying rate in New York City as certified for customs purposes by the Federal Reserve Bank of New York. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.

 
  Noon Buying Rate  
 
  Period End   Average (1)   High   Low  
 
  (RMB per US$1.00)
 

Period

                         

2013

    6.0537     6.1412     6.2438     6.0537  

2014

    6.2046     6.1704     6.2591     6.0402  

2015

    6.4778     6.2869     6.4896     6.1870  

2016

    6.9430     6.6549     6.9580     6.4480  

2017

    6.5063     6.7350     6.9575     6.4773  

2018

    6.8755     6.6090     6.9737     6.2649  

2019

                         

March

    6.7112     6.7119     6.7381     6.6912  

April

    6.7347     6.7161     6.7418     6.6870  

May

    6.9027     6.8519     6.9182     6.7319  

June

    6.8650     6.8977     6.9298     6.8510  

July

    6.8833     6.8775     6.8927     6.8487  

August

    7.1543     7.0629     7.1628     6.8972  

September

    7.1218     7.1119     7.1786     7.0659  

October (through October [25], 2019)

    7.0647     7.1050     7.1473     7.0624  

Note:

(1)
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

73


Table of Contents


ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

        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 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:

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

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

        We have appointed C T Corporation System, located at 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

        We have been advised by Walkers (Hong Kong), our counsel as to Cayman Islands law, that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that there is uncertainty as to whether a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability provisions, whether or not predicated solely upon the U.S. federal securities laws, would be enforceable in the Cayman Islands. This uncertainty relates to whether such a judgment would be determined by the courts of the Cayman Islands to be penal or punitive in nature. We have also been advised by Walkers (Hong Kong) that, notwithstanding the above, a final and conclusive judgment obtained in U.S. federal or state courts under which a definite sum of money is payable as compensatory damages and not in respect of laws that are penal in nature (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) will be recognized and enforced in the courts of the Cayman Islands at common law, without any

74


Table of Contents

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:

    the court that gave the judgment was competent to hear the action in accordance with private international law principles as applied by the courts in the Cayman Islands and the parties subject to such judgment either submitted to such jurisdiction or were resident or carrying on business within such jurisdiction and were duly served with process;

    the judgment given by the foreign court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations;

    the judgment was final and conclusive and for a liquidated sum;

    the judgment was not obtained by fraud; and

    the judgment was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or public policy in the Cayman Islands.

        A Cayman Islands court may impose civil liability on us or our directors or officers in a suit brought in the Grand Court of the Cayman Islands against us or these persons with respect to a violation of U.S. federal securities laws, provided that the facts surrounding any violation constitute or give rise to a cause of action under Cayman Islands law.

PRC

        Zhong Lun Law Firm, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of China would:

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

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

        Zhong Lun Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law and relevant civil procedure requirements in China. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the jurisdiction where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in the PRC for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit.

75


Table of Contents

        It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC 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 ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

76


Table of Contents


CORPORATE HISTORY AND STRUCTURE

Corporate History

        In April 2014, Ms. Zhou established Yong Xiong Investment with other shareholders. In July 2015, Mr. Tan purchased 94% and 3% equity interests of Yong Xiong Investment from Ms. Zhou and another shareholder, respectively. Upon the completion of such share purchase, Mr. Tan and Ms. Zhou held 97% and 3% equity interest in Yong Xiong Investment, respectively. Yong Xiong Investment was renamed the Yong Xiong Group in 2015.

        Beginning in August 2018, we began our restructuring in contemplation of this offering. Under the restructuring:

    Incorporation of the listing entity.    In August 2018, we incorporated YX Asset Recovery Limited under the laws of the Cayman Islands as our offshore holding company to facilitate financing and an offshore listing.

    Incorporation of British Virgin Islands holding company, Hong Kong holding company and WFOE.    In August 2018, YX Asset Recovery Limited established a wholly-owned subsidiary in the British Virgin Islands named YX International Holding Ltd. In September 2018, YX International Holding Ltd established a wholly-owned subsidiary in Hong Kong named YX Services Limited. In November 2018, YX Services Limited established Hunan WFOE in China, which we will de-register in                  2019. In January 2019, YX Services Limited established a wholly-owned subsidiary in China named Shanghai Yong Xiong Information Technology Services Co., Ltd, or Shanghai WFOE. For the avoidance of doubt, we refer to Hunan WFOE as our WFOE from November 8, 2018 to January 11, 2019, and we refer to Shanghai WFOE as our WFOE from January 12, 2019 onwards.

    Contractual arrangements.    Our operations involve value-added telecommunications services. Due to PRC restrictions or prohibitions on foreign ownership of value-added telecommunications businesses in China, we operate our business in China through the Yong Xiong Group, a PRC domestic entity, in which we have no direct ownership interest. In November 2018, we, Hunan WFOE and other parties entered into a series of contractual arrangements with the Yong Xiong Group, which we refer to as our VIE in this prospectus, and its respective shareholders. These contractual arrangements enable us to exercise effective control over our VIE, receive substantially all of the economic benefits of our VIE, and have the exclusive option to purchase all or part of the equity interests in and assets of our VIE to the extent permitted by PRC law. Due to operational reasons, we entered into a series of contractual arrangements with Shanghai WFOE, our VIE and other parties in January 2019, which superseded those entered into in November 2018. We have further amended and restated the contractual arrangements in March 2019 based on the change of the ownership structure of our VIE. These contractual arrangements contain the same terms and conditions as those entered into in November 2018, and continue to have the same effect on the relationship between our VIE and us. For more details, please see "—Contractual Arrangements with the VIE and Its Shareholders."

        As a result of our restructuring and the VIE contractual arrangements, we are the primary beneficiary of our VIE, and we treat the Yong Xiong Group and its subsidiaries as our consolidated variable interest entities under U.S. GAAP. We rely on dividends and other distributions paid to us by our WFOE, which in turn depends on the service fees that our VIE pays to our WFOE. The amount of dividends we will collect from our WFOE depends on our dividend policy. We do not expect to collect any dividend from our WFOE in the foreseeable

77


Table of Contents

future because we do not expect to pay any dividend to our shareholders. For more details, please see "Dividend Policy." Our WFOE will collect service fees from our VIE pursuant to the VIE contractual arrangements, according to which our VIE should pay service fees to our WFOE after our VIE reserves funds for reasonable profits and costs. Our WFOE has the right to make discretionary determination on the amount of service fees to be collected from our VIE. We currently, and expect that we will, in the near future, derive substantially all of our revenues from our VIE, subject to future business plans. However, we do not have unfettered access to our WFOE's and VIE's revenues due to PRC legal restrictions on the payment of dividends by PRC companies, foreign exchange control restrictions, and the restrictions on foreign investment, among others. For more details and risks related to our variable interest entity structure, please see "Risk Factors—Risks Related to Our Corporate Structure." We have consolidated the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

        In August 2018, Mr. Tan, Ms. Zhou, the Yong Xiong Group, and other related parties entered into a framework agreement with Zhong Ping Capital to set forth the commercial arrangements among the parties, pending execution of definitive agreements. The parties first entered into the framework agreement rather than immediately agreeing to a definitive agreement because, in order for Mr. Tan to receive the deposit payment from Zhong Ping Capital in a timely manner, the principal terms of the transaction had to be agreed to as soon as possible. These principal terms were memorialized in the framework agreement. In addition, we believe that the transaction with Zhong Ping Capital will enable us to utilize Zhong Ping Capital's expertise and experience in the professional investment industry to strengthen our corporate profile and corporate governance as well as to diversify our shareholder composition.

        In January 2019, we, Mr. Tan, Ms. Zhou, the Yong Xiong Group and other parties entered into an amended and restated shares sale and purchase agreement with Zhong Ping Capital and Zhong Ping Vehicle, pursuant to which Zhong Ping Vehicle agreed to acquire 2,000,000 ordinary shares of YX Asset Recovery Limited from Mr. Tan with cash consideration of RMB300,000,000, representing 20% equity interest of YX Asset Recovery Limited from Mr. Tan immediately prior to the completion of this offering. In November 2018, Zhong Ping Vehicle and Mr. Tan entered into an equity transfer agreement, pursuant to which Zhong Ping Vehicle agreed to purchase a nominal 0.0001% equity interest of the Yong Xiong Group from Mr. Tan immediately prior to the completion of this offering. The purchase of 2,000,000 ordinary shares of YX Asset Recovery Limited and the purchase of nominal 0.0001% equity interest of the Yong Xiong Group by Zhong Ping Vechicle are collectively referred to as the Zhong Ping Transactions. At the closing of the Zhong Ping Transactions, 2,000,000 ordinary shares of YX Asset Recovery Limited were re-designated as 2,000,000 Series A preferred shares to Zhong Ping Vehicle.

        In January 2019, we, YX Management Holding Ltd., an entity wholly-owned by Mr. Tan, the Yong Xiong Group and other parties entered into an amended and restated share sale and purchase agreement with Lugu, pursuant to which Lugu agreed to purchase, or designate its affiliate to acquire 60,000 ordinary shares of YX Asset Recovery Limited from YX Management Holding Ltd. with cash consideration of RMB9,000,000 representing 0.6% equity interest of YX Asset Recovery Limited from YX Management Holding Ltd immediately prior to the completion of this offering, or the Lugu Transaction. At the closing of the Lugu Transaction in March 2019, 60,000 ordinary shares of YX Asset Recovery Limited were re-designated as 60,000 Series A preferred shares to Lugu.

        In July 2019, we incorporated Zhuhai Yongxiong Information Technology Services Co., Ltd. for the purpose of back office management and operation.

78


Table of Contents

        In August 2019, we and Mr. Tan entered into a Series B preferred shares purchase agreement with Rainflower Investments Limited, or Rainflower, which was subsequently amended and restated by the parties in October 2019. Pursuant to the Series B preferred share purchase agreement, we agreed to issue and Rainflower agreed to subscribe 100 redeemable convertible Series B preferred shares, or Series B preferred shares, of YX Asset Recovery Limited with cash consideration of USD15,000,000, which transaction we refer to as the Rainflower Transaction. Rainflower is a subsidiary of Avenue Capital Group. At the closing of the Rainflower Transaction, we issued 100 Series B preferred shares to Rainflower. Avenue is a seasoned strategic investor specialized in dealing in distressed debts. We believe our partnership with Avenue will create synergies through the leveraging of our expertise in collection of delinquent consumer receivables and Avenue's rich market experience in investment in distressed debt.

        In August 2019, we and Mr. Tan entered into a Series C preferred share purchase agreement with EP Next China Fund I, or EP Next China, which was subsequently amended and restated by the parties in October 2019. Pursuant to the Series C preferred share purchase agreement, we agreed to issue and EP Next China agreed to subscribe 50 redeemable convertible Series C preferred shares, or Series C preferred shares, of YX Asset Recovery Limited with cash consideration of USD5,000,000 which transaction we refer to as the EP Next China Transaction. EP Next China is affiliated with Earnest Partner LLC, or Earnest. At the closing of the EP Next China Transaction, we issued 50 Series C preferred shares to EP Next China.

79


Table of Contents

Corporate Structure

        The following diagram illustrates our corporate structure, including our principal subsidiaries and the VIE, upon the closing of this offering:

GRAPHIC


Notes:

(1)
Immediately following the completion of this offering, the shareholders of the Yong Xiong Group will be Mr. Tan, who holds 81.9999% of its equity interest, Hunan Yuxiong Enterprise Management Limited Partnership, which holds 15% of its equity interest, Ms. Zhou, who holds 3% of its equity interest, and Zhong Ping Vehicle, which holds 0.0001% of its equity interest.

(2)
We expect to de-register Hunan Yong Xiong Information Technology Services Co., Ltd. and Hunan Yong Xiong Intelligence Technology Co., Ltd. in due course.

Contractual Arrangements with the VIE and Its Shareholders

        Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications businesses, we currently conduct our business operations through our

80


Table of Contents

VIE, which we effectively control through a series of contractual arrangements. These contractual arrangements allow us to:

    exercise effective control over our VIE;

    receive substantially all of the economic benefits of our VIE; and

    have an exclusive option to purchase all or part of the equity interests in our VIE when and to the extent permitted by PRC law.

        As a result of these contractual arrangements, we are the primary beneficiary of our VIE. We have consolidated our VIE's financial results in our consolidated financial statements in accordance with U.S. GAAP.

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

Agreements that provide us with effective control over our VIE

        Shareholder Voting Proxy Agreement and Powers of Attorney.    Our WFOE, our VIE and each of the shareholders of our VIE entered into a Shareholder Voting Proxy Agreement, pursuant to which each of the shareholders of our VIE executed a power of attorney to irrevocably authorize our WFOE or any person designated by our WFOE to act as their attorney-in-fact to exercise all of their rights as a shareholder of our VIE, including, but not limited to, the right to convene and attend shareholders' meetings, vote on any resolution that requires a shareholder vote, such as the appointment and removal of directors, supervisors and officers, as well as the sale, transfer, pledge and disposal of all or part of the equity interests owned by such shareholder. The power of attorney will remain effective until the termination of the Shareholder Voting Proxy Agreement unless otherwise instructed by our WFOE.

        Equity Pledge Agreement.    Our WFOE, our VIE and each of the shareholders of our VIE entered into an Equity Pledge Agreement, pursuant to which the shareholders of our VIE agreed to pledge 100% equity interests of our VIE to our WFOE to guarantee the performance by the shareholders of their obligations under the contractual arrangements including the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement and the Equity Pledge Agreement, as well as the performance by our VIE of its obligations under the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement, the Exclusive Consultation and Service Agreement and the Equity Pledge Agreement. We completed the registration of all the equity pledges with relevant regulatory authorities in accordance with the PRC Property Rights Law. In the event of a breach by our VIE or any shareholder of contractual obligations under the Equity Pledge Agreement, our WFOE, as pledgee, has the right to dispose of the pledged equity interests in our VIE and has priority in receiving the proceeds from such disposal. The shareholders of our VIE also undertake that, without the prior written consent of our WFOE, they will not dispose of, create or allow any encumbrance on the pledged equity interests. Our VIE undertakes that, without the prior written consent of our WFOE, it will not assist or allow any encumbrance to be created on the pledged equity interests. Each shareholder also executed a power of attorney to irrevocably authorize Mr. Tan as their attorney-in-fact to sign any legal documents that are required or useful in exercising our WFOE's rights under the Equity Pledge Agreement.

Agreement that allow us to receive economic benefits from the VIE

        Exclusive Consultation and Service Agreement.    Our WFOE and our VIE entered into an Exclusive Consultation and Service Agreement, pursuant to which our WFOE has the exclusive

81


Table of Contents

right to provide our VIE with the consulting and technical services required by our VIE's business. Under the Exclusive Consultation and Service Agreement, our VIE agrees that it may not accept any services subject to this agreement from any third party without our WFOE's prior written consent. Our VIE agreed to pay our WFOE service fees after our VIE reserves for reasonable profits and costs. Our WFOE has the right to make discretionary determination on the amount of service fees to collect from our VIE. Our WFOE has the exclusive ownership of all the intellectual property rights created as a result of the performance of the Exclusive Consultation and Service Agreement, to the extent permitted by applicable PRC laws. To guarantee our VIE's performance of its obligations thereunder, the shareholders agreed to pledge their equity interests of our VIE to our WFOE pursuant to the Equity Pledge Agreement. The Exclusive Consultation and Service Agreement will remain effective for an indefinite term, unless otherwise terminated pursuant to mutual agreement in writing or applicable PRC laws.

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

        Exclusive Option Agreement.    We, our WFOE, our VIE and each of the shareholders of our VIE entered into an Exclusive Option Agreement, pursuant to which the shareholders of our VIE will irrevocably granted our WFOE an exclusive option to purchase all or part of their equity interests of our VIE, and our VIE will irrevocably granted our WFOE an exclusive option to purchase all or part of its assets. Under the Exclusive Option Agreement, our WFOE has the right to exercise, or designate a person or entity to exercise, such options at the lowest price permitted under applicable PRC laws. The shareholders of our VIE undertake that, without our WFOE's prior written consent, they will not, among other things, (i) create any pledge or encumbrance on their equity interests of our VIE, (ii) transfer or otherwise dispose of their equity interests of our VIE, (iii) change our VIE's registered capital, (iv) amend our VIE's articles of association, (v) dispose of our VIE's material assets (except in the ordinary course of business), or (vi) merge our VIE with any other entity. In addition, our VIE undertakes that, without our WFOE's prior written consent, it will not, among other things, create any pledge or encumbrance on any of its assets, or transfer or otherwise dispose of its material assets (except in the ordinary course of business). The WFOE has the right to transfer its rights and/or obligations under the Exclusive Option Agreement to YX Asset. The Exclusive Option Agreement will remain effective until the entire equity interests and all the assets of our VIE have been transferred to our WFOE or its designated person or entity.

Financial Support Undertaking Letter

        We executed a financial support undertaking letter addressed to our VIE, pursuant to which we irrevocably undertake to provide unlimited financial support to our VIE to the extent permissible under the applicable PRC laws and regulations, regardless of whether our VIE has incurred an operational loss. We executed this financial support undertaking letter because our entire operation is located within the PRC and substantially carried out by our VIE, which may require capital from time to time to meet its operational needs. The board of directors of our VIE will decide how much financial support should be provided. The form of financial support includes but is not limited to cash, entrusted loans and borrowings. We will not request repayment of any outstanding loans or borrowings from our VIE under any circumstances. The letter is effective until the earlier of (i) the date on which all of the equity interests of our VIE have been acquired by us or its designated representative(s); and (ii) the date on which we, in our sole and absolute discretion, unilaterally terminate the applicable financial support undertaking letter.

*    *    *

82


Table of Contents

        In the opinion of Zhong Lun Law Firm, our PRC legal counsel:

    the ownership structures of our VIE in China and Hunan WFOE complied with all PRC laws and regulations then in effect from November 2018 to January 2019;

    the ownership structures of our VIE in China and Shanghai WFOE, both currently and immediately after giving effect to this offering, comply with all existing PRC laws and regulations; and

    the contractual arrangements among our company, our WFOE, our VIE and each of the shareholders of our VIE, governed by PRC law, are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.

        However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or, if adopted, what they would provide. If we or our VIE 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 Related to Our Corporate Structure—If the agreements that establish the structure for certain of our operations in China do not comply with PRC regulations, or if these regulations or the interpretation of existing regulations 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 Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us."

83


Table of Contents


SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated statements of income data (other than US$ data) for the years ended December 31, 2016, 2017 and 2018, selected consolidated balance sheets data (other than US$ data) as of December 31, 2017 and 2018 and selected consolidated statements of cash flows data (other than US$ data) for the years ended December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this registration statement. Our selected consolidated balance sheets data as of December 31, 2016 have been derived from our audited consolidated financial statements not included in this registration statement. Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The following selected consolidated statements of income data (other than US$ data) for the six months ended June 30, 2018 and 2019, selected consolidated balance sheet data (other than US$ data) as of June 30, 2019 and selected consolidated statements of cash flows data (other than US$ data) for the six months ended June 30, 2018 and 2019 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. 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 are not necessarily indicative of results expected for future periods.

 
  Year ended December 31,   Six months ended June 30,  
 
  2016   2017   2018   2018   2019  
 
  RMB   %   RMB   %   RMB   US$   %   RMB   %   RMB   US$   %  
 
  (in thousands, except percentages)
 

Selected Consolidated Statements of Income Data

                                                                         

Revenues

    435,636     100.0     595,279     100.0     757,788     110,384     100.0     292,964     100.0     515,116     75,035     100.0  

Cost of revenues

    (244,109 )   (56.0 )   (388,106 )   (65.2 )   (519,414 )   (75,661 )   (68.5 )   (200,056 )   (68.3 )   (381,914 )   (55,632 )   (74.1 )

Gross Profit

    191,527     44.0     207,173     34.8     238,374     34,723     31.5     92,908     31.7     133,202     19,403     25.9  

Selling and marketing expenses

    (1,145 )   (0.3 )   (981 )   (0.2 )   (502 )   (73 )   (0.1 )   (263 )   0.1     (111 )   (16 )   0.0  

General and administrative expenses

    (55,505 )   (12.7 )   (56,497 )   (9.5 )   (69,926 )   (10,186 )   (9.2 )   (27,710 )   (9.5 )   (76,658 )   (11,166 )   (14.9 )

Income from operations

    134,877     31.0     149,695     25.1     167,946     24,464     22.2     64,935     22.2     56,433     8,220     11.0  

Interest income

    32     0.0     85     0.0     120     17     0.0     40     0.0     88     13     0.0  

Interest expense

    (8,439 )   (1.9 )   (12,609 )   (2.1 )   (2,475 )   (361 )   (0.3 )   (1,251 )   (0.4 )   (1,463 )   (213 )   (0.3 )

Government grants

    302     0.1     1,959     0.3     4,856     707     0.6     358     0.1     7,039     1,025     1.4  

Income before income taxes

    126,772     29.1     139,130     23.4     170,447     24,828     22.5     64,082     21.9     62,097     9,045     12.1  

Income tax expense

    (29,123 )   (6.7 )   (29,561 )   (5.0 )   (46,442 )   (6,765 )   (6.1 )   (16,638 )   (5.7 )   (29,766 )   (4,336 )   (5.8 )

Net income

    97,649     22.4     109,569     18.4     124,005     18,063     16.4     47,444     16.2     32,331     4,710     6.3  

84


Table of Contents

 
  As of December 31,    
   
 
 
  As of June 30,
2019
 
 
  2016   2017   2018  
 
  RMB   RMB   RMB   US$   RMB   US$  
 
  (in thousands)
 

Selected Consolidated Balance Sheets Data:

                                     

Cash

    45,003     44,830     61,806     9,003     93,464     13,615  

Accounts receivable

    91,819     105,110     250,591     36,503     247,535     36,058  

Amounts due from related parties

    45,695     117,594     14     2     177     26  

Prepaid expenses and other current assets

    47,143     73,717     15,037     2,190     37,307     5,434  

Total current assets

    230,904     364,310     331,173     48,241     379,311     55,253  

Total assets

    361,458     530,167     586,330     85,409     641,362     93,425  

Short-term bank loans, including current portion of long-term bank loan

    111,466     8,833     4,961     723     29,639     4,317  

Amounts due to related parties

    22,052     77,605                  

Accrued expenses and other payables

    80,773     143,330     146,044     21,274     126,713     18,458  

Total current liabilities

    251,022     270,034     192,436     28,031     191,281     27,863  

Long-term bank loan, excluding current portion

    34,908     30,275     25,314     3,687     22,703     3,307  

Total liabilities

    291,315     320,485     252,643     36,802     248,834     36,247  

Total equity

    70,143     209,682     333,687     48,607     392,528     57,178  

 

 
  Year ended December 31,   Six months ended June 30,  
 
  2016   2017   2018   2018   2019  
 
  RMB   RMB   RMB   US$   RMB   RMB   US$  
 
  (in thousands)
 

Selected Consolidated Cash Flow Data:

                                           

Net cash provided by operating activities

    88,801     137,165     63,671     9,275     35,256     37,572     5,473  

Net cash used in investing activities

    (132,081 )   (105,797 )   (102,117 )   (14,875 )   (73,663 )   (23,072 )   (3,361 )

Net cash provided by (used in) financing activities

    80,303     (31,541 )   55,422     8,073     8,729     17,158     2,499  

Net increase (decrease) in cash

    37,023     (173 )   16,976     2,473     (29,678 )   31,658     4,612  

Cash at the beginning of the year/period

    7,980     45,003     44,830     6,530     44,830     61,806     9,003  

Cash at the end of the year/period

    45,003     44,830     61,806     9,003     15,152     93,464     13,615  

85


Table of Contents

Non-GAAP Financial Measures

        We use adjusted net income and adjusted EBITDA, which are non-GAAP financial measures, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net income represents net income excluding share-based compensation expenses, and such adjustment has no impacts on income tax.

        We believe that adjusted net income and adjusted EBITDA help identify underlying trends in our business that could otherwise be distorted by the effect of certain expenses that we include in net income. We believe that adjusted net income and adjusted EBITDA provide useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

        Adjusted net income and adjusted EBITDA should not be considered in isolation or construed as an alternative to net income or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measures to the most directly comparable GAAP measures. Adjusted net income and Adjusted EBITDA presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 
  Year ended December 31,   Six months ended June 30,  
 
  2016   2017   2018   2018   2018   2019   2019  
 
  RMB
  RMB
  RMB
  US$
  RMB
  RMB
  US$
 
 
   
  (In thousands)
 

Non-GAAP Financial Measures

                                           

Net income

    97,649     109,569     124,005     18,063     47,444     32,331     4,710  

Adjustments:

                                           

Share-based compensation

                        26,510     3,862  

Adjusted net income

    97,649     109,569     124,005     18,063     47,444     58,841     8,571  

Adjustments:

                                           

Interest expense

    8,439     12,609     2,475     361     1,251     1,463     213  

Income tax

    29,123     29,561     46,442     6,765     16,638     29,766     4,336  

Depreciation

    8,838     14,690     17,946     2,614     8,389     13,541     1,972  

Amortization

        416     624     91     312     312     45  

Adjusted EBITDA

    144,049     166,845     191,492     27,894     74,034     103,923     15,137  

86


Table of Contents


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

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

Overview

        We are a leading business service provider of delinquent consumer debt collection in China. We believe that delinquent consumer debt collection is crucial to the maintenance of a sound financial environment because debt collection is a mechanism to establish principles and rules governing consumer lending, and facilitates the restoration of credit of the debtors and the establishment of a society built on credit. According to iResearch, we are the largest provider of delinquent credit card receivables recovery service in the PRC in terms of total value of receivables under collection and number of collection specialists employed as of June 30, 2019, and total commission for the six months ended June 30, 2019. We offer nation-wide consumer debt collection services. We collect delinquent consumer receivables such as credit card receivables originated by commercial banks, and online receivables originated by online consumer finance companies. For the six month period ended June 30, 2019, we serviced seven of the top 10 commercial banks as measured by outstanding balance of credit cards in China in 2018, and reputable online consumer finance companies in China. Our clients engage us to collect delinquent consumer receivables and we primarily generate commission-based fees based on our collection success. Our industry expertise, operation scale, innovative approach and IT infrastructure allow us to offer our clients a cost-effective and trustworthy solution to recover delinquent consumer receivables. We intend to continue to leverage our strengths and grow our business through our disciplined approach, which has contributed to our growth and success to-date.

        We generate substantially all of our revenue from the commission we receive from the successful collection of delinquent consumer receivables. In the six months ended June 30, 2019, we derived 72.3% of our revenues from the collection of delinquent credit card receivables, 27.7% from the collection of online receivables, and the remaining revenue from other activities. In most cases, our clients have unsuccessfully attempted to collect these delinquent consumer receivables through their in-house collection teams and other service providers prior to engaging us. Tertiary receivables are past due for a longer period of time and more difficult to collect compared to fresher receivables such as primary and secondary receivables, and thus the market compensation for successful collection of tertiary receivables is generally higher than the market compensation for successful collection of primary and secondary receivables. We believe our focus on the tertiary receivables segment of the general market enables us to generate higher profit margins relative to other collection service providers in China.

        We have achieved strong growth in the recent period. In the six months ended June 30, 2019, our revenue reached RMB515.1 million (US$75.0 million), representing a growth of 75.8% compared to the six months ended June 30, 2018. In the six months ended June 30, 2019, our gross profit amounted to RMB133.2 million (US$19.4 million), representing a growth of 43.4% compared to the six months ended June 30, 2018. For the six months ended June 30, 2018 and 2019, our net income for the period amounted to RMB47.4 million and

87


Table of Contents

RMB32.3 million (US$4.7 million), respectively. Our adjusted net income increased from RMB47.4 million in the six months ended June 30, 2018 to RMB58.8 million (US$8.6 million) in the six months ended June 30, 2019. See "Non-GAAP Financial Measures." From 2017 to 2018, our revenue increased from RMB595.3 million to RMB757.8 million (US$110.4 million). In 2017 and 2018, we reported gross profit of RMB207.2 million and RMB238.4 million (US$34.7 million), respectively, and recorded net income of RMB109.6 million and RMB124.0 million (US$18.1 million), respectively.

General Factors Affecting Our Results of Operations

        Our business and operating results are affected by, among others, general factors that affect China's consumer receivable recovery industry, which include:

    China's overall economic growth and level of per capita disposable income;

    the availability of consumer credit and the continued growth of consumer debt in China;

    commercial banks, online consumer finance companies and other financial service providers' willingness to outsource delinquent consumer receivables for collection;

    commercial banks, online consumer finance companies and other financial service providers' pricing strategy for outsourced collections;

    the overall competitive landscape of the delinquent receivable recovery industry;

    the general collectability of the delinquent consumer receivables outsourced; and

    regulatory policies and initiatives that affect China's consumer receivable recovery industry.

        Unfavorable changes in any of these general industry conditions could negatively affect demand for our services and materially and adversely affect our results of operations.

Specific Factors Affecting Our Results of Operations

        While our business is influenced by general factors affecting the consumer receivable recovery industry in China, we believe our results of operations are more directly affected by company-specific factors, including the following major factors.

Our ability to obtain sufficient quality delinquent consumer receivables for collection

        We derive our revenue primarily from providing collection services to commercial banks and online consumer finance companies. The commissions that we receive from such services represent the predominant source of our revenues. To operate profitably, we must continuously receive delinquent consumer receivables for collection from our clients. Therefore, our ability to maintain, develop and expand our business to obtain the same or greater value and number of quality delinquent consumer receivables for collection is essential to our operation. Any material change in consumer receivables for collection could have a significant impact on our results of operations. We currently maintain strong business relationships with top national commercial banks and reputable online consumer finance companies in China and have a consistent stream of receivables for collection. To this end, we need to continue to maintain our relationships with existing clients and develop business relationships with new clients to ensure that we have sufficient consumer receivables for collection.

88


Table of Contents

Our ability to allocate company resources and select profitable consumer receivables for collection

        The efficient use of limited resources, which include human resources and capital commitments, to conduct our collection operation is fundamental to our success. Therefore, our ability to select profitable consumer receivables based on the receivables' overall collectability and projected commission revenue is essential to our operation. Based on our market experience and the industry data we accumulated over the years, we have the ability to assess and evaluate receivable portfolio bids under portfolio collection and the ability to target commercial banks as ideal clients under general collection. We believe as we further implement and incorporate greater technology into our collection platform, our ability to select profitable consumer receivables for collection and ability to allocate company resources will improve.

Our ability to collect delinquent consumer receivables efficiently

        Our business, financial condition and results of operations depend on our ability to collect delinquent consumer receivables efficiently. Our clients pay us a certain percentage of the total value of delinquent consumer receivables collected as commission and the commission rates are correlated to an agreed-upon collection rate schedule with our clients. Our operations have been profitable largely due to the fact that we have been able to collect these delinquent consumer receivables at rates that are generally above the industry average collection rates, and thus receive relatively higher commissions. The key measures of our collection efficiency are the monthly average amount collected per collection specialist, monthly commission earned per collection specialist and the total amount collected. As a result of our experienced collection specialists and advances in technology, we believe we can maintain and continue to improve our overall productivity and efficiency in our future operation.

Our ability to manage our growth effectively

        We expanded rapidly since our formation and intend to continue to expand our business in terms of market segment expansion, geographic presence and strategic partnerships. As a part of our overall expansion plan, we will leverage our experience in tertiary receivable recovery into earlier stage consumer receivable segments and other non-consumer receivable markets, increase our geographic coverage in China by establishing additional offices and synergize our big data resources into our current operations.

    Market Segment Expansion.    We believe our success in the tertiary receivable segment enables us to expand into other segments of the collection industry.

    Geographic Expansion.    We will continue to use our centralized operations and proprietary management system to manage our ongoing geographic expansion. Many of our competitors allow their regional offices to operate relatively more independent from central management by allowing their branch offices to engage clients directly and only collect delinquent consumer receivables from credit originators in that local area. Unlike our competitors, our company headquarters in Changsha centrally manage our regional offices by centralizing nationwide client engagement efforts and allocating consumer receivables to regional offices and operating centers for collection based on our efficiency analysis. Therefore, we believe we can maintain the same quality of service throughout all of our regional offices.

    Partnerships.    Our strategic partnership with China Unicom aims to utilize the database of one of the largest telecommunication service providers in China to strengthen our

89


Table of Contents

      skip tracing system. We believe we can leverage and utilize China Unicom's large database resources into our current platform to improve our collection efficiency.

        We believe we can manage our expansion initiatives effectively to develop and grow our company. Failure to do so could adversely affect our business and results of operation.

Our ability to invest in technology infrastructure effectively

        Our technology infrastructure and innovation are critical to our collection service. We must continue to upgrade and expand our technology infrastructure to keep pace with the growth of our operations and accommodate changes in the market. We devote significant resources to develop and improve our technology. In addition, we aim to incorporate the use of AI, and big data analytical capability platform into our current technology infrastructure. We believe our ability to effectively invest in technology infrastructure solidifies our status as an innovative industry leader. Failure to continue to successfully adopt technology infrastructure could adversely affect our results of operation.

Our ability to attract, nurture, retain and motivate collection specialists and our ability to manage staff costs

        Our ability to collect delinquent consumer receivables depends on our collection specialists' capability and experience. Therefore, the ability to attract, nurture, retain and motivate capable collection specialists is critical to the success of our business. We believe our reputation as an industry leader and a preferred employer as well as the training and compensation we offer to our employees afford us the ability to maintain a sufficient level of employees to ensure our business operation, overall productivity and expansion initiative to develop and grow our company.

        Our efforts to maintain a capable collection team must be balanced with the effective management of staff costs. Staff costs constitute our largest operating cost by far. The inability to manage staff costs diminishes our profitability. We continue to implement and incorporate technologies to increase per specialist output and reduce reliance on human resources in expanding our business.

Key Components of Results of Operations

Revenues

        We derive our revenues substantially from commissions generated from our collection of delinquent credit card receivables and online receivables. The following table presents our revenue lines and as percentages of our total revenues for the periods presented.

 
  Year ended December 31,   Six months ended June 30,    
 
 
  2016   2017   2018   2018   2019  
 
  RMB   %   RMB   %   RMB   US$   %   RMB   %   RMB   US$   %  
 
  (in thousands, except percentages)
 

Collection of credit card debts

    420,033     96.4     574,924     96.6     610,108     88,872     80.5     255,586     87.2     372,431     54,251     72.3  

Collection of other debts

    10,012     2.3     18,622     3.1     147,556     21,494     19.5     37,276     12.7     142,574     20,768     27.7  

Others

    5,591     1.3     1,733     0.3     124     18     0.0     102     0.1     111     16     0.0  

Total

    435,636     100.0     595,279     100.0     757,788     110,384     100.0     292,964     100.0     515,116     75,035     100.0  

90


Table of Contents

Collection Service

        We collect delinquent consumer receivables such as delinquent credit card receivables and online receivables. We mainly generate our revenues from commissions received for the successful collection of delinquent credit card receivables. With the emergence of the online receivable industry and the growth of online receivable market in China, we expect our revenue generated from online receivable collections to increase in the next few years.

Others

        Revenue from other services in 2016 and 2017 primarily consists of revenues generated from Yong Xin Catering for meal services provided to our employees. In March 2017, Yong Xin Catering was sold to Changsha Yong Xiong Equity Investment Management Co., Ltd., or Yong Xiong Equity Investment, a company controlled by our founder, Mr. Tan.

Operating Costs and Expenses

        Our operating costs and expenses consist of (i) cost of revenues, (ii) selling and marketing expenses, and (iii) general and administrative expenses.

        Cost of revenues.    Our cost of revenues mainly consists of staff costs, operating lease charges, depreciation and amortization, property management fees, and communication charges incurred from our provision of collection services. Staff costs under cost of revenues consist of the salary, bonus, social benefit contributions and other compensation that we pay to our collection specialists. Operating lease charges are expenses related to the lease of our operating centers in Changsha and regional offices. Depreciation and amortization expenses consist of the depreciated value of our property and equipment such as buildings, leasehold improvements and building decorations, machinery and electronic equipment, office equipment and motor vehicles used for our collection service. Property management fees consist of management fees and utility expenses for our operating centers and regional offices. Communication charges are expenses related to our collection service in which we attempt to contact debtors mainly by telephone calls and text messages.

        Selling and marketing expenses.    Our sales expenses consist of business entertainment expenses, and other related expenses. Business entertainment expenses are expenses incurred by our marketing department for providing meals, hotel accommodations and transportation for business development activities. Other related expenses primarily consist of marketing and advertising expenses.

        General and administrative expenses.    Our general and administrative expenses mainly consist of staff costs, depreciation and amortization, business entertainment expenses, professional fees and other related expenses. Similar to our cost of revenues, staff costs and depreciation and amortization of assets comprise a large portion of our general and administrative expenses. Under general and administrative expenses, staff costs are salary, bonus, social benefit contributions and other compensation to company management and administrative staff. Depreciation and amortization expenses consist of depreciated value of our property and equipment such as buildings, leasehold improvements and building decorations, machinery and electronic equipment, office equipment and motor vehicles used by our company management administrative staff. Business entertainment expenses are meal, hotel accommodation and transportation expenses incurred by our administrative and management departments for business development activities. Professional fees consist of fees the company paid to law firms, accounting and auditing firms and consulting firms for legal, auditing, tax and other professional services. We expect that we will continue to incur

91


Table of Contents

expenses for professional services in the near future as we become a publicly listed company and need to comply with U.S. securities laws and other U.S. regulations. Other expenses include miscellaneous administrative and office expenses.

Interest Expenses

        In the course of engaging our clients to obtain portfolio collection contracts, we may need to provide security deposits to these clients as guarantees for the minimum value of consumer receivables collected. We may, from time to time, finance these security deposits by obtaining loans from various banks. Therefore, we incur interest expenses for the provision of security deposits. We also obtained a mortgage for the purchase of our headquarters building in Changsha which contributed to our interest expenses.

Taxation

        We had income tax expenses of RMB29.1 million, RMB29.6 million, RMB46.4 million (US$6.8 million) and RMB29.8 million (US$4.3 million) in 2016, 2017, 2018 and the six months ended June 30, 2019, respectively. We are subject to various rates of income tax under different jurisdictions. The following summarizes the major factors affecting our applicable tax rates in the Cayman Islands, Hong Kong and the PRC.

Cayman Islands

        We are an exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income, corporation or capital gains tax in the Cayman Islands. In addition, our payment of dividends to our shareholders, if any, is not subject to withholding tax in the Cayman Islands.

Hong Kong

        Our subsidiaries in Hong Kong are subject to the uniform tax rate of 16.5%. Under Hong Kong tax law, our subsidiaries in Hong Kong are exempted from income tax on their foreign-derived income and there is no withholding tax in Hong Kong on remittance of dividends. A two-tiered profits tax rates regime was introduced in 2018 where the first HK$2,000 of assessable profits earned by a company will be taxed at half of the current tax rate while the remaining profits will continue to be taxed at 16.5%. We did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong for any of the periods presented.

PRC

        Generally, our PRC subsidiary, our VIE and its subsidiaries are subject to enterprise income tax, or EIT, on their taxable income in the PRC at a rate of 25.0%. The EIT is calculated based on the entity's global income as determined under PRC tax laws and accounting standards.

        Yubang Software currently qualifies as a Newly Established and Qualified Software Enterprise and enjoys two year tax holiday from 2016 to 2017 and three year 50.0% tax reductions under the preferential tax treatment from 2018 to 2020.

        Our PRC subsidiary, our VIE and its subsidiaries are currently subject to VAT at a rate of 6.0% on the services we provide.

        If our holding company in the Cayman Islands or our subsidiary outside of the PRC were deemed to be a "resident enterprise" under the EIT law, it would be subject to EIT on its

92


Table of Contents

worldwide income at a rate of 25.0%. See "Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders."

Results of Operations

        The following table summarizes our consolidated results of operations and as percentages of our total revenues for the years presented.

 
  Year ended December 31,   Six months ended June 30,  
 
  2016   2017   2018   2018   2019  
 
  RMB   %   RMB   %   RMB   US$   %   RMB   %   RMB   US$   %  
 
  (in thousands, except percentages)
 

Revenues

                                                                         

Collection of credit card debts

    420,033     96.4     574,924     96.6     610,108     88,872     80.5     255,586     87.2     372,431     54,251     72.3  

Collection of other debts

    10,012     2.3     18,622     3.1     147,556     21,494     19.5     37,276     12.7     142,574     20,768     27.7  

Others

    5,591     1.3     1,733     0.3     124     18     0.0     102     0.1     111     16     0.0