F-1 1 d118108df1.htm FORM F-1 Form F-1
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As filed with the Securities and Exchange Commission on April 30, 2021

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Ximalaya Inc.

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   7370   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Building 1-2, Phase III, Guochuang Center, No. 799 Dangui Road

Pudong New District, Shanghai

People’s Republic of China

+86 21 5017 9079

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

 

 

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

+1 800-221-0102

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

 

 

Copies to:

 

Z. Julie Gao, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP c/o 42/F, Edinburgh Tower

The Landmark

15 Queen’s Road Central,

Hong Kong +852 3740-4700

 

Haiping Li, Esq.

Yuting Wu, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Jing An Kerry Centre

Tower II, 46th Floor

1539 Nanjing West Road

Shanghai 200040,

China +86 21-6193-8200

 

Yi Gao, Esq.

Simpson Thacher & Bartlett LLP

c/o 35th Floor, ICBC Tower

3 Garden Road

Central, Hong Kong

+852-2514-7600

 

 

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.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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.  ☐

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.  ☐

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.  ☐

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  ☒

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.  ☐

†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.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Proposed maximum
aggregate offering
price(1)
  Amount of
registration fee

Class A Ordinary shares, par value US$0.0001 per share(2)(3)

  US$100,000,000   US$10,910.00

 

 

(1)

Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)

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 option to purchase additional ADSs. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.

(3)

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

 

 

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, or the SEC, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We [and the selling shareholders] 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 jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated                     , 2021

American Depositary Shares

 

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Ximalaya Inc.

 

Representing   Class A Ordinary Shares

 

 

This is the initial public offering of American depositary shares, or ADSs, of Ximalaya Inc.

We are offering                      ADSs. Each ADS represents                      of our Class A ordinary shares, par value US$0.0001 per share.

Prior to this offering, there has been no public market for our ADSs or our Class A ordinary shares. It is currently estimated that the initial public offering price per ADS will be between US$             and US$            . We intend to list the ADSs on the New York Stock Exchange under the symbol “XIMA.”

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

Immediately prior to the completion of this offering, our authorized share capital will consist of Class A ordinary shares and Class B ordinary shares. Xima Holdings Limited and Touch Sound Limited, holding entities that are beneficially owned by Mr. Jianjun Yu and Ms. Yuxin Chen, our co-founders, respectively, will beneficially own all of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately             % of our total issued and outstanding share capital immediately after the completion of this offering and             % of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option. 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 will be entitled to one vote, and each Class B ordinary share will be entitled to ten votes and will be convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

 

 

Investing in our ADSs involve risks. See “Risk Factors” beginning on page 24 to read about factors you should consider before buying the ADSs.

 

 

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.

 

 

 

     Per
ADS
     Total  

Initial public offering price

   US$                    US$                

Underwriting discount and commissions(1)

   US$                    US$                

Proceeds, before expenses, to us

   US$                    US$                

 

(1)

For a description of the compensation payable to the underwriters, see “Underwriting.”

To the extent the underwriters sell more than                      ADSs, the underwriters have a 30-day option to purchase up to an additional                      ADSs from us at the initial public offering price less the underwriting discount.

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

 

 

 

Goldman Sachs    Morgan Stanley    BofA Securities    CICC

(in alphabetical order)

Prospectus dated                     , 2021


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PROSPECTUS SUMMARY

     1  

THE OFFERING

     14  

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

     17  

RISK FACTORS

     24  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     76  

USE OF PROCEEDS

     78  

DIVIDEND POLICY

     79  

CAPITALIZATION

     80  

DILUTION

     82  

ENFORCEABILITY OF CIVIL LIABILITIES

     84  

CORPORATE HISTORY AND STRUCTURE

     86  

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     93  

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

     99  

INDUSTRY OVERVIEW

     134  

BUSINESS

     142  

REGULATION

     174  

MANAGEMENT

     189  

PRINCIPAL [AND SELLING] SHAREHOLDERS

     197  

RELATED PARTY TRANSACTIONS

     200  

DESCRIPTION OF SHARE CAPITAL

     203  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     221  

SHARES ELIGIBLE FOR FUTURE SALE

     233  

TAXATION

     235  

UNDERWRITING

     241  

EXPENSES RELATED TO THIS OFFERING

     252  

LEGAL MATTERS

     253  

EXPERTS

     254  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     255  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

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 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.

We have not 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 or any filed free writing 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 this prospectus or any filed free writing prospectus outside the United States.

Until                     , 2021 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

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

Our Mission

Our mission is to empower people to share wisdom and embrace a better life via voice.

Our Vision

Our vision is to become a leader of the global audio ecosystem and the best content creation platform in the world.

Our Values

Our core values are to be user-centric, and to be altruistic to our partners. We inspire people to scale new heights and reach their own Himalayas.

Who We Are

We are the largest online audio platform in China in terms of average MAUs, total mobile listening time, and total revenues in 2020, according to CIC. We have built a platform where our content creators and users can connect and interact with one another, and through which, we advocate for a brand new lifestyle and provide lifelong nourishment to every generation within the family. We aspire to redefine how people produce, share and consume knowledge, information and entertainment content, pioneering the audio-based “Economy of Ears,” according to CIC.

Ximalaya has become an essential part of our users’ daily lives. We are the online audio platform of choice by users, according to the survey conducted by CIC. In the first quarter of 2021, we had average MAUs of 250 million, including 104 million mobile MAUs from our mobile apps and 146 million MAUs who listened to our audio content through internet-of-things (IoT) and other third-party platforms. For details of our average MAUs during historical periods, see “Summary Consolidated Financial and Operating Data—Summary Operating Data.” Meanwhile, in the first quarter of 2021, the average mobile MAUs on our flagship mobile app “Ximalaya” ranked first among China’s independent online audio apps, and exceeded the sum of average mobile MAUs of the nine apps that were ranked immediately below us, according to CIC. In 2020, users on our mobile apps spent a total of 1,564.3 billion minutes listening to our audio content, accounting for approximately 75.0% of total mobile listening time among all online audio platforms in China, according to CIC.

Our Understanding of “Audio”

Since prehistoric times, voice has served as the primary means through which people communicate, share, discover and learn. For instance, Analects of Confucius, or Lun Yu (论语), a Chinese Confucian classic that records the words and deeds of Confucius as well as those of his disciples, and Buddhism preaching by Sakyamuni, the religious leader of Buddhism, were both initially handed down through word of mouth in



 

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conversational style. Nowadays, internet media has brought new vigor and vitality into voice as a critical means for cross-culture interaction and communication. Voice conveys emotions and companionship in a more touching and intimate way, and offers bigger room for imagination, as compared to text or video. Audio content consumption has become an important part of daily life, leading to a new lifestyle.

Deeply rooted in the mobile internet and IoT era, significant development of the audio industry is the trend of the times.

 

   

Audio is a rare medium that offers simultaneous companionship. Audio is able to accompany people anywhere at any time with content that enriches their life experience and lightens up their days, in parallel to their bustling life;

 

   

Audio is the perfect match for IoT. Due to its companionship nature, audio has a wide range of application scenarios, such as smart wearable devices, smart home devices and smart in-car devices. These devices deliver pleasure and services wherever a listener goes and greatly improve the quality of people’s lives, which makes audio the perfect match for IoT product and service offerings;

 

   

Audio shields people from information overload and allows them to retain inner peace. Information overload intrudes into people’s minds and lives. Audio, on the other hand, provides an immersive experience. Audio allows listeners to focus on themselves, set them free from noises and information overload from the outside world. Voice calms the listeners down, enriches their well-being, and allows them to retain inner peace;

 

   

The production and consumption of audio content could be diversified, personalized and popularized, leveraging the mobile internet infrastructure and other technologies. Leveraging mobile internet infrastructure and other technologies, audio content could be produced by anyone—bringing significant diversity and personal touch to the audio content, and also for anyone—representing personalized and popularized content offerings to users of different age groups. Utilization of such technologies and their integration with mobile internet infrastructure have made and will continue to make audio easily accessible in a variety of scenarios in people’s daily lives, fulfilling the increasing needs for self-achievement, companionship, relaxation and nursery usages.

 

   

The “Economy of Ears” era is here. We believe the power that audio could bring to human beings has not been fully unleashed. Despite the rapid growth of the audio industry in the past few years, the discovery and realization of the true value of audio has just been revealed. In particular, we believe the rising trend of IoT and in-car listening scenarios will bring enormous opportunities and potentials to the future prosperity of the “Economy of Ears.”



 

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Our World of Voices

 

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According to CIC, we are the pioneer of the era of online audio and the “Economy of Ears.” We have built a world of voices where everyone can easily listen to and share their ideas, connecting people’s minds and wisdom.

 

   

Connecting and serving users through voice: We connect and serve a massive and loyal user base through omni-channel coverage via voice. Our online audio service offerings create a world in parallel to the daily life of our users, through which we reach, connect and serve our users simultaneously when they wake up, during their commute, at their spare time or before bedtime with our diversified audio content. Our online audio content offerings also embrace comprehensive needs that a person may have throughout their lifespan, delivering diversified yet personalized audio content to address specific demands at different stages of their lives and conveying care to every generation within the family. Due to the companionship that voice offers, we are able to seamlessly expand the application scenarios from mobile applications to IoT and in-car devices as well as other third-party platforms, enabling us to serve our users more conveniently.

 

   

Understanding the world through voice: We strategically and systematically audioize human history, civilization and wisdom, helping people better understand the world and share their wisdom through our high-quality and diversified audio content ecosystem. We offer a broad range of audio content across 100 genres, including but not limited to educational training, history and humanities, parenthood, business and commerce, and entertainment.

 

   

Facilitating the formation of communities with network effects through voice: We have brought together communities of people who are connected with one another over billions of minutes of audio content. Utilizing voice as the medium and through our platform, our content creators attract and reach an audience of their own and form groups of users who share the same interest and appreciation, enabling them to communicate and interact with each other on our platform and in turn further attracting more users to such communities and inviting more in-depth communication and interaction.

 

   

Better understanding voice through technology: Artificial intelligence (AI) technology and big data analytic capabilities play an important role in content production, distribution and operation. On one hand, leveraging our proprietary AI and big data technologies to conduct deep learning on our data, we



 

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have established an AI-enabled discovery and recommendation mechanism and smart tagging system to improve the content distribution accuracy and efficiency as well as the user experience. On the other hand, our proprietary technologies could also assist us in better producing high-quality audio content. For example, our cutting-edge text-to-speech (TTS) technology and automatic speech recognition (ASR) technology allow us to efficiently convert a large amount of text in news, articles and books to audio or vice versa, significantly expanding the size and variety of content available on our platform.

 

   

Creating value through voice: Our deep insights into audio content and users, unique core values and robust execution abilities enable us to realize increased revenue for third-party IP partners and content creators. In 2020, we helped more than 161,000 content creators and third-party IP partners achieve income of RMB1.3 billion from our revenue sharing. In addition, we have realized the value of our platform and proven our diversified monetization venues. We generate revenue from subscription, advertising, live streaming, education services, and other innovative services and products. In the first quarter of 2021, our average monthly active mobile paying users from our platform reached 13.9 million, representing a 70.2% increase from the same period in 2020. During the same period of 2021, average monthly active mobile user paying ratio on our mobile platform was approximately 13.3%. For details of our MAUs, paying users and paying ratios during historical periods, see “Summary Consolidated Financial and Operating Data—Summary Operating Data.”

Our Scale and Financial Performance

 

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Notes:

(1)

Among all online audio platforms in China, according to CIC.

(2)

Excluding trial members.

(3)

Refers to content creators who have uploaded at least one piece of audio content during the applicable period.

(4)

As of March 31, 2021.

We have achieved strong revenue growth in recent years and demonstrated our diversified monetization capabilities. Our revenues increased by 81.4% from RMB1,475.8 million in 2018 to RMB2,677.0 million in 2019, and further by 51.3% to RMB4,050.0 million (US$620.7 million) in 2020. Our revenues increased by 65.2% from RMB699.3 million for the three months ended March 31, 2020 to RMB1,155.2 million (US$176.3 million) for the same period in 2021. We recorded gross profit of RMB647.2 million, RMB1,165.7 million and



 

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RMB1,985.3 million (US$304.3 million) in 2018, 2019 and 2020, respectively. We recorded gross profit of RMB261.5 million and RMB565.6 million (US$86.3 million) for the three months ended March 31, 2020 and 2021, respectively. Our net loss decreased from RMB773.7 million in 2018 to RMB773.3 million in 2019, and further decreased to RMB605.1 million (US$92.7 million) in 2020. Our net loss decreased from RMB282.7 million for the three months ended March 31, 2020 to RMB267.2 million (US$40.8 million) for the same period in 2021. Our adjusted net loss, a non-GAAP financial measure, was a loss of RMB773.7 million in 2018, RMB773.3 million in 2019 and RMB546.8 million (US$83.8 million) in 2020. Our adjusted net loss for the three months ended March 31, 2020 and 2021 was RMB224.5 million and RMB248.9 million (US$38.0 million), respectively. See “Summary Consolidated Financial and Operating Data—Non-GAAP Measure” for details.

Industry Overview

Online audio refers to digitalized audio content that is streamed online or downloaded to personal devices for listening, and the form of social entertainment that centers around a specific topic and conducted through audio or voice transmissions. Compared with other forms of content such as online videos and music, online audio has features including 24/7 coverage, highly diversified scenarios, ability to meet extensive user demand, diversified content distribution channels, and being highly personalized and interactive. Driven by factors such as an increasing supply of high-quality content, evolving user groups and increasing willingness of users to pay for content, rise of IoT and greater connectivity, improving technologies, and favorable regulation and policies, China’s online audio industry is poised to continue to grow rapidly.

China is the world’s largest online audio market in terms of the number of online audio users. However, China’s online audio penetration rate is far lower than that of the U.S. According to CIC, the penetration rate of online audio in China, as defined as the mobile online audio MAUs as a percentage of total mobile internet MAUs in the applicable period, was 16.1% in 2020, as compared to penetration rate of online audio in the U.S. of 47% in 2020. Meanwhile, penetration rates of online music, short videos and long videos in China in 2020 accounted for 56.7%, 73.8% and 74.2%, respectively. China’s low online audio penetration rate leaves significant potential of growth. According to CIC, China’s online audio market in terms of revenue grew from RMB1.6 billion in 2016 to RMB13.1 billion in 2020, at a CAGR of 69.4%, and is expected to further grow to RMB120.1 billion by 2025, representing a CAGR of 55.8% during the period. The primary means of audio monetization in China include membership subscription, paid on-demand content, advertising, live streaming and education.

The three main types of players in China’s online audio platform industry are content-focused platforms, interaction-focused platforms and comprehensive platforms. Among them, comprehensive platforms enjoy the most significant growth, thanks to their diversified audio content offerings and use case scenarios. Comprehensive platforms are expected to drive innovation in the online audio industry.

Entry barriers to China’s online audio industry remain high. Key success factors include rich and diversified content offerings, building of community-based ecosystems that encourage user interactions and engagement, integration of audio content in IoT, V2X and other devices, advanced AI and big data technological infrastructure and diversified monetization models.

Our Strengths

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

 

   

the largest online audio platform in China;

 

   

rich content ecosystem with a massive and ever-growing content library;

 

   

an enormous and highly engaged user base;



 

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diversified scenario coverage laying a solid foundation for the era of IoT;

 

   

AI-powered and data-driven platform;

 

   

proven monetization capabilities with diversity; and

 

   

visionary and dedicated management team as pioneer and trendsetter of industry.

Our Strategies

We intend to accomplish our mission by pursuing the following strategies:

 

   

continue to enrich content offerings and empower our content creators;

 

   

constantly optimize product and service experience based on users’ needs, offer our users easier access to their desired content and grow our user base;

 

   

continue to advance our next-generation technology, AI and big data capabilities;

 

   

deliver unique value propositions through continuous innovation; and

 

   

provide solutions for lifelong learning and drive the development and prosperity of our education ecosystem.

Corporate History and Structure

The following chart shows our major corporate milestones since founding:

 

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We commenced our operations in China in August 2012 through Shanghai Ximalaya Technology Co., Ltd. (formerly known as Shanghai Zhengda Ximalaya Network Technology Limited), or Shanghai Ximalaya, a limited liability company established under the laws of the PRC founded by Mr. Jianjun Yu and Ms. Yuxin Chen, our co-founders. In September 2013, our holding company, Ximalaya Inc., was incorporated in the Cayman Islands. We also established Ximalaya (Hong Kong) Limited, or Ximalaya HK, a wholly-owned Hong Kong subsidiary in the same month.

In February 2017, we acquired all of the equity interests in Shenzhen Tianbo Internet Media Limited, or Shenzhen Tianbo, a limited liability company established under the laws of the PRC, from Mr. Jianping Zheng and Mr. Wei Lin. In March 2018, we transferred our equity interests in Shenzhen Tianbo to Mr. Jianjun Yu and Ms. Yuxin Chen.



 

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In September 2018, as part of our reorganization to further the strategic development of our business, we established Xizhang (Shanghai) Network Technology Co., Ltd., which we refer to as Xizhang in this prospectus, as a wholly-owned PRC subsidiary of Ximalaya HK. In November 2019, we incorporated Ximalaya (BVI) Limited, or Ximalaya BVI, under the laws of BVI. In January 2020, Ximalaya BVI obtained 100% equity interest in Ximalaya HK.

In October 2020, Shanghai Wonder Education Technology Co., Ltd., or Shanghai Wonder Education, was established under PRC law to provide education services focusing on education for users aged 0-12 and related business, the equity interest in which were held by two designated employees of our company on behalf of and for the benefit of Shanghai Ximalaya. Towards the end of 2020 and in early 2021, we established a majority owned and controlled subsidiary Wonder Education Tech Limited, a limited liability company incorporated under the laws of Cayman Islands, and its underlying wholly owned subsidiaries Wonder Education Tech (Hong Kong) Holdings Limited, or Wonder Education Holdings, a company incorporated under the laws of Hong Kong, and Qizhi (Shanghai) Network Technology Co., Ltd., or Qizhi Shanghai, a limited company established under the laws of PRC. Qizhi Shanghai entered into a series of contractual arrangements with Shanghai Wonder Education and its shareholders in January 2021 for us to obtain effective control over Shanghai Wonder Education.

We currently conduct our business primarily through Xizhang, Shanghai Ximalaya, Shenzhen Tianbo and Shanghai Wonder Education, and their respective subsidiaries. We refer to Shanghai Ximalaya, Shenzhen Tianbo and Shanghai Wonder Education as our VIEs in this prospectus. Due to restrictions and prohibitions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other related business, Xizhang entered into a series of contractual arrangements (as amended and restated) with Shanghai Ximalaya, Shenzhen Tianbo and their shareholders, and Qizhi Shanghai entered into a series of contractual arrangements with Shanghai Wonder Education and its shareholders. For more details, please see “—Contractual Arrangements with Our VIEs and Their Respective Shareholders.” As a result of our direct ownership in our WFOEs and the variable interest entity contractual arrangements, we are regarded as the primary beneficiary of our VIEs. We treat them and their subsidiaries as our consolidated affiliated entities under the accounting principles generally accepted in the United States of America, or U.S. GAAP., and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP.

For our historical equity financing, see “Description of Share Capital—History of Securities Issuances.”



 

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The following diagram illustrates our corporate structure, including our principal subsidiaries and our VIEs and their principal subsidiaries, upon the completion of this offering, assuming the underwriters do not exercise their over-allotment option:

 

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Notes:

(1)

Ximalaya Inc., through direct ownership and control over an aggregate of approximately 51.7% of its outstanding equity interests, consolidates the results of Wonder Education Tech Limited. Directors, officers and principal shareholders of our company as disclosed in the sections titled “Management” and “Principal [and Selling] Shareholders” of this prospectus beneficially own an aggregate of 34.4% of the outstanding equity interests of Wonder Education Tech Limited.

(2)

Shanghai Xiquan Enterprise Management Center (Limited Partnership) and Shanghai Xijie Investment Management Center (Limited Partnership), both are affiliated with our co-founder Mr. Jianjun Yu, and a third-party holding entity affiliated with an existing shareholder of ours, each owns 92.9%, 5.8% and 1.3% of the equity interests in Shanghai Ximalaya Technology Co., Ltd., respectively.

(3)

Mr. Jianjun Yu and Ms. Yuxin Chen, co-founders of our company, each owns 50% and 50% of the equity interests in Shenzhen Tianbo Internet Media Limited.

(4)

Mr. Zhiying Xiao and Mr. Huan Yao, who are employees of our company, each owns 67% and 33% of the equity interests in Shanghai Wonder Education Co., Ltd.

Summary of Risk Factors

Investing in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus before making an investment in our ADSs. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Risk Factors.”

Risks relating to our business and industry

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

 

   

If we are not able to continue to attract and retain users, convert non-paying users into paying users, and increase spending of paying users on our products and services, our business and prospects may be materially and adversely affected;

 

   

We may fail to attract, retain and cultivate talented and popular content creators, which may materially and adversely affect our overall content ecosystem and our business and operations;

 

   

If we fail to source requisite intellectual property rights from third-party IP partners upon terms acceptable to us, our business may be materially and adversely affected;

 

   

We have incurred net losses in the past, and we may continue to incur losses in the future;

 

   

The laws, regulations and official guidance relating to our business are complex, evolving rapidly and may be subject to further changes. Non-compliance with any existing or new regulation may result in penalties, limitations and prohibitions on our business activities, and we may need to modify our business operations in response to changes in laws and regulations;

 

   

If we fail to obtain or maintain the required regulatory licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operation may be materially and adversely affected;

 

   

Our content monitoring system may not be effective in preventing misconduct on our platform, and we may be held liable for information or content displayed on, retrieved from or linked to our platform. If any content on our platform is deemed to violate PRC laws or regulations, or if improper or fraudulent activities are conducted on our platform, PRC authorities may impose legal sanctions on us and our reputation may be damaged;

 

   

Our license agreements are complex, and numerous restrictions and obligations affecting our business operations are contemplated under these agreements. Any breach of such agreements could adversely affect our business, results of operation and financial condition;

 

   

If content creators who create and upload content on our platform have not obtained all necessary copyright licenses in connection with such uploaded content, we may be subject to potential disputes and liabilities;



 

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If we are unable to obtain accurate and comprehensive information necessary to identity the copyright ownership of the audio content offered on our platform, our ability to obtain necessary or commercially viable licenses from the copyright owners may be adversely affected, which may result in us having to remove such content from our platform, and may subject us to potential copyright infringement claims and difficulties in controlling content-related costs;

 

   

We operate in a fast evolving industry, and our monetization model continues to evolve. We cannot guarantee that our monetization strategies will be successfully implemented or generate sustainable revenues and profit; and

 

   

If we fail to develop effective advertising products and systems, retain existing or attract new advertisers, or maintain and improve our attractiveness to advertisers, our results of operations and financial condition may be materially and adversely affected.

Risks relating to our corporate structure

Risks and uncertainties relating to our corporate structure include, but are not limited to, the following:

 

   

If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, 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;

 

   

We rely on contractual arrangements with our VIEs and their respective shareholders for our business operations, which may not be as effective as direct ownership in providing operational control; and

 

   

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

Risks relating to doing business in China

We are also subject to risks and uncertainties relating to doing business in China in general, including, but are not limited to, the following:

 

   

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

 

   

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

 

   

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

General risks relating to our ADSs and this offering

In addition to the risks described above, we are subject to general risks relating to our ADSs and this offering, including, but not limited to, the following:

 

   

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

 

   

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



 

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

Implication of Being an Emerging Growth Company and a Foreign Private Issuer

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.00 billion in non-convertible debt; or (d) 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 the 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.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE listing standards. See “Risk Factors—Risks Relating to our ADSs and this Offering—As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE listing standards.”

Corporate Information

Our principal executive offices are located at Building 1-2, Phase III, Guochuang Center, No. 799 Dangui Road, Pudong New District, Shanghai, People’s Republic of China. Our telephone number at this address is +86 21-5017 9079. Our registered office in the Cayman Islands is located at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

Investors should contact us for any inquiries through the address and telephone number of our principal executive offices.

Conventions Which Apply to this Prospectus

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

 

   

“Active content creators” refers to content creators who have uploaded at least one piece of audio content during the applicable period;

 

   

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



 

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“Album” refers to an episodic series of audio content in the form of digital audio files that a content creator uploads to our platform;

 

   

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

 

   

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

 

   

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

 

   

“MAUs” refers to the number of active users in a given month, calculated as the sum of our mobile MAUs and IoT and other platform MAUs without eliminating duplicates. As we do not require users to register on a real-name basis or provide personally identifiable information to get access to audio content on our platform, we are not able to quantify or eliminate duplicates. We calculate mobile MAUs based on the number of mobile devices that launched our mobile apps during a given month, and IoT and other platform MAUs based on the number of IoT and in-car devices or third-party applications that accessed our platform during a given month. For mobile MAUs calculation, if an individual launches our mobile apps using multiple mobile devices, such individual will be counted more than once;

 

   

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

 

   

“our platform” refers to our mobile apps, websites and a variety of related features, functionalities, tools and services that we provide to users and content creators through IoT and in-car devices and third-party applications;

 

   

“our WFOEs” refers to Xizhang (Shanghai) Internet Technology Co., Ltd. and Qizhi (Shanghai) Technology Co., Ltd., our subsidiaries established in the PRC.

 

   

“paying members” on our platform refers to users who make payments for membership subscriptions. A user has to register an account with us in order to make payments for products and services offered on our platform. A user who makes payments across different types of membership subscriptions offered on our platform using the same registered account is counted as one paying member, and we treat each paying member who used our mobile apps at least once during a given period as an “active paying member” during the applicable period;

 

   

“paying users” on our platform refers to users who make payments for various products and services on our platform, including payments for membership subscriptions, purchases of on-demand listening content, payments for consumable virtual gifts and items, purchases of education services and other innovative products and services. A user has to register an account with us in order to make payments for products and services offered on our platform. A user who makes payments across different products and services offered on our platform using the same registered account is counted as one paying user, and we treat each paying user who used our mobile apps at least once during a given period as an “active paying user” during the applicable period;

 

   

“PGC” refers to professionally-generated content;

 

   

“PUGC” refers to professional user-generated content;

 

   

“RMB” and “Renminbi” refer to the legal currency of China;

 

   

“UGC” refers to user-generated content;

 

   

“Ximalaya,” “we,” “us,” “our company” and “our” refer to Ximalaya Inc., a Cayman Islands exempted company, and its subsidiaries and, in the context of describing our operations and consolidated financial information, also include our consolidated affiliated entities and its subsidiaries;



 

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“V2X” refers to vehicle-to-everything; and

 

   

“VIEs” refers to variable interest entities.

We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals or percentages may not be an arithmetic calculation of the figures that preceded them.

Our reporting currency is the Renminbi. This prospectus also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at the end of the applicable period, that is, RMB6.5250 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2020, or RMB6.5518 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2021. We make no representation that the Renminbi or U.S. dollars amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On April 23, 2021, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.4945 to US$1.00.

This prospectus contains information derived from various public sources and certain information from an industry report in March 2021 commissioned by us and prepared by CIC, a third-party industry research firm, to provide information regarding our industry and market position. Such information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in this report. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in this report.



 

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THE OFFERING

 

Offering Price

We expect that the initial public offering price will be between US$             and US$             per ADS.

 

ADSs Offered

             ADSs

 

ADSs Outstanding Immediately After This Offering

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

 

Ordinary Shares Issued and Outstanding Immediately After This Offering

             ordinary shares, comprised of              Class A ordinary shares and              Class B ordinary shares (or              ordinary shares if the underwriters exercise their over-allotment option in full, comprised of              Class A ordinary shares and              Class B ordinary shares).

 

NYSE Trading Symbol

XIMA

 

The ADSs

Each ADS represents                      Class A ordinary shares. The ADSs may be evidenced by ADRs.

 

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

 

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

 

  You may surrender your ADSs to the depositary in exchange for our 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.

 

Ordinary Shares

Immediately prior to the completion of this offering, our authorized share capital will consist of Class A ordinary shares and Class B ordinary shares. 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 will be entitled to one vote, and each Class B ordinary share will be entitled to ten votes and will be convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.


 

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  Any number of Class B ordinary shares held by a holder thereof will be automatically and immediately converted into an equal number of Class A ordinary shares upon the occurrence of (i) any direct or indirect sale, transfer, assignment or disposition of such number of Class B ordinary shares by the holder thereof or the direct or indirect transfer or assignment of the voting power attached to such number of Class B ordinary shares through voting proxy or otherwise to any person that is not Xima Holdings Limited, Touch Sound Limited, Mr. Jianjun Yu, Ms. Yuxin Chen or an entity controlled by either of them, or (ii) the direct or indirect sale, transfer, assignment or disposition of a majority of the issued and outstanding voting securities of, or the direct or indirect transfer or assignment of the voting power attached to such voting securities through voting proxy or otherwise, or the direct or indirect sale, transfer, assignment or disposition of all or substantially all of the assets of, a holder of Class B ordinary shares that is an entity to any person that is not Xima Holdings Limited, Touch Sound Limited, Mr. Jianjun Yu, Ms. Yuxin Chen or an entity controlled by either of them.

 

  For a description of Class A ordinary shares and Class B ordinary shares, see “Description of Share Capital.”

 

Option to purchase additional ADSs

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of              additional ADSs, at the initial public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.

 

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$             million from this offering (or US$             million if the underwriters exercise their option to purchase additional ADSs in full), after deducting the underwriting discounts, commissions and estimated offering expenses payable by us and assuming an initial public offering price of US$             per ADS, being the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus.

 

  We plan to use the net proceeds of this offering primarily (i) to advance our next-generation technology, AI and big data capabilities, (ii) to expand and enhance our content offerings and empower our content creators, (iii) for marketing and branding, including marketing and promotional activities to further expand our user base and strengthen our brand, and (iv) for potential strategic investments and acquisitions, working capital and general corporate purposes.

 

  See “Use of Proceeds” for additional information.

 

Lock-up

We, our directors and executive officers, and all of our existing shareholders have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ADSs,



 

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ordinary shares or similar securities for a period of 180 days after the date of this prospectus. Further, through a letter agreement, we will instruct Citibank, N.A., as depositary, not to accept any deposit of any ordinary shares or deliver any ADSs until after 180 days following the date of this prospectus unless we consent to such deposit or issuance. We will not provide such consent without the prior written consent of the representatives of the underwriters. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Risk Factors

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

 

Depositary

Citibank, N.A.

 

[Directed Share Program]

[At our request, the underwriters have reserved up to         % of the ADSs offered by this prospectus for sale, at the initial public offering price, to our directors, officers, employees and other individuals associated with us and members of their families. Any sales made through the directed share program will be made by              . We do not know if these persons will choose to purchase all or any portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs available to the general public. Any reserved ADSs not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs. Certain participants may be subject to the lock-up agreements as described in “Underwriting—Directed Share Program” elsewhere in this prospectus.]

 

Listing

We will apply to list the ADSs on the NYSE. Our Class A ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

Payment and Settlement

The underwriters expect to deliver the ADSs against payment on                     , 2021, through the facilities of the Depositary Trust Company, or DTC.

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

 

   

is based upon              ordinary shares outstanding as of the date of this prospectus, assuming the re-designation or conversion of all issued and outstanding ordinary shares and preferred shares into              ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and                  Class A ordinary shares issued in connection with this offering

 

   

assumes no exercise of the underwriters’ option to purchase additional ADSs representing ordinary shares;

 

   

excludes                      ordinary shares issuable upon the exercise of options outstanding under our Amended Global Plan as of the date of this prospectus; and

 

   

excludes                  ordinary shares reserved for future issuances under our Amended Global Plan.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of comprehensive loss data for the years ended December 31, 2018, 2019 and 2020, summary consolidated balance sheet data as of December 31, 2018, 2019 and 2020, and summary consolidated statements of cash flows data for the years ended December 31, 2018, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of comprehensive loss data for the three months ended March 31, 2020 and 2021, summary consolidated balance sheet data as of March 31, 2021, and summary consolidated statements of cash flows data for the three months ended March 31, 2020 and 2021 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair statement of our financial position and results of operations for the periods presented. You should read this Summary Consolidated Financial Data and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods.

The following table shows summary consolidated statements of comprehensive loss data for the years ended December 31, 2018, 2019 and 2020 and the three months ended March 31, 2020 and 2021, both in absolute amount and as percentages of total revenues.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2018     2019     2020     2020     2021  
    RMB     %     RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages, share and per share data)  

Summary Consolidated Statements of Comprehensive Loss Data:

                       

Revenues(1)

    1,475,775       100       2,677,008       100       4,050,021       620,693       100       699,275       100       1,155,230       176,323       100  

Cost of revenues(1)(2)

    (828,550     (56     (1,511,337     (56     (2,064,702     (316,429     (51     (437,810     (63     (589,617     (89,994     (51
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    647,225       44       1,165,671       44       1,985,319       304,264       49       261,465       37       565,613       86,329       49  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                       

Research and development expenses(2)

    (249,563     (17     (432,962     (16     (611,881     (93,775     (15     (170,820     (24     (172,036     (26,258     (15

Sales and marketing expenses(1)(2)

    (939,901     (64     (1,196,001     (45     (1,684,279     (258,127     (42     (291,775     (42     (565,223     (86,270     (49

General and administrative expenses(2)

    (187,708     (13     (327,430     (12     (384,942     (58,995     (10     (93,275     (13     (144,607     (22,071     (13

Other income, net

    13,710       1       27,882       1       48,576       7,445       1       995       0       10,672       1,629       2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (1,363,462     (93     (1,928,511     (72     (2,632,526     (403,452     (66     (554,875     (79     (871,194     (132,970     (75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (716,237     (49     (762,840     (28     (647,207     (99,188     (17     (293,410     (42     (305,581     (46,641     (26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

    22,626       2       13,388       0       15,811       2,423       0       2,125       0       14,039       2,143       1  

Interest income(1)

    4,591       0       5,531       0       1,556       238       0       840       0       1,415       216       0  

Interest expense(1)

    (9,763     (1     (22,510     (1     (34,964     (5,358     (1     (11,347     (2     (847     (129     (0

Foreign exchange gains (losses)

    1,926       0       (3,285     (0     (1,672     (256     (0     731       0       826       126       0  

Fair value change of equity securities investments

    5,670       0       467       0       32,952       5,051       1       11,333       2       22,620       3,452       2  

Others, net

    1,102       0       439       0       4,270       654       1       384       0       589       90       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2018     2019     2020     2020     2021  
    RMB     %     RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages, share and per share data)  

Loss before income tax expenses and equity in (losses) gains of affiliated companies

    (690,085     (48     (768,810     (29     (629,254     (96,436     (16     (289,344     (41     (266,939     (40,743     (23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

    —         —         —         —         —         —         —         —         —         —         —         —    

Equity in (losses) gains of affiliated companies

    (83,567     (5     (4,472     (0     24,178       3,705       1       6,624       1       (309     (47     (0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (773,652     (53     (773,282     (29     (605,076     (92,731     (15     (282,720     (40     (267,248     (40,790     (23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to non-controlling interests

    1,630       0       13,562       1       10,541       1,615       0       4,271       1       11,476       1,752       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ximalaya Inc.

    (772,022     (53     (759,720     (28     (594,535     (91,116     (15     (278,449     (40     (255,772     (39,038     (22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ximalaya Inc.’s ordinary shareholders

    (2,106,443       (922,047       (914,655     (140,177       (309,455       (408,655     (62,372  
 

 

 

     

 

 

                   

Net loss per share attributable to Ximalaya Inc.’s ordinary shareholders

                       

—Basic and diluted

    (24.45       (10.70       (10.62     (1.63       (3.59       (4.74     (0.72  
 

 

 

     

 

 

     

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

Weighted average number of ordinary shares

                       

—Basic and diluted

    86,154,070         86,154,070         86,154,070       86,154,070         86,154,070         86,154,070       86,154,070    
 

 

 

     

 

 

     

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

Notes:

(1)

Revenues, cost of revenues, sales and marketing expenses, interest income and interest expense from transactions with related parties are set forth below:

 

     For the Year Ended December 31,     For the Three Months Ended March 31,  
     2018     2019     2020     2020     2021  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Revenues

     19,920       29,941       112,611       17,258       11,636       27,801       4,243  

Cost of revenues

     (19,945     (53,116     (70,643     (10,827     (13,797     (30,334     (4,630

Sales and marketing expenses

     (66,812     (14,878     (19,988     (3,063     (2,907     (5,268     (804

Interest income

     362       362       —         —         —         —         —    

Interest expense

     —         (9,364     (8,696     (1,333     (4,613     —         —    

 

(2)

Share-based compensation expense was allocated as follows:

 

     For the Year Ended December 31,      For the Three Months Ended March 31,  
     2018      2019      2020      2020      2021  
     RMB      RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

           —                —          4,284        657        4,284        —          —    

Research and development expenses

     —          —            44,586           6,833        44,586        —          —    

Sales and marketing expenses

     —          —          949        145        949        —          —    

General and administrative expenses

     —          —          8,444        1,294        8,444        18,377        2,805  

The table below sets forth the unaudited pro forma net loss per share assuming a Qualified IPO had occurred on January 1, 2020 to reflect: (i) the automatic conversion of all of our outstanding preferred shares including Series Angel preferred shares into ordinary shares on one-for-one basis as of January 1, 2020, irrespective of when the preferred shares were issued; (ii) the impact of share-based compensation expenses for share-based



 

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awards to be recorded when IPO performance condition was satisfied on January 1, 2020 and the share-based compensation expenses continued to be recognized during the year ended December 31, 2020 and three months ended March 31, 2021, and (iii) weighted average number of shares related to restricted share units to be vested and considered issued and outstanding since January 1, 2020 when IPO performance condition was satisfied and the service condition continued to be satisfied during the year ended December 31, 2020 and three months ended March 31, 2021.

 

     For the Year Ended
December 31, 2020
    For the Three Months Ended
March 31, 2021
 
     RMB     US$     RMB     US$  
     (in thousands, except for share and per share data)  
     (unaudited)  

Numerator:

        

Net loss attributable to ordinary shareholders

     (914,655     (140,177     (408,655     (62,372

Pro forma adjustment of conversion of preferred shares

     320,120       49,061       152,883       23,334  

Pro forma adjustment of share-based compensation

     (343,882     (52,702     (492,109     (75,111
  

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for pro forma basic and diluted net loss per share

     (938,417     (143,818     (747,881     (114,149
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted average number of ordinary shares outstanding

     86,154,070       86,154,070       86,154,070       86,154,070  

Pro forma effect of conversion of preferred shares

     232,174,264       232,174,264       232,174,264       232,174,264  

Pro forma effect of vesting of restrict share units

     954,404       954,404       1,278,625       1,278,625  
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator for pro forma basic and diluted net loss per share

     319,282,738       319,282,738       319,606,959       319,606,959  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted net loss per ordinary share:

     (2.94     (0.45     (2.34     (0.36
  

 

 

   

 

 

   

 

 

   

 

 

 


 

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The following table shows summary consolidated balance sheet data as of December 31, 2018, 2019 and 2020 and as of March 31, 2021.

 

     As of December 31,     As of March 31,  
     2018     2019     2020     2021  
    Actual     Pro forma(1)
(unaudited)
 
     RMB     RMB     RMB     US$     RMB     US$     RMB     US$  
     (in thousands)  

Summary Consolidated Balance Sheet Data:

                

Cash, cash equivalents and restricted cash

     500,669       215,136       1,152,636       176,649       495,810       75,675       495,810       75,675  

Short-term investments

     329,107       577,073       917,447       140,605       1,644,863       251,055       1,644,863       251,055  

Accounts receivable, net

     231,805       296,327       384,663       58,952       346,528       52,891       346,528       52,891  

Total current assets

     1,197,856       1,306,305       2,597,661       398,109       2,660,456       406,066       2,660,456       406,066  

Total non-current assets

     733,356       1,143,442       1,327,968       203,521       1,413,811       215,790       1,413,811       215,790  

Total assets

     1,931,212       2,449,747       3,925,629       601,630       4,074,267       621,856       4,074,267       621,856  

Total current liabilities

     4,222,148       2,462,528       1,976,181       302,863       1,790,839       273,336       1,790,839       273,336  

Total non-current liabilities

     18,092       75,395       86,749       13,295       82,314       12,564       82,314       12,564  

Total liabilities

     4,240,240       2,537,923       2,062,930       316,158       1,873,153       285,900       1,873,153       285,900  

Total mezzanine equity

     2,547,142       5,904,471       8,965,162       1,373,971       9,847,075       1,502,957       11,595       1,770  

Ordinary shares (US$0.0001 par value; 275,476,694, 274,748,965 and 254,007,958 shares authorized, 86,154,070 shares issued and outstanding as of December 31, 2018, 2019 and 2020 and March 31, 2021, respectively; and 318,328,334 shares issued and outstanding on a pro-forma basis as of March 31, 2021)

     56       56       56       9       56       9       209       32  

Series Angel preferred shares (US$0.0001 par value; 24,577,820 shares authorized, issued and outstanding as of December 31, 2018, 2019 and 2020 and March 31, 2021; and nil outstanding on a pro-forma basis as of March 31, 2021)

     16       16       16       2       16       2       —         —    

Additional paid-in capital

     —         —         —         —         —         —         10,671,334       1,628,764  

Accumulated other comprehensive income

     7,592       40,273       53,291       8,167       41,445       6,326       41,445       6,326  

Accumulated deficit

     (4,868,104     (6,053,190     (7,170,513     (1,098,928     (7,691,737     (1,173,988     (8,527,728     (1,301,586

Non-controlling interests

     4,270       20,198       14,687       2,251       4,259       650       4,259       650  

Total shareholders’ (deficit) equity

     (4,856,170     (5,992,647     (7,102,463     (1,088,499     (7,645,961     (1,167,001     2,189,519       334,186  

Total liabilities, mezzanine equity and shareholders’ deficit

     1,931,212       2,449,747       3,925,629       601,630       4,074,267       621,856       4,074,267       621,856  


 

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Note:

(1)

The summary consolidated balance sheet data as of March 31, 2021 is presented on an unaudited pro forma basis to reflect: (i) the automatic conversion of all of our outstanding preferred shares including Series Angel preferred shares into ordinary shares upon the completion of the IPO on one-for-one basis; and (ii) the impact of share-based compensation expenses of for share-based awards to be recorded upon the completion of the IPO, assuming the IPO was completed on March 31, 2021.

The following table presents our summary consolidated cash flow data for the years ended December 31, 2018, 2019 and 2020 and for the three months ended March 31, 2020 and 2021:

 

     For the Year Ended December 31,     For the Three Months Ended
March 31,
 
     2018     2019     2020     2020     2021  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Summary Consolidated Cash Flow Data:

              

Net cash (used in) provided by operating activities

     (92,495     (389,425     45,596       6,987       (65,592     (252,405     (38,524

Net cash (used in) provided by investing activities

     (508,489     (758,954     (643,473     (98,616     145,365       (911,311     (139,093

Net cash provided by financing activities

     663,460       860,489       1,543,207       236,507       69,952       517,350       78,962  

Net increase (decrease) in cash, cash equivalents and restricted cash

     62,476       (287,890     945,330       144,878       149,725       (646,366     (98,655

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     5,286       2,357       (7,830     (1,200     1,719       (10,460     (1,597

Cash, cash equivalents and restricted cash at the end of year/period

     500,669       215,136       1,152,636       176,649       366,580       495,810       75,675  

Non-GAAP Measure

To supplement our combined and consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use adjusted net loss, a non-GAAP financial measure, which is calculated as net loss adjusted for shared-based compensation expenses, to understand and evaluate our core operating performance. Adjusted net loss is presented to enhance investors’ overall understanding of our financial

performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP financial measures. In light of the foregoing limitations, you should not consider adjusted net loss as a substitute for, or superior to net loss prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety and not rely on any single financial measure.



 

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The table below sets forth a reconciliation of adjusted net loss to net loss for the periods indicated:

 

     For the Year Ended December 31     For the Three Months Ended March 31,  
     2018     2019     2020     2020     2021  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (773,652     (773,282     (605,076     (92,731     (282,720     (267,248     (40,790

Share-based compensation expenses

     —         —         58,263       8,929       58,263       18,377       2,805  

Adjusted net loss

     (773,652     (773,282     (546,813     (83,802     (224,457     (248,871     (37,985

Summary Operating Data

The following table presents certain of our operating data for the periods indicated. Our management uses these operating data to monitor the vitality and attractiveness of our platform as well as users’ level of activity, which reflect our ability to attract and retain users, maintain and enhance user engagement, and convert users into paying users. Therefore, our management constantly evaluates these operating data and implements measures to optimize our business plans and operations, accordingly. We believe these operating data provide useful indicators to investors of the developmental trajectory of our business, the size of our user base and their engagement level and willingness to pay. The operating metrics disclosed in this prospectus are subject to inherit limitations and risks of inaccuracy. See “Risk Factors—Our operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may harm our reputation and our business.”

 

    For the Three Months Ended  
    Mar 31,
2018
    Jun 30,
2018
    Sep 30,
2018
    Dec 31,
2018
    Mar 31,
2019
    Jun 30,
2019
    Sep 30,
2019
    Dec 31,
2019
    Mar 31,
2020
    Jun 30,
2020
    Sep 30,
2020
    Dec 31,
2020
    Mar 31,
2021
 

MAUs(1) (in millions)

                         

Average MAUs

    73.0       82.4       85.3       107.8       110.1       143.4       146.6       160.1       201.7       215.0       215.6       228.9       250.3  

Average mobile MAUs

    43.7       49.6       54.4       71.5       76.2       78.1       80.0       94.9       103.0       101.1       101.2       103.6       104.3  

Average IoT and other platform MAUs(2)

    29.3       32.8       30.9       36.3       33.9       65.3       66.6       65.2       98.7       113.9       114.4       125.3       146.0  

Paying users (in millions)

                         

Average monthly active mobile paying users(3)

    0.8       1.2       1.5       2.3       3.2       4.6       5.3       7.1       8.2       9.1       10.4       12.6       13.9  

Average monthly active mobile paying members(4)

    0.2       0.5       0.7       1.5       2.4       3.8       4.6       6.3       7.5       8.5       9.8       12.0       13.3  

Paying ratios(5) (%)

                         

Average monthly active mobile paying users(3)

    1.8     2.5     2.7     3.3     4.3     5.9     6.7     7.5     7.9     9.0     10.2     12.2     13.3

Average monthly active mobile paying members(4)

    0.4     1.1     1.3     2.0     3.1     4.9     5.7     6.7     7.3     8.4     9.7     11.6     12.8

 

Notes:

(1)

“MAUs” refers to the number of active users in a given month, calculated as the sum of our mobile MAUs and IoT and other platform MAUs without eliminating duplicates. As we do not require users to register on a real-name basis or provide personally identifiable information to get access to audio content on our platform, we are not able to quantify or eliminate duplicates. We calculate mobile MAUs based on the number of mobile devices that launched our mobile apps during a given month, and IoT and other platform MAUs based on the number of IoT and in-car devices or third-party applications that accessed our platform during a given month. For mobile MAUs calculation, if an individual launches our mobile apps using multiple mobile devices, such individual will be counted more than once.



 

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(2)

The following table sets forth a breakdown of our average IoT and other platform MAUs by IoT and in-car devices and third-party applications:

 

    For the Three Months Ended  
    Mar 31,
2018
    Jun 30,
2018
    Sep 30,
2018
    Dec 31,
2018
    Mar 31,
2019
    Jun 30,
2019
    Sep 30,
2019
    Dec 31,
2019
    Mar 31,
2020
    Jun 30,
2020
    Sep 30,
2020
    Dec 31,
2020
    Mar 31,
2021
 

IoT and in-car devices MAUs

    1.9       2.2       2.3       3.1       4.6       12.4       18.8       22.1       30.2       31.3       38.2       43.8       48.3  

Third-party applications MAUs

    27.4       30.6       28.6       33.2       29.3       52.9       47.8       43.1       68.5       82.6       76.2       81.5       97.7  

 

(3)

“paying users” on our platform refers to users who make payments for various products and services on our platform, including payments for membership subscriptions, purchases of on-demand listening content, payments for consumable virtual gifts and items, purchases of education services and other innovative products and services. A user has to register an account with us in order to make payments for products and services offered on our platform. A user who makes payments across different products and services offered on our platform using the same registered account is counted as one paying user, and we treat each paying user who used our mobile apps at least once during a given period as an “active paying user” during the applicable period.

(4)

“paying members” on our platform refers to users who make payments for membership subscriptions. A user has to register an account with us in order to make payments for products and services offered on our platform. A user who makes payments across different types of membership subscriptions offered on our platform using the same registered account is counted as one paying member, and we treat each paying member who used our mobile apps at least once during a given period as an “active paying member” during the applicable period.

(5)

Paying ratio in this prospectus refers to the number of our average monthly active mobile paying users or average monthly active mobile paying members as a percentage of our average mobile MAUs only as we are still exploring the monetization methods and potentials for our IoT and other platform MAUs and have not offered paid products and services to generate meaningful revenue from those IoT and other platform MAUs.



 

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RISK FACTORS

Risks Relating to our Business and Industry

If we are not able to continue to attract and retain users, convert non-paying users into paying users, and increase spending of paying users on our products and services, our business and prospects may be materially and adversely affected.

Our ability to attract and retain our users, drive user engagement and deliver a superior online audio user experience depends largely on our ability to continue to offer, recommend and distribute attractive content, including audiobooks, audio entertainment, podcasts, premium knowledge sharing, audio live streaming and others. Online audio content that was once well-received by our users may become less attractive if user preferences evolve. The success of our business relies on our ability to anticipate changes in user preferences and industry dynamics, respond to such changes in a timely, appropriate and cost-effective manner, and to recommend and distribute content to targeted users precisely and effectively. If we fail to cater to the tastes and preferences of our users or fail to deliver superior user experiences, we may suffer from reduced user traffic and engagement, and our business, financial condition and results of operation may be materially and adversely affected.

As we generate revenues primarily from users paying for our products and services, failure to address the abovementioned risks and challenges could in turn materially and adversely affect our ability to convert our non-paying users into paying users or increase their spending on our services and products. Although we have been able to develop a large and rapidly growing paying user base, to continue to do so, we must implement our monetization strategy effectively and further explore monetization potential. Our ability to do so is affected by a number of factors, such as our ability to cultivate users’ willingness to pay for online audio content and our ability to integrate more monetization models into the overall user experience on our platform. Monetization of our user base is also affected by our ability to optimize our pricing strategy and fee models.

We strive to generate creative ideas for content acquisition and to source high-quality content, including both popular, mainstream content and long-tail content. Sourcing attractive content may be challenging, expensive and time consuming. We have invested and intend to continue to invest substantial resources in content acquisition and production. However, we may not be able to successfully source or produce attractive content or to recover our investments in content. Any deterioration in our content quality, failure to anticipate user preferences, inability to acquire attractive content, or any negative feedback of users to our existing content offerings may materially and adversely affect our user retention and acquisition. Also, as a result, we cannot assure you that our users will consider to pay for our products and services or increase their spending with us. If we fail to address those risks and challenges, our user may not be willing to pay for our products and services and existing paying users may cease to pay for our services and products and discontinue using them, which could materially and adversely affect our business, results of operation and prospects.

We may fail to attract, retain and cultivate talented and popular content creators, which may materially and adversely affect our overall content ecosystem and our business and operations.

The size and engagement level of our user base as well as the quality of the audio content offered on our platform are critical to our success and are closely linked to our content creators. Our content creators include celebrities and performing artists, professional audiobook narrators and radio drama performers, established experts and professionals from a variety of industries, and people from all walks of life who come to our platform to share their interests and life stories.

Retaining and incentivizing content creators to continue producing attractive content is the cornerstone of our ecosystem, and we strive to build long-term, trusted relationships with content creators. Although we have entered into multi-year cooperation agreements that contain exclusivity clauses with some of the top content creators on our platform, if any of these content creators decides to terminate the agreement or chooses not to

 

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continue the cooperation with us once the term of the agreement expires, the popularity of our platform may decline and the number of our users may decrease, which could materially and adversely affect our results of operations and financial condition. We must continue to attract, retain and cultivate talented, popular and productive content creators in order to maintain and increase our content offerings and ensure the sustainable growth of our community. We must identify and acquire potential talented content creators and provide them with sufficient resources. We cooperate with talent agencies to recruit, manage, train and support our content creators, especially live streaming hosts. However, we cannot assure you that we can continue to maintain the same level of attractiveness to our content creators and talent agencies. The cost to discover, train and develop popular content creators may increase as the competition intensifies. If our content creators become too costly, we will not be able to procure and offer high-quality content at commercially acceptable costs. If our competitors’ platforms offer more attractive compensation package with an intent to attract our popular content creators, costs to retain such content creators may increase. Furthermore, as our business and user base further expands, we may have to devote more resources in encouraging and incentivizing our content creators to produce content that meets the evolving interests of a diverse user base, which would increase the costs of content on our platform.

Content creators on our platform, including those who have entered into exclusivity agreements with us, may leave us for other platforms which may offer better services and terms than we do. Furthermore, we may lose content creators if the talent agencies that manage them are unable to reach or maintain satisfactory cooperation arrangements with such content creators. In addition, if talented and popular content creators cease to contribute content to our platform, or their audio content fail to attract users, we may experience a decline in user traffic and user engagement, which may have a material and adverse impact on our results of operations and financial conditions.

If we fail to source requisite intellectual property rights from third-party IP partners upon terms acceptable to us, our business may be materially and adversely affected.

Our ability to provide our users with high-quality, popular content depends in part on our ability to procure requisite intellectual property rights relating to certain copyrighted works from third-party IP partners. For example, we produce PGC in collaboration with selected third-party IP partners. We typically enter into license and sub-license agreements with third-party IP partners. The license periods and the terms and conditions of such licenses vary. If the third-party IP partners are no longer willing or able to license intellectual property rights to us upon terms acceptable to us, or if it turns out that the third-party IP partners that we collaborate with do not have the requisite intellectual property rights at all or there are defects in their intellectual property rights, our ability to offer content to our users will be adversely affected. In the case where we obtained the right to distribute content through sub-license agreements, if the licensors lose their right to sub-license such intellectual property rights to us, we may incur additional cost and resources to procure requisite license to the underlying copyrighted works, which in turn would also adversely affect our ability to offer content to our users. For intellectual property rights sub-licensed to us, we may be forced to remove related content as a result of our licensor’s disputes with the original intellectual property rights owners, which may result in loss of user traffic and revenues. If we fail to remove such content in a timely manner, we may become the subject of adverse legal actions from the original content provider. As competition intensifies, we may see the cost of intellectual property rights licensing increase. As we seek to differentiate our service, we are increasingly focused on securing rights other than merely distribution and online streaming rights. We also acquire other forms of copyright such as rights to adapt the original content into other formats. We focus on offering an overall mix of content that appeals to our users in a cost efficient manner. If we do not maintain a compelling mix of content, our user acquisition and retention may be adversely affected.

Additionally, we have minimum control over our third-party IP partners in collaboration with us. Even though our strategy is to enter into long-term license agreements with them, we cannot guarantee that these parties will always choose to license the underlying intellectual property rights to us. Certain intellectual property rights in connection with our most popular audio content are owned by a number of major third-party IP partners.

 

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Our business may be adversely affected if our access to such intellectual property rights is limited or delayed because of deterioration in our relationships with one or more of these third-party IP partners or if they choose not to license to us for any other reason. Third-party IP partners also may attempt to take advantage of their market power to seek onerous financial terms from us, which could have a material adverse effect on our financial condition and results of operations. To the extent that we are unable to license a large amount of content or the content of certain popular content creators, our business, results of operation and financial condition could be materially and adversely affected.

We have incurred net losses in the past, and we may continue to incur losses in the future.

We incurred net losses since our inception, including net losses in the amount of RMB773.7 million, RMB773.3 million and RMB605.1 million (US$92.7 million) in 2018, 2019 and 2020, respectively. We also incurred net losses of RMB267.2 million (US$40.8 million) for the three months ended March 31, 2021. Our ability to achieve profitability is affected by various factors. For example, our revenues depend on our ability to expand user base and enhance user engagement, our ability to enrich our content library and cultivate and retain content creators, and our ability to maximize monetization potential. In addition, the production and procurement of content also have historically accounted for a considerable portion of our cost of revenues. Moreover, our profitability is also subject to our ability to improve operating efficiency and economies of scale. We may continue to incur net losses in the future due to our continued investments in content, technology, sales and marketing initiatives and other aspects of our business. We may also continue to incur net losses in the future due to changes in the macroeconomic and regulatory environment, competitive dynamics. Accordingly, we cannot assure you that our company will turn profitable in the short term.

The laws, regulations and official guidance relating to our business are complex, evolving rapidly and may be subject to further changes. Non-compliance with any existing or new regulation may result in penalties, limitations and prohibitions on our business activities, and we may need to modify our business operations in response to changes in laws and regulations.

The PRC government has closely regulated the online audio platforms in the past and may continue to tighten the regulation and control on those platforms. In accordance with the Notice on Further Regulating the Order of Online Audio-Visual Program Dissemination, which was issued by State Administration of Press, Publication, Radio, Film and Television, or SAPPRFT, and became effective on March 16, 2018, online program service providers are forbidden to illegally seize, edit and adapt audio-visual programs, and online program service providers shall enhance management of certain audio-visual programs and naming and sponsorship of programs on their platforms. The provincial press, publication, radio and television administrative authorities shall supervise the local audio-visual program websites to further improve the program content monitoring system and ensure the online program service providers to fully implement the relevant requirements.

In August 2018, the National Office of Anti-Pornography and Illegal Publication, or the NOAPIP, the Ministry of Industry and Information Technology of the PRC, or the MIIT, the Ministry of Public Security, the Ministry of Culture and Tourism, the National Radio and Television Administration, or the NRTA, and the Cyberspace Administration of China, or the CAC, jointly issued the Notice on Strengthen the Management of Live Streaming Service, which required a real-name registration system for users to be put in place by live streaming service providers. Under this real-name registration system, we validate the identity information of the registered users primarily based on their mobile numbers. Currently, we are not required to obtain information such as legal names, citizen identification cards or other personal information during the registration process to validate the identify information of our users who are not a live streaming host. However, the PRC government may further tighten the real-name registration requirements or require us to implement a more thorough compulsory real-name registration system for all users on our platform in the future. If we were required to implement a more rigid real-name registration system for users on our platform, potential users may be deterred from registering with our platform, which may in turn negatively affect the growth of our user base and prospect.

 

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In June 2019, the CAC, launched a campaign against illegal activities and inappropriate content on online audio platforms and undertook restrictive measures against certain online audio platforms, including our Ximalaya app. Due to such campaign, our flagship mobile app, along with a number of other online audio platforms, was temporarily removed from Apple’s and Android’s App Stores for a period of 30 days from June to July 2019. During this period, we were allowed to maintain normal operations of our Ximalaya app that have been already installed by our existing users on their mobile devices and were required to adopt enhanced measures to improve our content monitoring system. Subsequent to such campaign, we took and implemented a variety of measures to enforce a more comprehensive training mechanism for our content monitoring team, enhancing our content monitoring technologies and applying more stringent compliance training and management programs to our content creators. See “—Our content monitoring system may not be effective in preventing misconduct on our platform, and we may be held liable for information or content displayed on, retrieved from or linked to our platform. If any content on our platform is deemed to violate PRC laws or regulations, or if improper or fraudulent activities are conducted on our platform, PRC authorities may impose legal sanctions on us and our reputation may be damaged.” Upon the expiration of the 30-day suspension, the suspension on downloading services of our Ximalaya app was lifted. Due to such temporary suspension, the growth of our user base and user spending, as well as our revenues and results of operation were adversely affected to certain extent. If the PRC government launches similar campaign against the industry we operate in, or if the PRC government undertakes further actions against our platform, our business, financial condition, and results of operation may be further adversely affected.

We also do not have full control over the behaviors of our content creators and users and the content generated by them, and therefore cannot assure you that our platform would not be misused by others to engage in illegal or inappropriate activities. Due to the uncertainty of the evolving regulatory regime in the PRC, we may be subject to tightened implementation of applicable regulations in the future and additional restrictive measures may be imposed upon our platform. Such evolving changes in regulatory regime may adversely affect our results of operations. Accordingly, we may be required to change our business strategies, substantially change the functions of our products, impose restrictions on user behaviors and content creation, or adjust our monetization methods. Also, we cannot assure you that our new products or features will meet the requirements of governmental authorities in China in a timely manner, or at all.

If we fail to obtain or maintain the required regulatory licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operation may be materially and adversely affected.

The internet industry in China is highly regulated, which requires certain regulatory licenses, permits, filings and approvals to conduct and develop business. Currently, we have obtained several regulatory licenses and permits relevant to our business, including Value-added Telecommunications Business Permit, Publication Business Permit, Broadcasting and Television Program Production and Operation License and Internet Culture Operation License through our VIEs or their subsidiaries.

Due to the uncertainties of interpretation and implementation of existing and future laws and regulations, the regulatory licenses we held may not be sufficient to meet regulatory requirements, which may restrain our ability to expand our business scope and may subject us to fines or other regulatory actions by relevant regulators if our practice is deemed as violating relevant laws and regulations. As we further develop and expand our business scope, we may need to obtain additional qualifications, permits, filings, approvals or licenses. Moreover, we may be required to obtain additional licenses or approvals if the PRC government adopts more stringent policies or regulations for our industry.

According to the Administrative Provisions on Internet Audio-visual Programs Services which was jointly promulgated by the State Administration for Radio, Film and Television, or SARFT, which is the predecessor of the SAPPRFT, and Ministry of Information Industry of the PRC, which is the predecessor of the MIIT, came into effect on January 31, 2008, and amended on August 28, 2015, or the Audio-Visual Program Provisions, a License

 

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for Online Transmission of Audio-visual Programs, or Audio-visual License, is required to engage in the business of online transmitting audio-visual programs.

While Shanghai Ximalaya Technology Co., Ltd., or Shanghai Ximalaya, one of our variable interest entities, has been registered in the National Internet Audio-visual Programs Registration and Management System, subject to the same regulation and supervision as an Audio-visual License holder, Shanghai Ximalaya currently does not hold an Audio-visual License. Shenzhen Tianbo, another variable interest entity of ours, holds an Audio-visual License, which could cover our current business to certain, but not all, extent, and is currently in the process of renewing such license. Given the above, even though we are already subject to the regulation and supervision as an Audio-visual License holder, there can be no guarantee that the regulatory authorities will not require us to further obtain an Audio-visual License for Shanghai Ximalaya or expand the scope of the Audio-visual License held by Shenzhen Tianbo. However, we cannot assure you that we are able to obtain the license or expand the scope of such license as requested by the regulatory authorities in a timely manner or at all. If we fail to obtain or expand the scope of the Audio-visual License or operating internet audio-visual program services without the Audio-visual License, relevant PRC government authorities may issue warnings, order us to rectify our audio-visual program related operations and impose fines of up to RMB30,000 on us. In the case of serious violations as determined by relevant authorities at their discretion, they may ban our audio-visual related operations, seize our equipment and/or impose a fine based on our investment amount in connection with such operation. As a result, our business, financial conditions and results of operations may be materially and adversely affected.

According to the Measures for Online Publication Service Administration, which was jointly promulgated by the SAPPRFT and the MIIT, came into effect on March 10, 2016, an Online Publishing Service License is required for the provision of online publishing services. Currently, we allow content creators to upload their audio content on our platform, which may be considered as the “internet publications.” As of the date of this prospectus, we have not obtained an Online Publishing Service License. If the relevant PRC government authority decides that we are operating without the proper license, we may be subject to penalties such as shutting down our platform, deletion of all relevant online publications, confiscation of income and major equipment and special tools relating to audio content operation, fines or other penalties. As the internet industry in China is still at a relatively early stage of development, new laws and regulations may be adopted from time to time to address new issues that come to the authorities’ attention. Considerable uncertainties still exist with respect to the interpretation and implementation of existing and future laws and regulations governing our business activities. We cannot assure you that we will not be found in violation of any future laws and regulations or any of the laws or regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations.

Considerable uncertainties exist in relation to the interpretation and implementation of existing and future laws and regulations governing online education businesses in China. For example, in August 2018, the Ministry of Justice, or MOJ, published the draft amendment to the Regulations on the Implementation of the Law for Promoting Private Education of the PRC, or MOJ Draft, for public comment. According to the MOJ Draft, online non-diploma-awarding education service provider must file with the department of education at the provincial level. As of the date of this prospectus, the MOJ Draft is still pending for final approval and has not come into effect. It remains uncertain when and how the MOJ Draft would come into effect, and whether and how local governments would promulgate rules related to the filing or licensing requirement applicable to online education services. Furthermore, the Ministry of Education, or the MOE, jointly with certain other PRC government authorities, promulgated the Implementation Opinions on Regulating Online After-School Training, or the Online After-School Training Opinions, effective on July 12, 2019. The Online After-School Training Opinions are intended to regulate academic after-school training involving internet technology provided to students in primary and secondary schools. Among other things, the Online After-School Training Opinions require that online after-school training institutions shall file with the competent provincial education regulatory authorities and that such education regulatory authorities and other provincial government authorities shall jointly review these filings and the qualifications of the institutions making these filings. It remains uncertain whether our

 

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education services and related business are subject to such regulatory requirements and we have not completed those filings with the MOE or competent local counterparts for K12 online education services on our platform as of the date of this prospectus. If the applicable regulatory authorities believe that our education services and related business are subject to such regulatory requirements, we may be required to complete those filings and there can be no assurance that we are able to complete such filings in a timely manner or at all. We may be found in violation of any future laws and regulations or the laws and regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations. Failure to comply with these regulatory requirements or promptly complete filings may subject us to fines, regulatory orders to suspend our relevant operations or other regulatory and disciplinary sanctions. Any such penalties or changes in policies, regulations or enforcement by government authorities, may disrupt our operations and materially and adversely affect our business, financial condition and results of operations.

In addition, to expand our business scope and explore innovative business models, we have adopted and will continue to adopt various operating strategies and measures. Due to the uncertainties of interpretation and application of pertinent laws by the government authority, we cannot guarantee that such strategies and measures will not be challenged under PRC laws and regulations and if so, relevant PRC government authorities may issue warnings, order us to rectify our violating operations and impose fines on us. In the case of serious violations as determined by relevant authorities at their discretion, they may ban the violating operations, seize our equipment in connection with such operations, impose a fine or revoke the license, which may materially and adversely affect our business.

As of the date of this prospectus, we have not been subject to any material penalties from the relevant government authorities for failure to obtain any regulatory licenses for our business operations in the past. We cannot assure you, however, that the government authorities will not do so in the future. In addition, we may be required to obtain additional license or permits, and we cannot assure you that we will be able to timely obtain, maintain or renew all the required licenses or permits or make all the necessary filings in the future. If we fail to obtain, hold or maintain any of the required licenses or permits or make the necessary filings on time or at all, we may be subject to various penalties, such as confiscation of the net revenues that were generated through the unlicensed activities, the imposition of fines and the discontinuation or restriction of our operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.

Our content monitoring system may not be effective in preventing misconduct on our platform, and we may be held liable for information or content displayed on, retrieved from or linked to our platform. If any content on our platform is deemed to violate PRC laws or regulations, or if improper or fraudulent activities are conducted on our platform, PRC authorities may impose legal sanctions on us and our reputation may be damaged.

Our platform provides a one-stop online destination that allows people to talk and listen to each other whenever, wherever. We bring together a community of people who are connected with one another over billions of minutes of audio content. Because we may not have timely or sufficient control over the activities conducted by our users, content creators and the content generated by them, our platform may be misused by others to engage in illegal or inappropriate activities, or other activities that require permits, license or approval from the governmental authorities. If any illegal, inappropriate or unauthorized content is found on or linked to our platform, we as the service provider may be held liable for infringement of the rights of our content creators, users or other parties or violation of relevant PRC laws and regulations. The government may impose other legal sanctions against us, including, in serious cases, suspending or revoking the licenses needed to operate our platform.

We have deployed and are continuing to implement a variety of technologies and measures to monitor content for any illegal, fraudulent or inappropriate content or activities on our platform, primarily consisting of automatic content filtering tools supplemented by manual review, content creator real-name registration, user

 

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undertakings, regular review of content empowered by proprietary and third-party software with risk rating and ASR technologies. See “Business—Content Management and Regulation.” If our technologies and measures fail to interpret true and improper meaning of certain content, or if our monitoring team draws incorrect decision as to legality of certain content, illegal or unauthorized content may become accessible to our users via our platform and expose us to various risks which may materially and adversely impact our business, financial condition and results of operations. Despite our efforts to monitor content on our platform and the actions of the content creators and users, our platform was previously subject to restrictive measures taken by the government authority in the past for insufficient monitoring system. As a result of such incidents, we have adopted a more stringent content monitoring system to meet the tightened regulatory standards and to screen and remove inappropriate content stored on our platform. See “—The laws, regulations and official guidance relating to our business are complex, evolving rapidly and may be subject to further changes. Non-compliance with any existing or new regulation may result in penalties, limitations and prohibitions on our business activities, and we may need to modify our business operations in response to changes in laws and regulations.” However, we cannot assure you that our content monitoring system is sufficient to detect all improper or illegal content or activities in the future. We can neither assure you that we will not be subject to fines and other penalties in the future for improper or illegal content or activities on our platform.

We may also face tortious liabilities to third party for infringement of their rights. See “—If content creators who create and upload content on our platform have not obtained all necessary copyright licenses in connection with such uploaded content, we may be subject to potential disputes and liabilities.” and “—If we are unable to obtain accurate and comprehensive information necessary to identify the copyright ownership of the audio content offered on our platform, our ability to obtain necessary or commercially viable licenses from the copyright owners may be adversely affected, which may result in us having to remove such content from our platform, and may subject us to potential copyright infringement claims and difficulties in controlling content-related costs.”

Our license agreements are complex, and numerous restrictions and obligations affecting our business operations are contemplated under these agreements. Any breach of such agreements could adversely affect our business, results of operation and financial condition.

We enter into intellectual property license agreement with third-party IP partners and our strategy is generally to secure exclusive rights to high-quality and popular content. We have strong and long-term partnership with a wide range of online literature platforms and publishers.

Those license agreements may subject us to numerous restrictions and obligations. We typically pay these third-party IP partners based on revenue-sharing schemes. In some cases, we also pay a minimum guarantee in addition to the shared revenue. Under such fee arrangements, the amounts of fixed licensing fees and revenue-sharing incentives primarily depend on factors such as the type of content, the popularity of the content in its original form, and our relationships with the licensors. Some of our license agreements impose numerous obligations on us, including obligations to, among other things:

 

   

make minimum guarantee payment to the rights owner based on pre-determined timeline or upon satisfaction of certain conditions in connection with the online audio content;

 

   

calculate and make revenue-sharing payments based on the revenue-sharing schemes, which requires tracking sales volume, gross profit that may have inaccurate or incomplete metadata necessary for such calculation;

 

   

provide those rights owners access to the latest status and relevant data in connection with the sales volume, gross profit, listening times and hours;

 

   

preserve reputation, goodwill, brand image of the third-party IP partners;

 

   

seek additional consent or license for other intellectual property rights if the existing license is limited to specific rights or content;

 

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comply with certain marketing and advertising restrictions; and

 

   

comply with certain security and technical specifications.

If we materially breach any of these obligations or any other obligations set forth in any of our license agreements, or if we use content in ways that are found to exceed the scope of such agreements, we could be subject to damages and penalties and our rights under such license agreements could be terminated, either of which could have a material adverse effect on our business, results of operation, and financial condition.

If content creators who create and upload content on our platform have not obtained all necessary copyright licenses in connection with such uploaded content, we may be subject to potential disputes and liabilities.

We allow content creators to upload their content or live stream on our platform, which exposes us to potential disputes and liabilities in connection with third-party copyright. Historically, we have allowed content creators to upload audio content anonymously, and our platform has, over the years, accumulated content for which content creators may not have obtained proper and complete copyright licenses. Given the large volume of such content available on our platform, it is challenging for us to accurately identify and verify the individual users or content creators that uploaded such content, the copyright status of such content, and the appropriate copyright owners from whom copyright licenses should be obtained.

Under PRC laws and regulations, online service providers, which provide storage space for users to upload works or links to other services or content, may be held liable for copyright infringement under various circumstances, including situations where the online service provider knows or should reasonably have known that the relevant content uploaded or linked to on its platform infringes upon the copyright of others. For example, online service providers are subject to liability if they fail to take necessary measures, such as deletion, blocking or disconnection, after being duly notified by the legal right holders.

As an online service provider, we have adopted measures to reduce the likelihood of using, developing or making available any content without the proper licenses or necessary consents. Such measures include (i) requiring content creators and users to acknowledge and agree that they will not upload or perform content which may infringe upon others’ copyright; (ii) putting in place procedures to block users on our blacklists from uploading content; and (iii) implementing “notice and take-down” policies to be eligible for the safe harbor exemption under the PRC laws, which is a defense available for internet service provider to be exempted from liability if there is no evidence indicating that an internet service provider clearly knows or should know the facts of infringement, or the internet service provider has taken necessary measures to disconnect or remove relevant content after receiving notification from the intellectual property right holder without delay, for user-generated content. However, these measures may not be effective in preventing the unauthorized posting and use of third parties’ copyrighted content or the infringement of other third-party intellectual property rights. Specifically, it is possible that such acknowledgments and agreements by users may not be enforceable against third parties who file claims against us. Furthermore, a plaintiff may not be able to locate users who generate content that infringes on the plaintiff’s copyright and may choose to sue us instead. In addition, individual users who upload infringing content on our platform may not have sufficient resources to fully indemnify us, if at all, for any such claims. Also, such measures may fail or be considered insufficient by courts or other relevant governmental authorities. Furthermore, there can be no guarantee that we are able to raise the safe harbor exemption defense successfully as the court practice is currently unclear whether or to what extent a platform would be liable for the unauthorized content on its platform. If we are not eligible for the safe harbor exemption, we may be subject to joint infringement liability with the users, and we may have to change our policies or adopt new measures to become eligible and retain eligibility for the safe harbor exemption, which could be expensive and reduce the attractiveness of our platform to users.

 

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If we are unable to obtain accurate and comprehensive information necessary to identify the copyright ownership of the audio content offered on our platform, our ability to obtain necessary or commercially viable licenses from the copyright owners may be adversely affected, which may result in us having to remove such content from our platform, and may subject us to potential copyright infringement claims and difficulties in controlling content-related costs.

Comprehensive and accurate copyright owner information for certain portion of our online audio content is sometimes unavailable to us or difficult or, in some cases, impossible for us to obtain. For example, it may be difficult for us to identify the underlying copyrighted work in the audio content available on our platform, especially with regards to user-generated content. If we are unable to identify comprehensive and accurate copyright owner information for the audio content offered on our platform, such as identifying which party owns, administers, licenses or sublicenses the copyrighted works, or if we are unable to determine which copyrighted works correspond to specific audio content, it may be difficult for us (i) to identify the appropriate copyright owners from whom to obtain a license, or (ii) ascertain whether the scope of a license we have obtained covers specific audio recording. This also may make it difficult to comply with the obligations of any agreements with those rights holders.

If we do not obtain necessary and commercially viable licenses from copyright owners, whether due to the inability to identify or verify the appropriate copyright owners or for any other reason, we may be found to have infringed on the copyright of others, potentially resulting in claims for monetary damages, government fines and penalties, or a reduction of content available to users on our platform, which would adversely affect our ability to retain and expand our user base, attract paying users for our online audio services and generate revenue from our content library. Even though we are able to identify related third-party IP partners for certain content, such third-party IP partners may not have the requisite rights to the underlying copyrighted works or may not be authorized to sub-license such content to us. We cannot assure you that we are able to obtain knowledge that whether our third-party IP partners all have necessary intellectual property rights or licensing power to collaborate with us. Any such inability may also involve us in expensive and protracted copyright disputes.

We operate in a fast evolving industry, and our monetization model continues to evolve. We cannot guarantee that our monetization strategies will be successfully implemented or generate sustainable revenues and profit.

We operate in a fast evolving industry and our monetization model continues to evolve. We have built a multi-faceted monetization model that is seamlessly integrated with our products and services. We generate revenue primarily from subscriptions, including membership subscription and paid on-demand listening services, advertising, live streaming, education services and other innovative services and products. We cannot assure you that we can successfully implement the existing monetization model to generate sustainable revenues, especially with respect to our recent attempts in broadening monetization with limited track records, or that we will be able to develop new monetization strategies to grow our revenues. If we fail to maintain the implementation of our existing business model or develop new monetization approaches, we may not be able to maintain or increase our revenues or effectively manage any associated costs. In addition, we may introduce new products and services for which we have little or no prior development or operating experience. If these new products or services fail to meet our expectations or are unable to attract or engage users, content creators, business partners or other platform participants, as the case may be, we may fail to diversify our revenue streams or generate sufficient revenues to justify our investments and costs, and our business and operating results may suffer as a result.

If we fail to develop effective advertising products and systems, retain existing or attract new advertisers, or maintain and improve our attractiveness to advertisers, our results of operations and financial condition may be materially and adversely affected.

Our advertising revenues depend on the overall growth of the online advertising industry in China and advertisers’ willingness to deploy online advertising on our platform as part of their advertising spending. In addition, advertisers may choose more established Chinese internet portals or search engines over on our

 

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platform. If the online advertising market does not continue to grow, or if we are unable to capture and retain a sufficient share of that market, our ability to grow our advertising revenues may be materially and adversely affected.

Furthermore, our key and long-term priority of optimizing user experience and satisfaction may limit our ability to significantly grow our advertising revenues. For example, in order to provide our users with an uninterrupted online audio experience, we limit the amount of advertising for paying users during streaming. While this may adversely affect our operating results in the short-term, we believe it enables us to provide a superior user experience which will enable us to expand current user base and strengthen our monetization potential in the long-term. To address that, we are also working with advertisers and content creators to enable soft product placement that incorporates the advertised product into the audio content in order to facilitate a more natural and targeted advertisement experience. However, such efforts may not result in the benefits that we expect, in which case the success of our business, financial condition and results of operation could be materially and adversely.

We cannot assure you that we will be able to attract or retain direct advertisers or advertising agencies. For the year ended December 31, 2018, 2019 and 2020, we had direct advertisers and advertising agencies of 408, 882 and 752, respectively. The decrease in the number of direct advertisers and advertising agencies in 2020, as compared to 2019, was primarily due to the impact caused by COVID-19 pandemic. However, such decrease was offset by the increase in revenue generated from programmatic advertisements, through which the automated purchase and sale of advertising inventories are facilitated by demand-side platforms without advertisers or advertising agencies purchasing directly from us, in turn leading to an increase in our advertising revenue. If we fail to demonstrate the effectiveness of deploying advertising spending on our platform or to retain and enhance our business relationships with these advertisers or third-party advertising agencies, we may suffer from a loss of advertisers and our business and results of operation may be materially and adversely affected. If we fail to retain existing advertisers and advertising agencies or attract new direct advertisers and advertising agencies or any of our current advertising methods or promotion activities becomes less effective, our business, financial condition and results of operations may be materially and adversely affected. Furthermore, as demand-side platforms primarily track and automatically devote more resources to platforms with larger user base and increasing user engagement, our attractiveness and competitiveness in such market also depends on our user base, scale of platform and level of user engagement, primarily demonstrated by the number of our average MAUs and total listening time on our platform. As a result, if we fail to maintain or improve our attractiveness and competitiveness by enhancing our operating performance, our business prospects, financial condition and results of operations may be materially and adversely affected.

Advertisements on our platform may subject us to penalties and other administration actions.

Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our platform to ensure that such content is true and in consistent with supporting documents and in compliance with applicable laws and regulations. In addition, where a special government review is required for specific types of advertisements prior to internet posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, we are obligated to confirm that such review has been performed and approval has been obtained. Violation of these laws and regulations may subject us to penalties, including imposition of fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting the misleading information. In circumstances involving serious violations by us, PRC governmental authorities may force us to terminate our advertising operations or revoke our licenses.

While we have made significant efforts to ensure that the advertisements shown on our platform are in full compliance with applicable PRC laws and regulations, we cannot assure you that all the content contained in such advertisements is true and accurate as required by the advertising laws and regulations, especially given the uncertainty in the interpretation of these PRC laws and regulations. If we are found to be in violation of

 

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applicable PRC advertising laws and regulations, we may be subject to penalties and our reputation may be harmed, which may have a material and adverse effect on our business, financial condition, results of operations and prospects.

We cannot guarantee that our innovations in products or services or new business initiatives, such as IoT products and services, will be successfully implemented or generate sustainable revenue or profit.

From time to time, we may implement new innovations in products or services or new business initiatives within our existing business. For example, we built and continue to upgrade our platform to allow users to access our rich audio content anytime and anywhere through IoT devices made by ourselves or third-party partners, including smart speakers, smart watches and cars. However, there can be no assurance that our innovations in products or services or new business initiatives could be successfully implemented or generate sustainable revenue or profit, as we anticipate. With respect to such new business initiatives, we face significant challenges, uncertainties and risks, including, among others, with respect to our ability to:

 

   

establish and expand user base for those new business initiatives;

 

   

manage the resources and attention of management between our current core business and new business initiatives;

 

   

navigate an evolving and complex regulatory environment, such as licensing and compliance requirements;

 

   

establish and maintain business collaboration with new business partners in other fields; and

 

   

improve and maintain our operational efficiency for those new business initiatives.

If our innovations in products or services or new business initiatives are not well received by our users, it may disrupt the general user experience we provide to our users, leading to unexpected dissatisfactory experience of our users against us in general. If that occurs, we may not be able to further implement our innovations or new business initiatives. Additionally, we also face challenges relating to the monetization of our innovations in products and services and new business initiatives. For example, our IoT and other innovative services have made some progress among our users, expanding touchpoints to our content from mobile devices to in-car and household smart devices. However, there can be no assurance that we could successfully and effectively develop or implement our monetization strategy in this regard or fully explore and utilize their monetization potentials as anticipated.

If we fail to address the above, we may not be able to achieve the expected goal or implement our strategies and our investment in such new business initiatives may be futile. As a result, our business prospectus, results of operation and financial condition may be materially and adversely affected.

Failure to protect our intellectual property could substantially harm our business, results of operation and financial condition.

We believe that trademarks, trade secrets, copyright, and other intellectual property we use are critical to our business. We rely on a combination of trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. Protection of intellectual property rights in China may not be as effective as in the United States or other jurisdictions, and as a result, we may not be able to adequately protect our intellectual property rights, which could adversely affect our revenues and competitive position.

We have completed registration of trademarks for logos that are material to our business and daily operation in various trademark categories in terms of their use, especially in Category 9 (includes instruments for audio-visual and information technology equipment) and Category 38 (includes the service for radio broadcasting or

 

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television programs). However, our applications for trademark registration for the logo “ LOGO ” under Category 35 (includes services rendered by advertising establishments) and for the logo “ LOGO ” under Category 42 (includes services design and development of computer hardware and software) were rejected. In addition, our applications for trademark registration for “ LOGO ” in various categories were also rejected primarily due to, among others, lack of distinctiveness, except for Category 38 under which we have successfully registered trademark for “ LOGO ”. Furthermore, any application for trademark registration based on a combination or variation of the logos that were previously rejected is likely to be rejected again. Currently, we have submitted petition for rehearing the rejected trademark registration and we may continue to apply for registration of trademarks for other logos from time to time for our current or future business operation. However, there can be no assurance that any of such applications will be completed successfully.

If we fail to register any of such logos under the trademark category relevant to our business operations successfully, third parties would be able to use such logos and we may be subject to claims by such third parties for infringement by using those logos. In addition, any unauthorized use of our intellectual property by third parties may adversely affect our revenues and our reputation. In particular, our members may abuse their membership privilege and illegally distribute paid content exclusively available to paid members, which could have a material and adverse effect on our financial condition, results of operations and prospects. Further, we may have difficulty addressing the threats to our business associated with piracy of our copyrighted content, particularly our original content. Our content and online audio services may be potentially subject to unauthorized consumer copying and illegal digital dissemination without an economic return to us. We adopt a variety of measures to mitigate risks associated with piracy, including by litigation and through technology measures. We cannot assure that such measures will be effective.

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

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

We have been, and may continue to be, subject to claims for infringement, misappropriation or other violation of third-party intellectual property rights. Assertions or allegations that we have infringed or violated intellectual property rights could harm our business and reputation.

Our success depends, in large part, on our ability to operate our business without infringing, misappropriating or otherwise violating third-party rights, including third-party intellectual property rights. Companies in the internet, technology and media industries own, and are seeking to obtain, a large number of patents, copyrights, trademarks and trade secrets, and they are frequently involved in litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights or other related legal rights. There may be patents issued or pending that are held by others that cover significant aspects of our technologies, products, or services, and such third parties may attempt to enforce such rights against us. In addition, we may not have obtained licenses for all content we offer and the scope, type and term of the licenses we obtained for certain content may not be broad enough to cover all manners we currently employ or may employ in the future. In addition, if any purported licensor does not actually have sufficient authorization relating

 

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to the content or right to license content to us, or if such purported licensor had lost its authorization to sub-license content that we are distributing on our platform, and do not timely inform us of such loss of authorization, we may be subject to claims of intellectual property infringement from third parties.

Although we have set up certain procedures to enable copyright owners to provide us with notice of alleged infringement, given the volume of content available on our platform, it is not possible to identify and remove or disable all potentially infringing content that may exist. As a result, third parties may take action and file claims against us if they believe that certain content available on our platform violates their copyrights or other intellectual property rights. We have been, and may in the future be, subject to such claims filed in China and other jurisdictions. We have been involved in, and may continue to be involved in from time to time, litigation based on allegations of infringement of third-party copyright due to the content available on our platform. Even though some of the litigations may be without merit, there can be no assurance that those litigations will be rejected by relevant PRC courts, withdrawn by the plaintiffs or settled by the parties. We also cannot assure you that we will prevail in those litigations. In 2018, 2019 and 2020, we incurred damages of RMB2.4 million, RMB6.3 million and RMB40.3 million, out of which RMB1.5 million, RMB6.1 million and RMB37.0 million was accrued as of December 31, 2018, 2019 and 2020, respectively, primarily related to allegation of copyright infringement. In the three months ended March 31, 2021, we incurred damages of RMB88,000. As of March 31, 2021, we recorded accrued settlement expense of RMB0.4 million, primarily related to allegation of copyright infringement.

Additionally, we may be subject to copyright laws or legal proceedings initiated by third parties in other jurisdictions outside of China, such as the United States, as a result of the ability of users to access our audio content in the United States and other jurisdictions, the extraterritorial application of foreign law by foreign courts, the fact that we sub-licensed content from licensors who in turn obtained their authorizations from content providers in the United States and other jurisdictions or otherwise. There can be no assurance that we will not be subject to similar claims or incur settlement fees and/or damages in the future. In addition, as we will become a publicly listed company after this offering, we may be exposed to increased risk of litigation. If a claim of infringement brought against us in the United States or other jurisdictions is successful, we may be required to, upon enforcement, (i) pay substantial statutory or other damages and fines, (ii) remove relevant content from our platform or (iii) enter into royalty or license agreements which may not be available on commercially reasonable terms or at all.

We cooperate with various talent agencies to manage and recruit our content creators and any adverse change in our relationships could materially and adversely impact our business.

We cooperate with talent agencies to manage, organize and recruit content creators, such as live streaming hosts, on our platform. As we are a platform that welcomes all content creators to register on our platform, cooperation with talent agencies substantially increases our operation efficiency in terms of discovering, supporting and managing content creators in a more organized and structured manner, and turning amateur content creators to full-time ones.

We share a portion of the revenues generated from the audio content attributed to the content creators, such as the virtual gifts attributed to the hosts’ live streams, with the content creators and the talent agencies who manage them. If we cannot balance the interests between us, content creators and the talent agencies and offer a revenue-sharing mechanism that is attractive to content creators and talent agencies, we may not be able to retain their services. If other platforms offer better revenue sharing incentives to talent agencies, such talent agencies may choose to devote more of their resources to content creators who collaborate with such other platforms, or encourage their content creators to use or even enter into exclusive agreements with such other platforms, all of which could materially and adversely affect our business, financial condition and results of operations.

Privacy concerns or security breaches relating to our platform could result in economic loss, damage our reputation, deter users from using our products, and expose us to legal penalties and liability.

We collect, process, and store significant amounts of data concerning our users, business partners and employees, including personal and transaction data involving our users. While we have taken reasonable steps to

 

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protect such data, there is no guarantee that such steps will be successful. Techniques used to gain unauthorized access to data and systems, disable or degrade service, or sabotage systems, are constantly evolving, and we may be unable to anticipate, deter, or prevent such techniques or otherwise implement adequate preventative measures to avoid unauthorized access to such data or our systems.

Like all internet services, our service is vulnerable to software bugs, computer viruses, internet worms, break-ins, phishing attacks, attempts to overload servers with denial-of-service, and similar attacks and disruptions from the unauthorized use of our and third-party computer systems, any of which could lead to system interruptions, delays, or shutdowns and cause the loss of critical data or the unauthorized access to our data or our users’ data. Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry. Any functions that we use to facilitate interactivity with other internet platforms have the potential to increase the scope of access that hackers may have to our user accounts. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, our failure to maintain performance, reliability, security and availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and ability to retain existing users and attract new users. Although we have in place systems and processes that are designed to protect our data and our users’ data, prevent data loss, disable undesirable accounts and activities on our platform, and prevent or detect security breaches, we cannot assure you that such measures will provide absolute security. We may incur significant costs in protecting against cyberattacks, and if an actual or perceived breach of security occurs to our systems or a third party’s systems, we could be required to expend significant resources to mitigate the breach of security and to address matters related to any such breach, including notifying users or regulators.

In addition, we are subject to a variety of laws and other obligations relating to the security and privacy of data, including restrictions on the collection, use and storage of personal information and requirements to take steps to prevent personal data from being divulged, stolen, or tampered with. The PRC Constitution, the PRC Criminal Law, the PRC Civil Code protect individual privacy in general. The Cybersecurity Law of the PRC, which came into effect in June 2017, requires certain authorization or consent from Internet users prior to collection, use or disclosure of their personal data and also protection of the security of the personal data of such users, but there are still great uncertainties as to the interpretation and application of the Cybersecurity Law. The CAC, the MIIT, the Ministry of Public Security, and the State Administration for Market Regulation jointly promulgated an announcement on January 23, 2019 to carry out special campaigns against illegal collection and usage of personal information by mobile internet application programs operators, including collecting personal information irrelevant to their services, or forcing users to give authorization in disguised manner. Further, the CAC issued the Provisions on the Cyber Protection of Children’s Personal Information, effective on October 1, 2019, which requires, among others, that internet operators who collect, store, use, transfer and disclose personal information of children under the age of 14 shall establish special rules and user agreements for the protection of children’s personal information, inform the children’s guardians in a noticeable and clear manner, and shall obtain the consent of the children’s guardians. We may be subject to laws and regulations relating to the security and privacy of data, including the collection, use and storage of personal information, of jurisdictions other than the PRC. Any failure, or perceived failure to maintain the security of our user data or to comply with applicable PRC or foreign privacy, data security and personal information protection laws and obligations may result in civil or regulatory liability, including governmental or data protection authority enforcement actions and investigations, fines, penalties, enforcement orders requiring us to cease operating in a certain way, litigation, or adverse publicity, and may require us to expend significant resources in responding to and defending allegations and claims.

In addition, although we currently do not operate in Europe, if and to the extent our operations are extended into Europe, we may be required to notify European Data Protection Authorities within strict time periods about any personal data breaches, unless the personal data breach is unlikely to result in a risk to the rights and freedoms of affected individuals. We may also be required to notify affected individuals of the personal data breach where there is a high risk to their rights and freedoms. If we suffer a personal data breach, or otherwise violate the General Data Protection Regulation, we could be fined up to EUR 20 million or 4% of worldwide

 

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annual turnover of the preceding financial year, whichever is greater. Furthermore, any data breach by service providers that are acting as data processors (i.e., processing personal data on our behalf) could also mean that we are subject to these fines and are required to comply with the notification obligations described above. Complying with the General Data Protection Regulation and other applicable regulatory requirements may cause us to incur substantial expenses or require us to alter or change our practices in a manner that could harm our business.

Regulatory requirements regarding the protection of data are constantly evolving and can be subject to differing interpretations or significant changes, making the extent of our responsibilities in that regard uncertain. We have certain level of presence in the United States. The state of California enacted the California Consumer Privacy Act, which became effect on January 1, 2020 and imposes heightened obligations with respect to data privacy, including the ability for individuals in California to object to the sale of their personal data in certain instances. If other states in the United States adopt similar laws, or if a comprehensive federal data privacy law is enacted, we may be required to expend considerable resources to meet the applicable requirements to the extent our operations are expanded into the United States.

Any failure, or perceived failure, by us, or by our third-party business partners, to maintain the security of our user data or to comply with applicable privacy or data security laws, regulations, policies, contractual provisions, industry standards, and other requirements, may result in civil or regulatory liability, including governmental or data protection authority enforcement actions and investigations, fines, penalties, enforcement orders requiring us to cease operating in a certain way, litigation, or adverse publicity, and may require us to expend significant resources in responding to and defending allegations and claims. Moreover, claims or allegations that we have failed to adequately protect our users’ data, or otherwise violated applicable privacy and data security laws, regulations, policies, contractual provisions, industry standards, or other requirements, may result in damage to our reputation and a loss of confidence in us by our users or our business partners, potentially causing us to lose users, advertisers, content creators, other business partners, which could have a material and adverse effect on our business, financial condition and results of operation.

Our business depends on our strong brand. Our business, financial condition, results of operation and prospects may be adversely affected as a result of our failure to protect or promote our brand and reputation, or negative media coverage of our company, our industry or our shareholders.

We have developed a strong brand that we believe has contributed significantly to the success of our business. Maintaining, protecting, and enhancing the “Ximalaya” brand is critical to expand our user base, and will depend largely on our ability to continue to develop and provide an innovative and high-quality experience for our users and to attract content creators, third-party IP partners, advertisers and other business partners to work with us, which we may not do successfully. If we do not successfully maintain a strong brand, our business could be harmed.

Our brand may be impaired by a number of other factors, including any failure to keep pace with technological advances, a decline in the quality or breadth of our online audio content offerings, any failure to protect our intellectual property rights, or alleged violations by us of law and regulations or public policy. Additionally, if our content creators fail to maintain high standards, our brands could be adversely affected.

Our business and reputation may be harmed by the misconduct or errors of our employees, content creators or business partners, or their failure to perform their duties.

Misconduct, including illegal, fraudulent or collusive activities, unauthorized business conducts and behavior, misuse of corporate authorization, or errors by our employees, content creators or other business partners or their failure to perform their duties could subject us to legal liability and negative publicity. Our employees may conduct fraudulent activities to bypass our internal system and to complete shadow transactions and/or transactions outside our official or authorized manner, such as kickbacks, self-dealing, misappropriation

 

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of corporate funds and resources, disclosing users’ information to competitors or other third parties for personal gains, or applying for fake reimbursement. They may conduct activities in violation of unfair competition law, which may expose us to unfair competition allegations and risks or conduct activities that may damage our reputation, corporate culture or internal working environment, such as sexual harassment. We have experienced such incidents in the past and may continue to experience or be subject to incidents of similar nature in the future. We terminated employment with the involved employees for serious misconducts and recovered our losses from those employees in certain cases. While we have further strengthened our code of conduct and related internal policies, we cannot assure you that such incidents will not occur in the future. It is not always possible to identify and deter such misconduct, and the precautions we take to detect and prevent these activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to prevent such misconduct. Such misconduct could damage our brand and reputation, which could adversely affect our business and results of operations.

We do not have full control over how users use our platform, whether through live streaming, commenting or other forms of sharing or communication. We face the risk that our platform may be misused or abused by content creators or users. We have a robust content monitoring system in place to review and monitor the audio content, live streams and other forms of social interactions among our users and content creators and will shut down streams that are illegal or inappropriate. However, we may not be able to identify all such streams and content, or prevent all such content from being posted. Moreover, we have limited control over the real-time behavior of our live streaming performers and users. To the extent such behavior is associated with our platform, our ability to protect our brand image and reputation may be limited. Our business and public perception of our brand may be materially and adversely affected by the misuse of our platform. In addition, in response to allegations of illegal or inappropriate activities conducted through our platform or any negative media coverage about us, PRC government authorities may intervene and hold us liable for non-compliance with PRC laws and regulations concerning the dissemination of information on the internet and subject us to administrative penalties, including confiscation of income and fines or other sanctions, such as requiring us to restrict or discontinue certain features and services. As a result, our business, financial condition and results of operation may be materially and adversely affected.

We have been in the past and may continue to be subject to complaints, claims, controversies, regulatory actions and legal proceedings, which could have a material adverse effect on our results of operation, financial condition, liquidity, cash flows and reputation.

We have been and may continue to be subject to or involved in various complaints, claims, controversies, regulatory actions, arbitrations and legal proceedings. Complaints, claims, arbitration, lawsuits, and litigations are subject to inherent uncertainties, and we are uncertain whether existing or new claims against us would develop into lawsuits or regulatory penalties and other disciplinary actions. Lawsuits, litigations, arbitration and regulatory actions may cause us to incur substantial costs or fines, utilize a significant portion of our resources and divert management’s attention from our day-to-day operations, or materially modify or suspend our business operations, any of which could materially and adversely affect our financial condition, results of operations and business prospects.

Defending litigations or other claims against us is costly and can impose a significant burden on our management and employees, and there can be no assurances that favorable final outcomes will be obtained in all cases. For example, we have been subject to various legal proceedings in connection with certain intellectual property infringement and employee misconducts and have paid damages for some of those legal proceedings. In 2018, 2019 and 2020, we incurred damages of RMB2.4 million, RMB6.3 million and RMB40.3 million, out of which RMB1.5 million, RMB6.1 million and RMB37.0 million was accrued as of December 31, 2018, 2019 and 2020, respectively, primarily related to allegation of copyright infringement. In the three months ended March 31, 2021, we incurred damages of RMB88,000. As of March 31, 2021, we recorded accrued settlement expense of RMB0.4 million, primarily related to allegation of copyright infringement. In addition, there can be no assurance that we will be successful in the claims we pursue against other parties. Any resulting liability, losses or expenses,

 

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or changes required to our businesses to reduce the risk of future liability, may have a material adverse effect on our business, financial condition and prospects. There remain uncertainties in the interpretation of PRC laws in different jurisdictions, and an adverse outcome of a single claim against us in one jurisdiction regarding our business practices may result in significant negative publicity and heightened scrutiny by regulators and courts of our business and operations across the country, or potential penalties or other regulatory actions against us. Any of such outcomes may cause significant disruptions to our operations and materially and adversely affect our results of operation and financial condition.

If we fail to keep up with industry trends or technological developments, our business, results of operation and financial condition may be materially and adversely affected.

The online audio industry is rapidly evolving and subject to continuous technological changes. Our success will depend on our ability to keep up with the changes in technology and user behavior resulting from new developments and innovations. For example, as we provide our product and service offerings across a variety of mobile systems and devices, we are dependent on the interoperability of our services with popular mobile devices and mobile operating systems that we do not control, such as Android and iOS. If any changes in such mobile operating systems or devices degrade the functionality of our services or give preferential treatment to competitive services, the usage of our services could be adversely affected.

Technological innovations may also require substantial capital expenditures in product development as well as in modification of products, services or infrastructure. We cannot assure you that we can obtain financing to cover such expenditure. See “—We may not be able to obtain additional capital when desired, on favorable terms or at all.” If we fail to adapt our products and services to such changes in an effective and timely manner, we may suffer from decreased user traffic and user base, which, in turn, could materially and adversely affect our business, financial condition and results of operation.

We have a limited operating history and our historical operating and financial results may not be indicative of future performance, which makes it difficult to predict our future business prospects and financial performance.

We have a limited operating history, which makes it difficult to evaluate our future prospects and ability to make profit. We commenced our operations in China in August 2012 and have grown rapidly since then. We expect to continue to grow our business and explore new market opportunities. However, due to our limited operating history, our past revenues and historical growth rate may not be indicative of our future performance. We cannot assure you that we will be able to achieve similar results or grow at the same rate as we had in the past or at all. Rather than relying on our historical operating and financial results to evaluate us, you should consider our business prospects in light of the risks and difficulties we may encounter as a company operating in a new, evolving and competitive market, including, among other things, our ability to expand our user base and convert non-paying users into paying users, provide high-quality content, enhance our technology capabilities, build our reputation and promote our brand, improve our operational efficiency, attract, retain and motivate talented employees, and anticipate and adapt to changing market conditions. We may not be able to successfully address these risks and difficulties, which could significantly harm our business, results of operations and financial condition.

We operate in a relatively new and evolving market and have experienced significant rapid growth and expansion. If we fail to effectively manage our growth, our business, results of operation, and financial condition may suffer.

The online audio market in China has experienced rapid growth in recent years. According to CIC, the China’s online audio market grew from RMB1.6 billion in 2016 to RMB13.1 billion in 2020. However, the growth rate may decrease due to uncertainties with respect to the acceptance of online audio content offerings, user experience, development and application of voice technologies and other factors. Furthermore, the online

 

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audio market in China is at its early stage and will continue to evolve, and the penetration of online audio services remains relatively low. There can be no assurance that the penetration of online audio services will further deepen, or that the online audio market will grow at a pace that we expect.

We continue to experience rapid growth in our business, which will continue to place significant demands on our management, operational and financial resources. We may encounter difficulties as we execute our strategies and expand our operations. We expect our expenses to continue to increase in the future as we acquire more users, procure more popular content and develop new technology. Continued growth could also strain our ability to maintain the quality and reliability of our platform, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Our expenses may grow faster than our revenues, and our expenses may be greater than we anticipate. We may expand into geographic areas where we do not have experience with local regulations or regulators or where local market conditions are unfavorable for our business model. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, results of operation and financial condition could be harmed.

We operate in a competitive industry. If we are unable to compete successfully, we may lose market share to our competitors.

We operate in a competitive industry. We face competition for users and their time and spending primarily from the online audio content provided by other online audio content providers in China. We also face competition from online offerings of other forms of content, including music, radio services, literature, games and video provided by other platforms. In particular, we are increasingly facing noticeable competition from offerings of other emerging forms of content which have been growing in popularity rapidly in recent years, such as live streaming and user-generated short videos.

We compete with our competitors based on a number of factors, such as the diversity and quality of content, product features, social interaction features, quality of user experience, brand awareness and reputation, and our ability to continuously attract, incentivize and retain content creators and IP partners. Some of our competitors may be able to respond more quickly to technological innovations or changes in user demands and preferences, acquire more attractive and diverse content, and act more effectively in the development, promotion and sale of products than we can. Also, they may enter into more favorable relationships with content creators and provide their users with content that competes with our offerings. If any of our competitors achieves greater market acceptance or is able to provide more attractive content offerings than we do, our user traffic and market share may decrease, which may result in a loss of users and a material and adverse effect on our business, financial condition and results of operation.

Our business, results of operation and financial condition may be adversely affected by the COVID-19 pandemic.

Our business, results of operation and financial condition may be adversely affected by the COVID-19 pandemic. In response to intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals in China who had the COVID-19, asking citizens to remain at home and to avoid gathering in public, and other actions. In light of such circumstances, our corporate office was closed for a certain period of time, which adversely affected our operating efficiency and productivity. The COVID-19 global pandemic has resulted in, and may intensify, global economic distress, and the duration and extent of the impact of COVID-19 outbreak is highly uncertain at this time. The extent to which it may affect our results of operations, financial condition and cash flows will depend on the future development of the outbreak, which is also highly uncertain. Such uncertainty poses operational challenges to our operation. Our business and operations could be disrupted if any of our employees, distributors, retailers or manufacturers is suspected of having COVID-19 in our offices, since it could require all of the possible contact persons to be quarantined and/or their offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that the outbreak harms the PRC economy in general.

 

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We rely on our mobile application to provide a significant amount of our products and services to users which, if inaccessible, may have material adverse impact on our business, financial condition and results of operation.

We rely on third-party mobile application distribution channels such as Apple’s App Store, various Android’s App Stores and other channels to distribute our mobile application to users. We expect a substantial number of downloads of our mobile apps will continue to be derived from these distribution channels. As such, the promotion, distribution and operation of our applications are subject to such distribution platforms’ standard terms and policies for application developers, which are subject to the interpretation of, and frequent changes by, these distribution channels. If Apple’s App Store or any other major distribution channels interpret or change their standard terms and conditions in a manner that is detrimental to us, or terminate their existing relationship with us, our business, financial condition and results of operations may be materially and adversely affected. Our main mobile app, Ximalaya, was temporarily removed from Apple’s and Android’s App Stores for 30 days due to inappropriate content stored on our platform from June to July 2019. Upon the expiration of the 30-day suspension, the suspension on downloading services of our Ximalaya app was lifted. Such incident of download suspension were temporary and did not affect our existing users, and therefore did not have any material adverse impact on our results of operations. Historically, our mobile app was removed from App Store due to other reasons. We cannot assure you that our app will not be removed again by a third party mobile application distribution channel in future and our business operation, reputation and financial conditions may be negatively affected.

The technologies we use or leverage are complex and may contain undetected errors or may not operate properly, which could adversely affect our business, results of operation and financial condition.

We use and leverage various proprietary technologies for our business operations, including but not limited to AI-enabled content discovery and recommendation system, text-to-speech (TTS) technologies and automatic speech recognition voice technology. If any part of those technologies that we use or leverage contains material defects, not only the corresponding portion of our audio content and certain features would be impaired, but also the overall function of products and services. We may incur significant expenses to remediate such defects, or may not be able to correct them at all. We have not experienced any material defects to date, but there can be no assurance that our technologies, consisting of certain programs and algorithms, are flawless. If any incidents of material defects took place, our user experience would be significantly harmed, and users may lose confidence and trust in us. As a result, we may incur significant reputational damage and market share loss.

The proper functioning of our technology platform is essential to our business. Any failure to maintain the satisfactory performance of our platform could materially and adversely affect our business and reputation.

The proper functioning of our platform is essential to our business. The satisfactory performance, reliability and availability of our IT systems are critical to our success and our ability to provide content to attract and retain users.

Our technology or infrastructure may not function properly at all times. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems could result in the unavailability or slowdown of our platform and the attractiveness of content provided on our platform. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to system interruptions, website or mobile app slowdown or unavailability or loss of data. Any of such occurrences could cause severe disruption to our daily operations. As a result, our reputation may be materially and adversely affected, our market share could decline and we could be subject to liability claims.

Some of our products and services contain open source software, which may pose particular risk to our proprietary software, products and services in a manner that negatively affects our business.

We use open source software in some of our products and services and will continue to use open source software in the future. There is a risk that open source software licenses could be construed in a manner that

 

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

We face risks associated with our international expansion.

We are continuing to expand our operations into additional international markets. However, offering our products and service in a new geographical area involves numerous risks and challenges. For example, the licensing terms offered by rights organizations and individual copyright owners in countries around the world are currently expensive. Addressing licensing structure and royalty rate issues in any new geographic market requires us to make very substantial investments of time, capital, and other resources, and our business could fail if such investments do not succeed. There can be no assurance that we will succeed or achieve any return on these investments.

In addition to the above, continued expansion around the world exposes us to other risks such as:

 

   

lack of well-functioning copyright collective management organizations that are able to grant us content licenses and distribute royalties in markets;

 

   

fragmentation of rights ownership in various markets causing lack of transparency of rights coverage and overpayment or underpayment to copyright owners;

 

   

difficulties in obtaining license rights to local audio content;

 

   

difficulties in achieving market acceptance of our products and services in different geographic markets with different tastes and interests;

 

   

difficulties in achieving viral marketing growth in certain other countries where we commit fewer sales and marketing resources;

 

   

difficulties in managing operations due to language barriers, distance, staffing, user behavior and spending capability, cultural differences, business infrastructure constraints, and laws regulating corporations that operate internationally;

 

   

application of different laws and regulations of other jurisdictions, including privacy, censorship and liability standards and regulations, as well as intellectual property laws;

 

   

potential adverse tax consequences associated with foreign operations and revenue;

 

   

complex foreign exchange fluctuation and associated issues;

 

   

increased competition from local websites and music content providers, some with financial power and resources to undercut the market or enter into exclusive deals with local content providers to decrease competition;

 

   

credit risk and higher levels of payment fraud;

 

   

political and economic instability in some countries;

 

   

restrictions on international monetary flows; and

 

   

reduced or ineffective protection of our intellectual property rights in some countries.

As a result of these obstacles, we may find it impossible or prohibitively expensive to enter additional markets, or entry into foreign markets could be delayed, which could hinder our ability to grow our business.

 

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We depend on our senior management and highly skilled personnel. If we are unable to attract, retain and motivate a sufficient number of them, our ability to grow our business could be harmed.

We believe that our future success depend significantly on our continuing ability to attract, develop, motivate and retain our senior management and a sufficient number of experienced and skilled employees. Qualified individuals are in high demand, particularly in the online audio industry, and we may have to incur significant costs to attract and retain them. Additionally, we use share-based awards to attract talented employees, and if the ADSs decline in value, we may have difficulties recruiting and retaining qualified employees.

In particular, we cannot ensure that we will be able to retain the services of our senior management and key executive officers. The loss of any key management or executive could be highly disruptive and adversely affect our business operations and future growth. Moreover, if any of these individuals joins a competitor or forms a competing business, we may lose crucial business secrets, technological know-how and other valuable resources. Although our senior management and executive officers have non-compete agreements with us, we cannot assure you that they will comply with such agreements or that we will be able to effectively enforce such agreements.

Our operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may harm our reputation and our business.

We regularly review MAUs, number of paying users and other key metrics to evaluate growth trends, measure our performance and make strategic decisions. These metrics are calculated using our internal data and have not been validated by an independent third party. While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our services are used across large populations in China. For example, an individual may have multiple mobile devices that launched our mobile apps during a given month. If an individual launches our mobile apps using multiple mobile devices, such individual will be counted more than once. An individual may also be counted multiple times in different MAU categories if he/she not only launches our mobile apps but also accesses our platform through different access points. As we do not require users to register on a real-name basis or provide personally identifiable information to get access to audio content on our platform, we are unable to quantify or eliminate duplicates. We are also subject to the risk associated with artificial manipulation of data. Any errors or inaccuracies in these metrics could result in less informed business decisions and operational inefficiencies. For example, if our user base is overstated by the MAU data we track, we may fail to make the right strategic choices needed to expand our user base and achieve our growth strategies.

Compliance with the laws or regulations governing virtual currency may result in us having to obtain additional approvals or licenses or change our current business model.

Due to the limited history of virtual currency in China, the regulatory framework governing such industry is still under development. The issuance and use of “virtual currency” in the PRC have been regulated since 2007 in response to the growth of the online games industry in China. In 2009, the Circular on Strengthening the Administration of Online Game Virtual Currency, or the Virtual Currency Circular, jointly issued by the Ministry of Culture and the MOFCOM, broadly defined online game virtual currency as a type of virtual exchange instrument issued by internet game operation enterprises, purchased directly or indirectly by the game users by exchanging legal currency at a certain exchange rate, saved outside the game programs, stored in servers provided by the internet game operation enterprises in electronic record format and represented by specific numeric units. In 2012, the Administrative Measures for Single-purpose Commercial Prepaid Cards was issue by the MOFCOM, which further requires enterprise that engages in the retail, accommodation, catering or resident service industries shall go through record-filing procedures within 30 days after they start single-purpose commercial prepaid card business. Although we issue different virtual currencies to users on our platform for them to purchase various items to be used on our platform, our service does not constitute online game virtual currency transaction services or single-purpose commercial prepaid card because our virtual currencies are not

 

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issued by internet game operation enterprises, users cannot transfer or trade these currencies among themselves and our virtual currencies are not used in for the retail, accommodation, catering or resident service. However, we cannot assure you that the PRC regulatory authorities will not take a view contrary to ours or any other aspects of our business operations involving virtual currencies be subject to the PRC regulatory regime on online games or single-purpose commercial prepaid card, in which case we may be required to obtain additional approvals or licenses or filings or change our current business model and may be subject to fines or other penalties, which could adversely affect our business. Furthermore, due to the uncertainty of the evolving regulatory regime in PRC, we cannot assure you that we will not be found in violation of any laws and regulations currently in effect or in the future due to changes in relevant authorities’ interpretation of these laws and regulations, as well as the view or interpretation taken by such authorities on the nature and operation of our virtual currency and relevant business activities.

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures and we were never required to evaluate our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. Our management has not completed assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of the effectiveness of our internal control over financial reporting.

In the course of preparing and auditing our consolidated financial statements for the year ended December 31, 2018, 2019 and 2020, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2020. According to the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to our lack of competent accounting and financial reporting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize and carry out key controls over the financial reporting process and to properly address complex accounting issues and to prepare and review consolidated financial statements and related disclosures in accordance with U.S. GAAP and SEC financial reporting requirements. The material weakness, if not remediated timely, may lead to material misstatements in our consolidated financial statements in the future.

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any material 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 the effectiveness of our internal control over financial reporting, additional material weaknesses may have been identified.

To remedy our identified material weakness, we plan to undertake steps to strengthen our internal control over financial reporting, including: (1) hiring additional qualified resources equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (2) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for accounting and financial reporting personnel, (3) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements, and (4) preparing comprehensive accounting policies, manuals and closing procedures to improve the quality and accuracy of their period-end financial closing process. However, the implementation of these measures may not fully address the material weakness in our internal control over

 

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financial reporting, and we cannot conclude that they will be fully remediated in a timely manner. Our failure to correct the material weakness identified or our failure to discover and address any other deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

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

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other 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 may not be able to obtain additional capital when desired, on favorable terms or at all.

We may make investments from time to time in technologies, facilities, equipment, hardware, software and other projects to remain competitive. Due to the unpredictable nature of the capital markets and our industry, there can be no assurance that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if we experience disappointing results of operations. If adequate capital is not available to us as required, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. If we do raise additional funds through the issuance of equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing shareholders.

Negative publicity may materially and adversely affect our brand, reputation, business and growth prospects.

Negative publicity involving us, our management, our users, our content, our content creators, our platform or our business model may materially and adversely harm our brand and our business. See “—We may be liable for intellectual property infringement with respect to content displayed on, retrieved from or linked to our

 

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platform which may materially and adversely affect our business, financial condition and prospects.” We cannot assure you that we will be able to defuse negative publicity about us, our management and/or our services to the satisfaction of our investors, users, content creators or business partners. There has been negative publicity about our platform and the misuse of our services by certain content creators and users. Such negative publicity may divert our management’s attention and materially and adversely impact our business, financial condition and results of operations.

We are subject to payment processing risks.

Our users pay for our membership subscription, the audio content offered on our platform and our other products and services through a variety of online payment solutions. We rely on third parties to process such payments. Acceptance and processing of these payment methods are subject to certain rules and regulations and require payment of interchange and other fees. To the extent there are increases in payment processing fees, material changes in the payment network, such as delays in receiving payments from processors and/or changes in the rules or regulations concerning payment processing, our ability to provide superior use experience, including convenient payment options, may be undermined, and our revenue, operating expenses and results of operation could be adversely impacted. In addition, in online payment transactions, secure transmission of user information, such as debit and credit card numbers and expiration dates, personal information and billing addresses, over public networks, is essential to user privacy protection and maintaining their confidence in our platform. We do not have control over the security measures of our third-party payment platforms, and their security measures may not be adequate at present or may not be adequate with the expected increased usage of online payment platforms.

Future strategic alliances or acquisitions may have a material and adverse effect on our business, results of operation and financial condition.

We may enter into strategic alliances, including joint ventures or minority equity investments, with various third parties to further our business purpose from time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the third party and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect our business, or our investments may be subject to loss. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such third party.

In addition, when appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased delay and costs, and may derail our business strategy if we fail to do so. Furthermore, past and future acquisitions and the subsequent integration of new assets and businesses into our own require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant.

We have granted and may continue to grant share options and other share-based awards in the future, which may result in increased share-based compensation expenses.

We adopted a global share plan, as amended in March 2021, or the Amended Global Plan, for the purpose of granting share-based compensation awards to employees, directors and consultants to incentivize their

 

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performance and align their interests with ours. Mr. Jianjun Yu and Ms. Yuxin Chen, through Ximalaya Welfare Limited, adopted a legacy global share plan, or the Legacy Plan, for similar reason. For further detailed information, please refer to “Management—Share Incentive Plans.” For the years ended December 31, 2018, 2019 and 2020, we recorded share-based compensation expenses of zero, zero and RMB58.3 million (US$8.9 million), respectively. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. In March 2021, we also adopted a 2021 share incentive plan, or 2021 Plan, effective upon the completion of this offering. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

If we are not able to control our labor costs in an effective way, our business, results of operation and financial condition may be adversely affected.

Our labor costs are primarily incurred in China. The economy of China has been experiencing significant growth, leading to inflation and increased labor costs, particularly in the large cities, such as Shanghai. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. We expect that our labor costs in China, including wages and employee benefits, will continue to grow as our business grows in scale. Significant additional government-imposed increases in the jurisdictions where we have operations may affect our profitability and results of operations, unless we are able to pass on these costs to our users by increasing prices of our programs.

Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China, as well as the effectiveness of mobile operating systems and networks.

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. Moreover, we primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. Web traffic in China has experienced significant growth during the past few years. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage. If we cannot increase our capacity to deliver our online services, we may not be able to accommodate the increases in traffic from expanding user base, and the adoption of our services may be hindered, which could adversely impact our business.

In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. Furthermore, if internet access fees or other charges to internet users increase, some users may be prevented from accessing the mobile internet and thus cause the growth of mobile internet users to decelerate. Such deceleration may adversely affect our ability to continue to expand our user base.

We have limited insurance coverage of our operations, which may expose us to significant costs and business disruption.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies. We do not have any business liability or disruption

 

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insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence may disrupt our business operations, require us to incur substantial costs and divert our resources, which could have an adverse effect on our results of operations and financial condition.

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

COVID-19 had a severe and negative impact on the Chinese and the global economy starting from the first quarter of 2020. Whether this will lead to a prolonged downturn in the economy is still unknown. The Chinese and global macroeconomic environment is facing numerous challenges. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. The tensions between China and the U.S. and other countries have been intensified especially since COVID-19. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

We face risks related to health epidemics and other outbreaks, as well as natural disasters, which could significantly disrupt our operations and adversely affect our business, results of operation and financial condition.

Our business could be adversely affected by the effects of epidemics. In recent years, there have been outbreaks of epidemics in China and globally. Our business operations could be disrupted if one of our employees is suspected of having contracted COVID-19, H1N1 flu, avian flu, Ebola or another epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. Our results of operations could be adversely affected to the extent that the outbreak has any negative impact on the Chinese and global economy in general and the Chinese and global mobile internet and gaming industries in particular.

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

We are subject to risks relating to our leased properties.

Currently, all of our offices are on leased premises. We may not be able to successfully maintain, extend or renew our leases upon expiration of the current terms on commercially reasonable terms or at all, and may therefore be forced to relocate to new offices. In the event we are forced to relocate, we may not be able to locate desirable alternative sites for our offices in a timely and cost-effective manner and the relocation of any of our offices may disrupt our operations and result in significant relocation expenses, which could adversely affect our business, financial condition and results of operations.

 

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

As of the date of this prospectus, we are not aware of any actions, claims or investigations threatened against us or our lessors with respect to the defects in our leasehold interests. However, if any of our leases is terminated as a result of challenges by other parties or governmental authorities for lack of title certificates or proof of authorization to lease, we do not expect to be subject to any fines or penalties, but we may be forced to relocate the affected offices and incur additional expenses relating to such relocation.

Risks Relating to our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, 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.

Foreign ownership of telecommunication businesses is subject to restrictions under current PRC laws and regulations. Specifically, foreign ownership of an internet information service provider may not exceed 50%, and the major foreign investor is required to have a record of good performance and operating experience in managing value-added telecommunications business. We are a Cayman Islands exempted company. Xizhang (Shanghai) Internet Technology Limited is our PRC subsidiary and a wholly foreign-owned enterprise under PRC laws. To comply with PRC laws and regulations, we conduct our business in China mainly through Shanghai Ximalaya, Shenzhen Tianbo and Shanghai Wonder Education, our variable interest entities, and their respective subsidiaries, based on a series of contractual arrangements by and among our WFOEs, our VIEs and their respective shareholders. For a description of these contractual arrangements, see “Corporate History and Structure—Contractual Arrangements with our VIEs and Their Respective Shareholders.” As a result of these contractual arrangements, we exert control over our VIEs and consolidate their financial results in our financial statements under U.S. GAAP.

In the opinion of CM Law Firm, our PRC legal counsel, (i) the ownership structure of our WFOEs and our VIEs in China does not result in any violation of PRC laws and regulations currently in effect; and (ii) the contractual arrangements between our WFOEs, our VIEs and their respective shareholders governed by PRC law will not result in any violation of PRC laws or regulations currently in effect. However, we have been further advised by our PRC counsel that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, the PRC government may ultimately take a view contrary to the opinion of our PRC counsel. If the PRC government otherwise find that we are in violation of any existing or future PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:

 

   

revoking the business licenses and/or operating licenses of such entities;

 

   

imposing fines on us;

 

   

confiscating any of our income that they deem to be obtained through illegal operations;

 

   

terminating or placing restrictions or onerous conditions on our operations;

 

   

placing restrictions on our right to collect revenues; and

 

   

shutting down our servers or blocking our mobile apps and websites.

 

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

We rely on contractual arrangements with our VIEs and their respective shareholders for our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with our VIEs and their respective shareholders to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. For example, our VIEs and their respective shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of our VIEs in China, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, 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 rely on the performance by our VIEs and their respective shareholders of their obligations under the contracts to exercise control over our VIEs. The shareholders of our VIEs 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 portion of our business through the contractual arrangements with our VIEs. 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 VIEs or their 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 VIEs may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

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

If our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. For example, if the shareholders of any of our VIEs were to refuse to transfer their equity interests in our VIEs to us or our designee if we exercise the exclusive call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All 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. 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

 

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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 delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be negatively affected. See “—Risks Relating to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

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

A significant portion of equity interests in our VIEs are held by our executive officers and shareholders or affiliates thereof. Conflicts of interest may arise between the roles of them as shareholders, directors or officers of our company and as shareholders of our VIEs. For individuals who are also our directors and officers, we rely on them to abide by the laws of the Cayman Islands, which provide that directors and officers owe fiduciary duties to our company, including duties to act in good faith and in the best interest of our company and not to use their positions for personal gain. The shareholders of our VIEs have executed powers of attorney to appoint our WFOEs or a person designated by our WFOEs to vote on their behalf and exercise voting rights as shareholders of our VIEs. We cannot assure you that when conflicts arise, these shareholders will act in the best interest of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and these shareholders, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIEs owes 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 within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements in relation to our VIEs were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of our VIEs 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 VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIEs’ 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 VIEs that are material to the operation of certain portion of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with our VIEs, the entity holds certain assets that are material to the operation of certain portion of our business, including permits, domain names and most of our intellectual property rights. If any of our VIEs goes bankrupt 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 VIEs may not, in any manner, sell, transfer, mortgage or dispose of its assets or legal or beneficial interests in the business without our prior consent. If our VIEs undergo a voluntary or involuntary

 

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liquidation proceeding, the 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.

Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which came into effect on January 1, 2020 and replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, uncertainties still exist in relation to its interpretation and implementation. The Foreign Investment Law does not touch upon the relevant concepts and regulatory regimes that were historically suggested relating to the regulating of VIE corporate structures. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. On December 26, 2019, the State Council issued the Implementation Regulations for the Foreign Investment Law of the People’s Republic of China, or the Implementation Regulations, which became effective on January 1, 2020. Pursuant to the Implementation Regulations, in the event of any discrepancy between the Foreign Investment law and the Implementation Regulations and relevant requirements for foreign investment promulgated prior to January 1, 2020, the Foreign Investment Law and the Implementation Regulations shall prevail. The Implementation Regulations on the Foreign Investment Law does not stipulate whether contractual arrangements should be deemed as a form of foreign investment. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. If the ownership structure, contractual arrangements and business of our company, our PRC subsidiaries or our variable interest entities are found to be in violation of any existing or future PRC laws or regulations, or if we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our PRC subsidiaries or our variable interest entities, revoking the business licenses or operating licenses of our PRC subsidiaries or our variable interest entities, shutting down our servers or blocking our online platform, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from our initial public offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. 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. If any of these occurrences results in our inability to direct the activities of any of our VIEs and/or our failure to receive economic benefits from any of them, we may not be able to consolidate their results into our consolidated financial statements in accordance with U.S. GAAP.

 

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

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

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

Risks Relating to Doing Business in China

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

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

The PRC government exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Although the Chinese economy has grown significantly in the past decade, growth has been uneven, both geographically and among various sectors of the economy. The growth also may not continue, as the growth of the Chinese economy has gradually slowed since 2010, and the impact of COVID-19 on the Chinese economy in 2020 was severe. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may have a negative effect on our company. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations.

 

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

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

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

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

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from our initial public 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 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. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

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

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior

 

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approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and VIEs to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

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

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

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the anti-monopoly law enforcement agency 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 anti-monopoly law enforcement agency shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In early February 2021, the Anti-monopoly Commission of the State Council published the Anti-monopoly Guidelines for the Internet Platform Economy Sector that aims at specifying some of the circumstances under which an activity of internet platforms may be identified as monopolistic act as well as setting out merger controlling filing procedures involving variable interest entities. In addition, the security review rules issued by the Ministry of Commerce, or 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. On December 19, 2020, the National Development and Reform Commission, or the NDRC and the MOFCOM jointly promulgated the Measures on the Security Review of Foreign Investment, effective on January 18, 2021, setting forth provisions concerning the security review mechanism on foreign investment, including the types of investments subject to review, review scopes and procedures, among others. The Office of the Working Mechanism of the Security Review of Foreign Investment (the “Office of the Working Mechanism”) will be established under the NDRC, who will lead the task together with the MOFCOM. Foreign investor or relevant parties in China must declare the security review to the Office of the Working Mechanism prior to the investments in, among other industries, important cultural products and services, important information technology and internet products and services, important financial services, key technologies and other important fields relating to national security, and obtain

 

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control in the target enterprise. 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 counterpart or anti-monopoly law enforcement agency may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Regulatory uncertainties relating to anti-monopoly and competition laws could adversely affect our business, financial condition, or operating results.

The PRC anti-monopoly enforcement agencies have in recent years strengthened enforcement under the PRC Anti-monopoly Law, including levying significant fines, with respect to concentration of undertakings and cartel activities, mergers and acquisitions, as well as abusive practices by companies with market dominance.

In February 2021, the Anti-monopoly Commission of the State Council has promulgated the Guidelines on Anti-monopoly Issues in Platform Economy, or the Platform Economy Anti-monopoly Guidelines, which for the first time specified that, any concentration as a result of mergers and combinations between variable interest entities shall be regulated by the Anti-monopoly Law. In addition, the Platform Economy Anti-monopoly Guidelines set out detailed standards and rules in respect of the definition of relevant markets, typical types of cartel activities and abusive practices by online platform operators with market dominance, which provide further guidelines for enforcement of anti-monopoly laws against online platform operators. For instance, online platform operators that use technological advantages, such as data and algorithms, to eliminate or restrict competition or impose price restrictions or exclusivity requirements on users may be deemed to be abusing dominant market position. Failure or perceived failure to comply with the Platform Economy Anti-monopoly Guidelines or other anti-monopoly related laws and regulations may result in enquiries or investigations or enforcement actions, penalties, litigation or claims against us and could adversely affect our business, financial condition, results of operations and future prospects.

Considering the evolving legislative activities and increasingly stringent anti-monopoly enforcement by the PRC regulatory authorities, we may be subject to greater scrutiny and attention from regulators and more frequent and strict review by regulators, which will increase our compliance costs and it could be time-consuming to comply with the relevant regulations described above to complete transactions in the future. Any of the required approval processes, including approval from SAMR, may be uncertain and could increase our costs and delay or inhibit our ability to operate and expand our business, maintain our market share or otherwise achieve the goals of our acquisition strategy.

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 our initial public offering to make loans to or make additional capital contributions to our PRC subsidiaries and VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

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

Most of these ways are subject to PRC regulations and approvals. For example, loans by us to our wholly owned PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. If we decide to finance our wholly owned PRC subsidiaries by means of capital contributions, these capital contributions are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information

 

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System and registration with other governmental authorities in China. Any foreign loan procured by our PRC subsidiaries is required to be registered or filed with SAFE or its local branches or satisfy relevant requirements as provided in SAFE Circular 28. Any medium or long-term loan to be provided by us to our VIEs must be registered with the NDRC and SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of our initial public 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.

Further, we are not likely to finance the activities of our VIEs by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in internet information services, online audio program services and related businesses.

SAFE promulgated Circular on the Reforming of the Management Method of the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB capital converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from our initial public offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China. On October 23, 2019, SAFE promulgated the Notice of the Administration of Foreign Exchange on Further Promoting the Convenience of Cross-Border Trade and Investment, or SAFE Circular 28, which, among other things, stipulates that non-investment foreign-invested entities may use foreign exchange capital or Renminbi funds converted from the foreign exchange capital to make domestic equity investments, provided that such investments should comply with the Negative List and other relevant PRC laws and regulations. Even though SAFE Circular 28 allows all foreign-invested enterprises (including those without an investment business scope) to utilize and convert their foreign exchange capital for making equity investment in China if certain requirements prescribed therein are satisfied, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation.

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

 

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negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ 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. On February 13, 2015, SAFE issued SAFE Circular No. 13, which took effect on June 1, 2015, pursuant to which, the power to accept SAFE registration was delegated from local SAFE to local qualified banks where the assets or interest in the domestic entity was located.

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

If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiaries 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 subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We have used our best efforts to notify PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange registrations. 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. We cannot assure you that all shareholders or beneficial owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

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

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

 

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

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or 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 State Administration of Taxation, or 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 State Administration of Taxation’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 our company is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of the ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or Class A 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 paid to our non-PRC individual shareholders (including the ADS holders) and any gain realized on the transfer of ADSs or Class A 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 dividends or 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 our company would be able to claim the benefits of any tax treaties between their

 

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country of tax residence and the PRC in the event that our company is treated as a PRC resident enterprise. Any such PRC tax may reduce the returns on your investment in the ADSs.

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

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

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

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 prospectus based on foreign laws.

We are a company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and a majority of them are PRC nationals. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Even if you are successful in bringing an action of this kind, PRC laws 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 PRC laws, see “Enforceability of Civil Liabilities.”

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

Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is

 

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allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. See also “—Risks Relating to Our ADSs and This Offering—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law” for risks associated with investing in us as a Cayman Islands company.

The approval of the China Securities Regulatory Commission, or CSRC, may be required in connection with this offering, and, if required, we cannot predict whether we will be able to obtain such approval.

The M&A Rules require an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s 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 the CSRC approval is required, it is uncertain how long it will take us to obtain such approval and any failure to obtain or delay in obtaining the approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, results of operations and financial condition.

Our PRC legal counsel has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on the New York Stock Exchange or the Nasdaq Stock Market. However, we cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

If the custodians or authorized users of controlling non-tangible assets of our company, including our corporate chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.

Under PRC law, legal documents for corporate transactions are executed using the chops or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the Administration of Industry and Commerce.

Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our PRC subsidiary, variable interest entity and its subsidiaries have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. In order to maintain the physical security of our chops and chops of our PRC entities, we generally store these items in secured locations accessible only by the

 

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authorized personnel of each of our subsidiaries and variable interest entity (including its subsidiaries). Although we monitor such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiary, variable interest entity or its subsidiaries, we or our PRC subsidiary, variable interest entity and its subsidiaries would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.

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

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

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

On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

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

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the

 

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HFCA Act are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCA Act. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.

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

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

Proceedings instituted by the SEC against certain 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.

In December 2012, the SEC instituted administrative proceedings against the big four PRC-based accounting firms in China, 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’ audit work papers with respect to certain other PRC-based companies that are publicly traded in the United States.

On January 22, 2014, the initial administrative law judge presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit papers and other documents to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months. Thereafter, the accounting firms filed a petition for review of the initial decision, prompting the SEC commissioners to review the initial decision, determine whether there had been any violation and, if so, determine the appropriate remedy to be placed on these audit firms.

On February 6, 2015, each of the four PRC-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 and to audit US-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to

 

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our delisting 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.

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 not to be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding PRC-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

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

The tension in international trade and rising political tension, particularly between U.S. and China, may adversely impact our business, financial condition, and results of operations.

Although cross-border business may not be an area of our focus, if we plan to expand our business internationally in the future, any unfavorable government policies may affect our international expansion or our competitive position, or prevent us from being able to conduct business in certain countries. If any new tariffs, legislation, or regulations are implemented, such changes could adversely affect our business, financial condition, and results of operation. There have been heightened tensions in international economic relations, such as the one between the United States and China.

Although the direct impact of the current international trade tension, and any escalation of such tension, on the online audio industry in China is uncertain, the negative impact on general, economic, political and social conditions may adversely impact our business, financial condition and results of operations.

In addition, political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the executive orders issued by U.S. President Donald J. Trump in August 2020 that prohibit certain transactions with certain Chinese companies and their applications. Rising political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations.

Risks Relating to our ADSs and this Offering

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

We intend to list our ADSs on the New York Stock Exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our Class A ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs is determined by negotiation between us and the underwriter based upon several factors, and the trading price of our ADSs after this offering could decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

 

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

The trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

actual or anticipated fluctuations in our quarterly results of operations;

 

   

variations in our revenues, earnings, cash flows;

 

   

fluctuations in operating metrics;

 

   

regulatory developments affecting us or our industry;

 

   

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

 

   

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

 

   

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

 

   

changes in financial estimates by securities analysts;

 

   

additions or departures of key personnel;

 

   

release of lockup 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. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings in recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial crisis, the ensuing economic recessions and deterioration in the credit market in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our ADSs. Volatility or a lack of positive performance in our ADS price may also adversely affect our ability to retain key employees, most of whom have been granted options or other equity incentives.

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

 

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

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies, and as a result of this election our financial statements may not be comparable to those of companies that comply with public company effective dates, including other emerging growth companies that have not made this election.

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

Immediately prior to the completion of this offering, we expect to create a dual-class share structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share based on our proposed dual-class share structure. We will sell Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Any number of Class B ordinary shares held by a holder thereof will be automatically and immediately converted into an equal number of Class A ordinary shares upon the occurrence of (i) any direct or indirect sale, transfer, assignment or disposition of such number of Class B ordinary shares by the holder thereof or the direct or indirect transfer or assignment of the voting power attached to such number of Class B ordinary shares through voting proxy or otherwise to any person that is not Xima Holdings Limited, Touch Sound Limited, Mr. Jianjun Yu, Ms. Yuxin Chen or any entity controlled by Mr. Jianjun Yu or Ms. Yuxin Chen, or (ii) the direct or indirect sale, transfer, assignment or disposition of a majority of the issued and outstanding voting securities of, or the direct or indirect transfer or assignment of the voting power attached to such voting securities through voting proxy or otherwise, or the direct or indirect sale, transfer, assignment or disposition of all or substantially all of the assets of, a holder of Class B ordinary shares that is an entity to any person that is not Xima Holdings Limited, Touch Sound Limited, Mr. Jianjun Yu, Ms. Yuxin Chen or any entity controlled by Mr. Jianjun Yu or Ms. Yuxin Chen.

Immediately prior to the completion of this offering, all of the shares held by Xima Holdings Limited and Touch Sound Limited will be re-designated as Class B ordinary shares. Upon the completion of this offering, Xima Holdings Limited and Touch Sound Limited will beneficially own an aggregate of 86,332,817 Class B ordinary shares, which, in aggregate, will represent             % of our total voting power, assuming the underwriters do not exercise their over-allotment option, or representing             % of our total voting power if the underwriters exercise their over-allotment option in full. Therefore, upon the completion of this offering, Mr. Jianjun Yu and Ms. Yuxin Chen, through Xima Holdings Limited and Touch Sound Limited, will continue to have decisive influence over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. 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 our Class A ordinary shares and the ADSs may view as beneficial.

 

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Our dual-class voting structure may render the ADSs representing our Class A ordinary shares ineligible for inclusion in certain stock market indices, and thus adversely affect the trading price and liquidity of the ADSs.

We cannot predict whether our dual-class share structure with different voting rights will result in a lower or more volatile market price of the ADSs, adverse publicity, or other adverse consequences. Certain index providers have announced restrictions on including companies with multi-class share structures in certain of their indices. For example, S&P Dow Jones and FTSE Russell have changed their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. As a result, our dual-class voting structure may prevent the inclusion of the ADSs representing our Class A ordinary shares in such indices, which could adversely affect the trading price and liquidity of the ADSs representing our Class A ordinary shares. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structure and our dual-class structure may cause shareholder advisory firms to publish negative commentary about our corporate governance, in which case the market price and liquidity of the ADSs could be adversely affected.

If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for the ADSs to decline.

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

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

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

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their Class A ordinary shares on a per ADS basis. As a result, you will experience

 

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immediate and substantial dilution, representing the difference between the initial public offering price of per ADS, and our adjusted net tangible book value per ADS, after giving effect to our sale of the ADSs offered in this offering. In addition, you may experience further dilution in connection with the issuance of Class A ordinary shares upon the exercise or vesting, as the case may be, of our share incentive awards. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

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

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

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

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

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

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

We have conditionally adopted our tenth amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. Our post-offering memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our post-offering memorandum and articles of association provides that our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, including Class A ordinary shares represented by ADSs. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more

 

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difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and the ADSs may be materially and adversely affected. In addition, our post-offering memorandum and articles of association also provides that only shareholders holding not less than one-third (1/3) of all votes attaching to all issued and outstanding shares of our company can requisition general meeting of shareholders, which limits the ability of our shareholders to obtain control of our company through general meetings of shareholders.

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

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares represented by your ADSs in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying Class A ordinary shares represented by your ADSs in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the underlying Class A ordinary shares represented by your ADSs. 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 cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested. Furthermore, as a Cayman Islands exempted company, we may but are not obliged by the Companies Act (As Revised) of the Cayman Islands to call shareholders’ annual general meetings.

The depositary for our ADSs will give us a discretionary proxy to vote our underlying Class A ordinary shares represented by your ADSs if you do not timely provide voting instructions to the depositary in accordance with the deposit agreement, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not timely provide voting instructions to the depositary, the depositary will give us a discretionary proxy to vote our Class A ordinary shares represented by your ADSs at shareholders’ meetings unless:

 

   

we have failed to timely provide the depositary with notice of the meeting and related voting materials;

 

   

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

 

   

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

 

   

we have informed the depositary that a matter to be voted on at the meeting may have an adverse impact on shareholders; or

 

   

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

The effect of this discretionary proxy is that if you do not timely provide voting instructions to the depositary in the manner required by the deposit agreement, you cannot prevent our Class A ordinary shares represented by your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our Class A ordinary shares are not subject to this discretionary proxy.

 

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Our post-offering memorandum and articles of association and the deposit agreement provide that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) is the exclusive judicial forum within the U.S. for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, and any suit, action or proceeding arising out of or relating in any way to the ADSs or the deposit agreement, which could limit the ability of holders of our Class A ordinary shares, the ADSs or other securities to obtain a favorable judicial forum for disputes with us, our directors and officers, the depositary, and potentially others.

Our post-offering memorandum and articles of association provide that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) is the exclusive forum within the United States for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than our company. The deposit agreement provides that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) shall have exclusive jurisdiction over any suit, action or proceeding against or involving us or the depositary, arising out of or relating in any way to the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs. The enforceability of similar federal court choice of forum provisions in other companies’ organizational documents has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable or unenforceable. If a court were to find the federal choice of forum provision contained in our post-offering memorandum and articles of association or the deposit agreement to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection clause in our post-offering memorandum and articles of association, as well as the forum selection provision in the deposit agreement, may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary, and potentially others in his or her preferred judicial forum, and this limitation may discourage such lawsuits. Holders of our shares or the ADSs will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder pursuant to the exclusive forum provision in the post-offering memorandum and articles of association and deposit agreement.

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 action events, in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act,

 

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and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

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

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

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of association, special resolutions, and the register of mortgages and charges, of such companies) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our post-offering articles of association that will become effective immediately prior to completion of this offering to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

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

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

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, all 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.”

 

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ADS 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 the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, in the state courts in New York County, New York) shall have exclusive jurisdiction to hear and determine claims arising out of or relating in any way to the deposit agreement (including claims arising under the Exchange Act or the Securities Act) and in that regard, 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, to the fullest extent permitted by law.

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. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waives the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary, lead to increased costs to bring a claim, limited access to information and other imbalances of resources between such holder and us, or limit such holder’s ability to bring a claim in a judicial forum that such holder finds favorable. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs shall relieve us or the depositary from our respective obligations to comply with the Securities Act and the Exchange Act nor serve as a waiver by any holder or beneficial owner of ADSs of compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder.

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

As a Cayman Islands company listed on the NYSE, we are subject to the NYSE listing standards, which requires listed companies to have, among other things, a majority of their board members to be independent and independent director oversight of executive compensation and nomination of directors. However, NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE listing standards.

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

 

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

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

 

   

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

 

   

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

 

   

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

 

   

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

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

There can be no assurance that we will not be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or Class A ordinary shares.

A non-U.S. corporation, such as our company, will be classified as a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year consists of certain types of “passive” income (the “income test”); or (2) at least 50% of the value of its assets (generally determined on the basis of a quarterly average) during such year is attributable to assets that produce passive income or are held for the production of passive income (the “asset test”). Although the law in this regard is not entirely clear, we treat our consolidated VIEs and their subsidiaries as being owned by us for U.S. federal income tax purposes because we control their management decisions and are entitled to substantially all of the economic benefits associated with them. As a result, we consolidate their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of our consolidated VIEs and their subsidiaries for U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year. Assuming that we are the owner of our consolidated VIEs and their subsidiaries for U.S. federal income tax purposes, and based on the current and anticipated value of our assets and composition of our income and assets (taking into account the projected cash proceeds from, 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, while we do not expect to be or become a PFIC, no assurance can be given in this regard because the determination of whether we are or will become a PFIC for any taxable year is a fact-intensive inquiry made annually that depends, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to be or become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test, including the value of our goodwill and other unbooked intangibles, may be determined by reference to the market price of our ADSs from time to time (which may be volatile). 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.

 

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If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) holds our ADSs or Class A ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

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

Upon the completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NYSE, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly.

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

In addition, after we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or 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;

 

   

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

 

   

the expected changes in our revenues, expenses or expenditures;

 

   

the expected growth of the online audio industry;

 

   

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

 

   

our expectations regarding our relationship with content creators, users, advertisers and other business partners;

 

   

competition in our industry;

 

   

general economic and business conditions in China and elsewhere;

 

   

government policies and regulations relating to our industry; and

 

   

the outcome of any current and future legal or administrative proceedings.

You should read 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 also contains statistical data and estimates that we obtained from government and private publications, including industry data and information from CIC. Although we have not independently verified the data, we believe that the publications and reports are reliable. The market data contained in this prospectus involves a number of assumptions, estimates and limitations. The online audio market and related markets in China and elsewhere may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a

 

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high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements.

 

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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. These estimates are based upon an assumed initial offering price of US$             per ADS, the midpoint of the range shown on the front cover page of this prospectus. A US$1.00 change in the assumed initial public offering price of US$             per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease the net proceeds of this offering by US$             million, or approximately US$             million if the underwriters exercise their option to purchase additional ADSs in full, assuming no change to the number of                      ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

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

 

   

approximately US$             million, or 30% of the net proceeds to advance our next-generation technology, AI and big data capabilities;

 

   

approximately US$             million, or 25% of the net proceeds to expand and enhance our content offerings and empower our content creators;

 

   

approximately US$             million, or 25% of the net proceeds for marketing and branding, including marketing and promotional activities to further expand our user base and strengthen our brand; and

 

   

the balance, approximately US$             million, or 20% of the net proceeds, for potential strategic investments and acquisitions, working capital and 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. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—General Risks Relating to our Business and Industry—We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.”

Pending use of the net proceeds, we intend to invest the net proceeds in short-term, interest-bearing, debt instruments.

In utilizing the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions and to our consolidated VIEs only through loans. 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. 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 or additional capital contributions to our PRC subsidiaries and our consolidated affiliated entities in China, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

We have not previously declared or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our shares or ADSs. 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 rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends. See “Risk Factors—Risks Relating to Doing Business in China—We may rely on dividends paid by our PRC subsidiaries to fund cash and financing requirements. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our Class A ordinary shares.”

Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium account, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay or recommend 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. If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the underlying Class A ordinary shares represented by your ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the underlying Class A ordinary shares represented by your ADSs held by such ADS holders, subject to the terms of the deposit agreement, net of 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.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2021:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (i) the automatic conversion of all of our issued and outstanding preferred shares including Series Angel preferred shares into                      ordinary shares on one-for-one basis immediately prior to the completion of this offering; and (ii) the impact of share-based compensation expense for share-based awards to be recorded upon the completion of this offering:

 

   

on a pro forma as adjusted basis to reflect (i) the automatic conversion of all of our issued and outstanding preferred shares including Series Angel preferred shares into                      ordinary shares on one-for-one basis immediately prior to the completion of this offering; (ii) the impact of share-based compensation expense for share-based awards to be recorded upon the completion of this offering and (iii) the sale of                      Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

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

 

    As of March 31, 2021  
    Actual     Pro Forma
(unaudited)
    Pro Forma As Adjusted(1)
(unaudited)
 
    RMB     US$     RMB     US$     RMB     US$  
                (in thousands)              

Mezzanine equity:

           

Series A convertible redeemable preferred shares (US$0.0001 par value; 2,161,425 shares authorized, issued and outstanding; and nil outstanding on a pro-forma basis)

    20,277       3,095       —         —        

Series B convertible redeemable preferred shares (US$0.0001 par value; 88,870,096 shares authorized, issued and outstanding; and nil outstanding on a pro-forma basis)

    1,856,554       283,365       —         —        

Series C convertible redeemable preferred shares (US$0.0001 par value; 10,631,112 shares authorized, issued and outstanding; and nil outstanding on a pro-forma basis)

    302,928       46,236       —         —        

Series D convertible redeemable preferred shares (US$0.0001 par value; 14,727,852 shares authorized, issued and outstanding; and nil outstanding on a pro-forma basis)

    851,119       129,906       —         —        

Series E convertible redeemable preferred shares (US$0.0001 par value; 105,023,737 shares authorized, 91,205,959 shares issued and outstanding; and nil outstanding on a pro-forma basis)

    6,804,602       1,038,585       —         —        

Redeemable non-controlling interests

    11,595       1,770       11,595       1,770      

 

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    As of March 31, 2021  
    Actual     Pro Forma
(unaudited)
    Pro Forma As Adjusted(1)
(unaudited)
 
    RMB     US$     RMB     US$     RMB     US$  
                (in thousands)              

Total mezzanine equity

    9,847,075       1,502,957       11,595       1,770      

Shareholders’ (deficit) equity:

           

Ordinary shares (US$0.0001 par value; 254,007,958 shares authorized, 86,154,070 shares issued and outstanding; 318,328,334 shares issued and outstanding on a pro-forma basis)

    56       9       209       32      

Series Angel preferred shares (US$0.0001 par value; 24,577,820 shares authorized, issued and outstanding; and nil outstanding on a pro-forma basis)

    16       2       —         —        

Additional paid-in capital

    —         —         10,671,334       1,628,764      

Accumulated other comprehensive income

    41,445       6,326       41,445       6,326      

Accumulated deficit

    (7,691,737     (1,173,988     (8,527,728     (1,301,586    

Non-controlling interests

    4,259       650       4,259       650      

Total shareholders’ (deficit) equity

    (7,645,961     (1,167,001     2,189,519       334,186      

Total capitalization

    2,201,114       335,956       2,201,114       335,956      

 

Note:

(1)

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS, which is the mid-point of the price range shown on the front cover of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ (deficit) equity and total capitalization by US$             million. The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total shareholders’ equity (deficit) and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DILUTION

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

Our net tangible book value as of March 31, 2021 was approximately US$             per ordinary share and US$             per ADS. Net tangible book value per ordinary share represents the amount of total tangible assets, minus the amount of total liabilities and mezzanine equity, divided by the total number of ordinary shares and Series Angel preferred shares outstanding. Pro forma net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all of our outstanding shares including Series Angel preferred shares. Dilution is determined by subtracting pro forma net tangible book value per ordinary share from the assumed public offering price per ordinary share.

Without taking into account any other changes in such net tangible book value after March 31, 2021, other than to give effect to our issuance and sale of                      ADSs, representing                      ordinary shares, offered in this offering at an assumed initial public offering price of US$             per ADS, the midpoint of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us (assuming the option to purchase additional ADSs is not exercised), our pro forma as adjusted net tangible book value as of March 31, 2021 would have been US$             per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, or US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share, or US$             per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share, or US$             per ADS, to purchasers of ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share      Per ADS  

Assumed initial public offering price per share

   US$                    US$                

Net tangible book value per share

   US$                    US$                

Amount of dilution in net tangible book value per ordinary share to new investors in the offering

   US$                    US$                

A US$1.00 change in the assumed public offering price of US$             per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease our pro forma as adjusted net tangible book value after giving effect to the offering by US$             million, the pro forma as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$ per ordinary share and per US$             ADS and the dilution in pro forma as adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. The pro forma 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.

 

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The following table summarizes, on a pro forma basis as of March 31, 2021, the differences between the shareholders as of March 31, 2021 and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid at an assumed initial public offering price of US$             per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

     Ordinary Shares
Purchased
     Total
Consideration
     Average
Price Per
Ordinary

Share
     Average
Price Per

ADS
 
     Number      Percent      Amount      Percent  

Existing shareholders

                                                                                                                       

New investors

                 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A US$1.00 change in the assumed public offering price of US$             per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease total consideration paid by new investors, total consideration paid by all shareholders, average price per ordinary share and average price per ADS paid by all shareholders by US$            , US$            , US$             and US$            , respectively, assuming no change to the number of                      ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The discussion and tables above also assume no exercise of any outstanding stock options outstanding as of the date of this prospectus. As of the date of this prospectus, there were              ordinary shares issuable upon exercise of outstanding stock options at a weighted average exercise price of US$             per ordinary share, and there were                      ordinary shares available for future issuance upon exercise of future grants under our share incentive plans. To the extent that any of these options are exercised or any ordinary shares are issued upon any conversion of the outstanding convertible promissory notes, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, (i) the Cayman Islands has a less exhaustive body of securities laws than the United States and these securities laws provide significantly less protection to investors; and (ii) Cayman Islands companies may not have standing to sue before the federal courts of the United States. Our memorandum and articles of association do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our assets are located outside the United States. In addition, a majority of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to bring actions or enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168, as our agent to receive service of process with respect to any action brought against us in the U.S. District Court for the Southern District of New York in connection with this offering under the federal securities laws of the United States or the securities laws of any State in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York in connection with this offering under the securities laws of the State of New York.

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

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands laws, has further advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands would, at common law, recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon without any re-examination of the merits underlying the dispute provided that (i) such courts had proper jurisdiction over the parties subject to such judgment, (ii) such courts did not contravene the rules of natural justice of the Cayman Islands, (iii) such judgment was not obtained by fraud, (iv) such judgment was not obtained in a manner, and is not of a kind the enforcement of which, is contrary to natural justice or the public policy of the Cayman Islands, (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands, and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a punitive judgment of a United States court predicated upon the civil liability provisions of the federal securities laws in the United States if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that

 

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may be regarded as fines, penalties or punitive in nature. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

CM Law Firm, our counsel as to PRC law, has advised us that (i) it would be highly unlikely that the courts of the PRC would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, and (ii) there is uncertainty as to whether the courts of the PRC would entertain original actions brought in the PRC against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.

CM Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements, public policy considerations and conditions set forth in applicable provisions of PRC laws, including of the PRC Civil Procedure Law. CM Law Firm has advised us further that under PRC law, a foreign judgment that does not otherwise violate basic legal principles, state sovereignty, safety or social public interest may be recognized and enforced by a PRC court, based either on bilateral treaties or international conventions contracted by China and the country where the judgment is made or on reciprocity between jurisdictions. As there currently exists no bilateral treaty, international convention or other form of reciprocity between China and the United States or the Cayman Islands governing the recognition of judgments, including those predicated upon the liability provisions of the U.S. federal securities laws, it would be highly unlikely that a PRC court would enforce judgments rendered by courts in the U.S. or in the Cayman Islands.

 

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CORPORATE HISTORY AND STRUCTURE

The following chart shows our major corporate milestones since founding:

 

LOGO

We commenced our operations in China in August 2012 through Shanghai Ximalaya Technology Co., Ltd. (formerly known as Shanghai Zhengda Ximalaya Network Technology Limited), or Shanghai Ximalaya, a limited liability company established under the laws of the PRC founded by Mr. Jianjun Yu and Ms. Yuxin Chen, our co-founders. In September 2013, our holding company, Ximalaya Inc., was incorporated in the Cayman Islands. We also established Ximalaya (Hong Kong) Limited, or Ximalaya HK, a wholly-owned Hong Kong subsidiary in the same month.

In February 2017, we acquired all of the equity interests in Shenzhen Tianbo Internet Media Limited, or Shenzhen Tianbo, a limited liability company established under the laws of the PRC, from Mr. Jianping Zheng and Mr. Wei Lin. In March 2018, we transferred our equity interests in Shenzhen Tianbo to Mr. Jianjun Yu and Ms. Yuxin Chen.

In September 2018, as part of our reorganization to further the strategic development of our business, we established Xizhang (Shanghai) Network Technology Co., Ltd., which we refer to as Xizhang in this prospectus, as a wholly-owned PRC subsidiary of Ximalaya HK. In November 2019, we incorporated Ximalaya (BVI) Limited, or Ximalaya BVI, under the laws of BVI. In January 2020, Ximalaya BVI obtained 100% equity interest in Ximalaya HK.

In October 2020, Shanghai Wonder Education Technology Co., Ltd., or Shanghai Wonder Education, was established under PRC law to provide education services focusing on education for users aged 0-12 and related business, the equity interest in which were held by two designated employees of our company on behalf of and for the benefit of Shanghai Ximalaya. Towards the end of 2020 and in early 2021, we established a majority owned and controlled subsidiary Wonder Education Tech Limited, a limited liability company incorporated under the laws of Cayman Islands, and its underlying wholly owned subsidiaries Wonder Education Tech (Hong Kong) Holdings Limited, or Wonder Education Holdings, a company incorporated under the laws of Hong Kong, and Qizhi (Shanghai) Network Technology Co., Ltd., or Qizhi Shanghai, a limited company established under the laws of PRC. Qizhi Shanghai entered into a series of contractual arrangements with Shanghai Wonder Education and its shareholders in January 2021 for us to obtain effective control over Shanghai Wonder Education.

We currently conduct our business primarily through Xizhang, Shanghai Ximalaya, Shenzhen Tianbo and Shanghai Wonder Education, and their respective subsidiaries. We refer to Shanghai Ximalaya, Shenzhen Tianbo

 

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and Shanghai Wonder Education as our VIEs in this prospectus. Due to restrictions and prohibitions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet-based businesses and other related business, Xizhang entered into a series of contractual arrangements (as amended and restated) with Shanghai Ximalaya, Shenzhen Tianbo and their shareholders, and Qizhi Shanghai entered into a series of contractual arrangements with Shanghai Wonder Education and its shareholders. For more details, please see “—Contractual Arrangements with Our VIEs and Their Respective Shareholders.” As a result of our direct ownership in our WFOEs and the variable interest entity contractual arrangements, we are regarded as the primary beneficiary of our VIEs. We treat them and their subsidiaries as our consolidated affiliated entities under U.S. GAAP., and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP.

For our historical equity financing, see “Description of Share Capital—History of Securities Issuances.”

 

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The following diagram illustrates our corporate structure, including our principal subsidiaries and our VIEs and their principal subsidiaries, upon the completion of this offering, assuming the underwriters do not exercise their overallotment option:

 

LOGO

 

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Notes:

(1)

Ximalaya Inc., through direct ownership and control over an aggregate of approximately 51.7% of its outstanding equity interests, consolidates the results of Wonder Education Tech Limited. Directors, officers and principal shareholders of our company as disclosed in the sections titled “Management” and “Principal [and Selling] Shareholders” of this prospectus beneficially own an aggregate of 34.4% of the outstanding equity interests of Wonder Education Tech Limited.

(2)

Shanghai Xiquan Enterprise Management Center (Limited Partnership) and Shanghai Xijie Investment Management Center (Limited Partnership), both are affiliated with our co-founder Mr. Jianjun Yu, and a third-party holding entity affiliated with an existing shareholder of ours, each owns 92.9%, 5.8% and 1.3% of the equity interests in Shanghai Ximalaya Technology Co., Ltd., respectively.

(3)

Mr. Jianjun Yu and Ms. Yuxin Chen, co-founders of our company, each owns 50% and 50% of the equity interests in Shenzhen Tianbo Internet Media Limited.

(4)

Mr. Zhiying Xiao and Mr. Huan Yao, who are employees of our company, each owns 67% and 33% of the equity interests in Shanghai Wonder Education Co., Ltd.

Contractual Arrangements with Our Consolidated Affiliated Entities and Their Shareholders

PRC laws and regulations impose restrictions or prohibitions on foreign ownership and investment in internet-based businesses such as distribution of online information and other value-added telecommunications services, internet audio-visual program services, radio and television program production and operation business and internet culture business. We are a Cayman Islands company and our PRC subsidiaries are considered foreign-invested enterprises. To comply with PRC laws and regulations or PRC regulators’ requirements, we have entered into a series of contractual arrangements, mainly through Xizhang and Qizhi Shanghai, our wholly foreign owned entities, with Shanghai Ximalaya, Shenzhen Tianbo and Shanghai Wonder Education, our consolidated affiliated entities, and the shareholders of Shanghai Ximalaya, Shenzhen Tianbo and Shanghai Wonder Education to obtain effective control over Shanghai Ximalaya, Shenzhen Tianbo, Shanghai Wonder Education and their subsidiaries.

We currently conduct our business through our consolidated affiliated entities and their subsidiaries based on these contractual arrangements, which allow us to:

 

   

exercise effective control over our consolidated affiliated entities and their subsidiaries;

 

   

receive substantially all of the economic benefits from our consolidated affiliated entities and their subsidiaries; and

 

   

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

As a result of these contractual arrangements, we have become the primary beneficiary of our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of Shanghai Ximalaya, Shenzhen Tianbo, Shanghai Wonder Education and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

Agreements that Allow us to Receive Economic Benefits from our Consolidated Affiliated Entities

Exclusive Business Cooperation Agreement. Under the exclusive business corporation agreement entered into on November 29, 2018, between Shanghai Ximalaya and Xizhang, Xizhang has the exclusive right to provide Shanghai Ximalaya technology support, business management consulting, marketing consultation, products research and development and technology services related to all technologies, and business operations needed for its business. Xizhang owns the exclusive intellectual property rights created because of the performance of this agreement. The service fee payable by Shanghai Ximalaya to Xizhang is determined by Xizhang based on its services provided including various factors such as the Xizhang’s incurred technology support and consulting services fees, performance data and Shanghai Ximalaya’s revenues. The term of this agreement is indefinite unless Xizhang unilaterally terminates the agreement in writing.

 

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On November 29, 2018, Shenzhen Tianbo and Xizhang entered into an exclusive business corporation agreement, which includes terms substantially similar to the exclusive business corporation agreement relating to Shanghai Ximalaya as described above.

On January 6, 2021, Shanghai Wonder Education and Qizhi Shanghai entered into an exclusive business corporation agreement, which includes terms substantially similar to the exclusive business corporation agreement relating to Shanghai Ximalaya as described above.

Agreements that Provide us with Effective Control over our Consolidated Affiliated Entities

Power of Attorney. Under the powers of attorney issued on November 29, 2018, restated and amended on March 3, 2020, by Shanghai Ximalaya’s shareholders, each of the shareholders of Shanghai Ximalaya irrevocably granted Xizhang or its designated representative(s) the right to exercise his/her rights as a shareholder of Shanghai Ximalaya including terminate and nominate board members and senior management of Shanghai Ximalaya and other shareholders’ voting rights. Unless each of the shareholders of Shanghai Ximalaya terminates to be a shareholder of Shanghai Ximalaya, the power of attorney shall be irrevocable and continuously effective and valid for permanent from the execution date.

On November 29, 2018, each of the shareholders of Shenzhen Tianbo issued a power of attorney, which includes terms substantially similar to the powers of attorney relating to Shanghai Ximalaya as described above.

On January 6, 2021, each of the shareholders of Shanghai Wonder Education issued a power of attorney, which includes terms substantially similar to the powers of attorney relating to Shanghai Ximalaya as described above.

Share Pledge Agreements. Pursuant to the share pledge agreements entered into on November 29, 2018, restated and amended on March 3, 2020, among Shanghai Ximalaya, Xizhang and Shanghai Ximalaya’s shareholders, the shareholders of Shanghai Ximalaya has pledged all of their equity interests in Shanghai Ximalaya to Xizhang to guarantee the performance by Shanghai Ximalaya and its shareholders’ performance of their respective obligations under the exclusive business corporation agreement, exclusive call option agreement and power of attorney. If Shanghai Ximalaya and/or its shareholders breach their contractual obligations under those agreements, Xizhang, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The pledge will remain binding until Shanghai Ximalaya and their shareholders discharge all their obligations under the contractual arrangements.

On November 29, 2018, Shenzhen Tianbo, Xizhang and each of the shareholders of Shenzhen Tianbo entered into a share pledge agreement, which includes terms substantially similar to the share pledge agreements relating to Shanghai Ximalaya as described above.

On January 6, 2021, Shanghai Wonder Education, Qizhi Shanghai and each of the shareholders of Shanghai Wonder Education entered into a share pledge agreement, which includes terms substantially similar to the share pledge agreements relating to Shanghai Ximalaya as described above.

We have completed the registration of the equity interest pledge under the effective share pledge agreements in relation to Shanghai Ximalaya, Shenzhen Tianbo and Shanghai Wonder Education with the relevant office of the State Administration of Market Regulation in accordance with the Civil Code of the PRC.

Agreements that Provide us with the Option to Purchase the Equity Interests and Assets in our Consolidated Affiliated Entities

Exclusive Call Option Agreement. Under the exclusive call option agreement entered into on November 29, 2018, restated and amended on March 3, 2020, among Shanghai Ximalaya, Xizhang and Shanghai Ximalaya’s

 

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shareholders, each of the shareholders of Shanghai Ximalaya irrevocably granted Xizhang or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of his or its equity interests in Shanghai Ximalaya. Xizhang or its designated representative(s) have sole discretion as to when to exercise such options, either in part or in full. The exercise price shall be the lowest allowable share purchase amount permitted by the PRC law for the 100% equity interest (or pro-rata if Xizhang decides to purchase part of the equity interest). Without Xizhang’s prior written consent, Shanghai Ximalaya’s shareholders shall not sell, transfer, mortgage or otherwise dispose their equity interests in Shanghai Ximalaya. The agreement expires upon transfer of all shares of Shanghai Ximalaya to Xizhang or its designated representative(s).

On November 29, 2018, Shenzhen Tianbo, Xizhang and the shareholders of Shenzhen Tianbo entered into an exclusive call option agreement, which includes terms substantially similar to the exclusive call option agreement relating to Shanghai Ximalaya as described above.

On January 6, 2021, Shanghai Wonder Education, Qizhi Shanghai and the shareholders of Shanghai Wonder Education entered into an exclusive call option agreement, which includes terms substantially similar to the exclusive call option agreement relating to Shanghai Ximalaya as described above, except that the shareholders of Shanghai Wonder Education shall fully return the share purchase amount to Qizhi Shanghai or any of its designated person within ten business days after the receipt of the share purchase amount.

Spousal Consent Letters. The spouse of certain beneficial owners of Shanghai Ximalaya issued a spousal consent letter, which unconditionally and irrevocably agreed that the equity interests in Shanghai Ximalaya held by and registered in the name of their spouse will be disposed of pursuant to the share pledge agreements, the exclusive call option agreements, and the power of attorney. Each spouse agreed not to assert any rights over the equity interests in Shanghai Ximalaya held by their spouse. In addition, in the event that any of them obtains any equity interests in Shanghai Ximalaya held by their spouse for any reason, they agreed to be bound by similar obligations and agreed to enter into similar contractual agreements.

On November 29, 2018, each spouse of the married shareholders of Shenzhen Tianbo issued a spousal consent letter, which includes terms substantially similar to the spousal consent letter relating to Shanghai Ximalaya as described above.

On January 6, 2021, each spouse of the married shareholders of Shanghai Wonder Education issued a spousal consent letter, which includes terms substantially similar to the spousal consent letter relating to Shanghai Ximalaya as described above.

Exclusive Asset Purchase Agreement. Under the exclusive asset purchase agreement entered into on January 6, 2021, among Shanghai Wonder Education, Qizhi Shanghai and Shanghai Wonder Education’s shareholders, Shanghai Wonder Education irrevocably granted Qizhi Shanghai or its designated representative(s) an exclusive right to purchase at any time, to the extent permitted under PRC law, all its intellectual property or all other assets owned by Shanghai Wonder Education now or in the future. The purchase price shall be the lowest purchase amount permitted by the PRC law. Additionally, the purchase amount paid by Qizhi Shanghai to the shareholders of Shanghai Wonder Education should be offset against the relevant amount payable by Shanghai Wonder Education to Qizhi Shanghai. Without Qizhi Shanghai’s prior written consent, Shanghai Wonder Education shall not sell, transfer, mortgage or otherwise dispose its asset. The agreement expires upon transfer of all assets of Shanghai Wonder Education to Qizhi Shanghai or its designated representative(s).

In the opinion of CM Law Firm, our PRC counsel, the ownership structures of our consolidated affiliated entities, currently do not result in any violation of the applicable PRC laws or regulations currently in effect; and except for certain clauses regarding the remedies or reliefs that may be awarded by an arbitration tribunal and the power of courts to grant interim remedies in support of the arbitration and liquidation arrangement of our consolidated affiliated entities, their subsidiaries and/or shareholders, the contractual arrangements (i) among our consolidated affiliated entities and their shareholders and (ii) between our consolidated affiliated entities and

 

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their shareholders, are governed by PRC laws or regulations, and are currently valid, binding and enforceable in accordance with the applicable PRC laws or regulations currently in effect, and do not result in any violation of the applicable PRC laws, regulations and rules currently in effect.

However, CM Law Firm 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 in the future take a view that is contrary to the above opinion of our PRC counsel. If the PRC government finds that the agreements that establish the structure for the operation of our consolidated affiliated entities do not comply with PRC government restrictions on foreign investment in our business, we could be subject to severe penalties, including being prohibited from continuing operations. See “Risk Factors—Risks Relating to Our Corporate Structure” and “—Risks Relating to Doing Business in China.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive loss data for the years ended December 31, 2018, 2019 and 2020, selected consolidated balance sheet data as of December 31, 2018, 2019 and 2020, and selected consolidated statement of cash flows data for the years ended December 31, 2018, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of comprehensive loss data for the three months ended March 31, 2020 and 2021, selected consolidated balance sheet data as of March 31, 2021, and selected consolidated statements of cash flows data for the three months ended March 31, 2020 and 2021 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair statement of our financial position and results of operations for the periods presented. You should read this Selected Consolidated Financial Data and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods.

The following table shows selected consolidated statements of comprehensive loss data for the years ended December 31, 2018, 2019 and 2020 and the three months ended March 31, 2020 and 2021, both in absolute amount and as percentages of total revenues.

 

   

For the Year Ended December 31,

 

For the Three Months Ended March 31,

   

2018

 

2019

 

2020

 

2020

 

2021

   

RMB

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

    (in thousands, except for percentages, number of shares and per share data)    

Selected Consolidated Statements of Comprehensive Loss Data:

                       

Revenues(1)

  1,475,775   100   2,677,008   100   4,050,021   620,693   100  

699,275

  100  

1,155,230

 

176,323

  100

Cost of revenues(1)(2)

  (828,550)   (56)   (1,511,337)   (56)   (2,064,702)   (316,429)   (51)  

(437,810)

  (63)   (589,617)   (89,994)   (51)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

  647,225   44   1,165,671   44   1,985,319   304,264   49  

261,465

  37   565,613   86,329   49
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

                       

Research and development expenses(2)

  (249,563)   (17)   (432,962)   (16)   (611,881)   (93,775)   (15)  

(170,820)

  (24)   (172,036)   (26,258)   (15)

Sales and marketing expenses(1)(2)

  (939,901)   (64)   (1,196,001)   (45)   (1,684,279)   (258,127)   (42)  

(291,775)

  (42)   (565,223)   (86,270)   (49)

General and administrative expenses(2)

  (187,708)   (13)   (327,430)   (12)   (384,942)   (58,995)   (10)  

(93,275)

  (13)   (144,607)   (22,071)   (13)

Other income, net

  13,710   1   27,882   1   48,576   7,445   1  

995

  0   10,672   1,629   2
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

  (1,363,462)   (93)   (1,928,511)   (72)   (2,632,526)   (403,452)   (66)  

(554,875)

  (79)   (871,194)   (132,970)   (75)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

  (716,237)   (49)   (762,840)   (28)   (647,207)   (99,188)   (17)  

(293,410)

  (42)   (305,581)   (46,641)   (26)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

  22,626   2   13,388   0   15,811   2,423   0  

2,125

  0   14,039   2,143   1

Interest income(1)

  4,591   0   5,531   0   1,556   238   0  

840

  0   1,415   216   0

Interest expense(1)

  (9,763)   (1)   (22,510)   (1)   (34,964)   (5,358)   (1)  

(11,347)

  (2)   (847)   (129)   (0)

Foreign exchange gains (losses)

  1,926   0   (3,285)   (0)   (1,672)   (256)   (0)  

731

  0   826   126   0

Fair value change of equity securities investments

  5,670   0   467   0   32,952   5,051   1  

11,333

  2   22,620  

3,452

  2

Others, net

  1,102   0   439   0   4,270   654  

1

 

384

  0   589   90   0
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax expenses and equity in (losses) gains of affiliated companies

 

(690,085)

  (48)   (768,810)   (29)   (629,254)   (96,436)  

(16)

 

(289,344)

  (41)   (266,939)   (40,743)   (23)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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For the Year Ended December 31,

 

For the Three Months Ended March 31,

   

2018

 

2019

 

2020

 

2020

 

2021

   

RMB

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

    (in thousands, except for percentages, number of shares and per share data)    

Income tax expense

  —     —     —     —     —     —     —    

—  

  —     —     —     —  

Equity in (losses) gains of affiliated companies

  (83,567)   (5)   (4,472)   (0)   24,178   3,705   1  

6,624

  1  

(309)

  (47)   (0)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

  (773,652)   (53)   (773,282)   (29)   (605,076)   (92,731)  

(15)

 

(282,720)

  (40)   (267,248)   (40,790)   (23)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to non-controlling interests

  1,630   0   13,562   1   10,541   1,615   0  

4,271

  1   11,476   1,752   1
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Ximalaya Inc.

  (772,022)   (53)   (759,720)   (28)   (594,535)   (91,116)  

(15)

 

(278,449)

  (40)   (255,772)   (39,038)   (22)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Ximalaya Inc.’s ordinary shareholders

  (2,106,443)     (922,047)     (914,655)   (140,177)    

(309,455)

    (408,655)   (62,372)  
 

 

   

 

   

 

 

 

   

 

   

 

 

 

 

Net loss per share attributable to Ximalaya Inc. ’s ordinary shareholders

                       

—Basic and diluted

  (24.45)     (10.70)     (10.62)   (1.63)     (3.59)    

 

 

(4.74)

 

 

(0.72)

 
 

 

   

 

   

 

 

 

   

 

   

 

 

 

 

Weighted average number of ordinary shares

                       

—Basic and diluted

  86,154,070     86,154,070     86,154,070   86,154,070     86,154,070     86,154,070   86,154,070  
 

 

   

 

   

 

 

 

   

 

   

 

 

 

 

 

Notes:

(1)

Revenues, cost of revenues, sales and marketing expenses, interest income and interest expense from transactions with related parties are set forth below:

 

     For the Year Ended December 31,     For the Three Months Ended March 31,  
     2018     2019     2020     2020     2021  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Revenues

     19,920       29,941       112,611       17,258       11,636       27,801       4,243  

Cost of revenues

     (19,945     (53,116     (70,643     (10,827     (13,797     (30,334     (4,630

Sales and marketing expenses

     (66,812     (14,878     (19,988     (3,063     (2,907     (5,268     (804

Interest income

     362       362         —         —         —         —         —    

Interest expense

     —         (9,364     (8,696     (1,333     (4,613     —         —    

 

(2)

Share-based compensation expense was allocated as follows:

 

     For the Year Ended December 31,      For the Three Months Ended March 31,  
     2018      2019      2020      2020      2021  
     RMB      RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

           —                —          4,284        657        4,284        —          —    

Research and development expenses

     —          —            44,586           6,833        44,586        —          —    

Sales and marketing expenses

     —          —          949        145        949        —          —    

General and administrative expenses

     —          —          8,444        1,294        8,444        18,377        2,805  

 

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The following table shows selected consolidated balance sheet data as of December 31, 2018, 2019 and 2020 and March 31, 2021.

 

    As of December 31,     As of March 31,  
    2018     2019     2020     2021  
    RMB     RMB     RMB     US$     RMB     US$  
    (in thousands)  

Selected Consolidated Balance Sheet Data:

           

Cash, cash equivalents and restricted cash

    500,669       215,136       1,152,636       176,649       495,810       75,675  

Short-term investments

    329,107       577,073       917,447       140,605       1,644,863       251,055  

Accounts receivable, net

    231,805       296,327       384,663       58,952       346,528       52,891  

Total current assets

    1,197,856       1,306,305       2,597,661       398,109       2,660,456       406,066  

Total non-current assets

    733,356       1,143,442       1,327,968       203,521       1,413,811       215,790  

Total assets

    1,931,212       2,449,747       3,925,629       601,630       4,074,267       621,856  

Total current liabilities

    4,222,148       2,462,528       1,976,181       302,863       1,790,839       273,336  

Total non-current liabilities

    18,092       75,395       86,749       13,295       82,314       12,564  

Total liabilities

    4,240,240       2,537,923       2,062,930       316,158       1,873,153       285,900  

Total mezzanine equity

    2,547,142       5,904,471       8,965,162       1,373,971       9,847,075       1,502,957  

Ordinary shares (US$0.0001 par value; 275,476,694, 274,748,965 and 254,007,958 shares authorized, 86,154,070 shares issued and outstanding as of December 31, 2018, 2019 and 2020 and March 31, 2021)

    56       56       56       9       56       9  

Series Angel preferred shares (US$0.0001 par value; 24,577,820 shares authorized, issued and outstanding as of December 31, 2018, 2019 and 2020 and March 31, 2021)

    16       16       16       2       16       2  

Total shareholders’ deficit

    (4,856,170     (5,992,647     (7,102,463     (1,088,499     (7,645,961     (1,167,001

Total liabilities, mezzanine equity and shareholders’ deficit

    1,931,212       2,449,747       3,925,629       601,630       4,074,267       621,856  

 

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The following table presents our selected consolidated cash flow data for the years ended December 31, 2018, 2019 and 2020 and for the three months ended March 31, 2020 and 2021:

 

     For the Year Ended December 31,     For the Three Months Ended March 31,  
     2018     2019     2020     2020     2021  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Selected Consolidated Cash Flow Data:

              

Net cash (used in) provided by operating activities

     (92,495     (389,425     45,596       6,987       (65,592     (252,405     (38,524

Net cash (used in) provided by investing activities

     (508,489     (758,954     (643,473     (98,616     145,365       (911,311     (139,093

Net cash provided by financing activities

     663,460       860,489       1,543,207       236,507       69,952       517,350       78,962  

Net increase (decrease) in cash, cash equivalents and restricted cash

     62,476       (287,890     945,330       144,878       149,725       (646,366     (98,655

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     5,286       2,357       (7,830     (1,200     1,719       (10,460     (1,597

Cash, cash equivalents and restricted cash at the end of year/period

     500,669       215,136       1,152,636       176,649       366,580       495,810       75,675  

Non-GAAP Measure

To supplement our combined and consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use adjusted net loss, a non-GAAP financial measure, which is calculated as net loss adjusted for shared-based compensation expenses, to understand and evaluate our core operating performance. Adjusted net loss is presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and

presented in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP financial measures. In light of the foregoing limitations, you should not consider adjusted net loss as a substitute for, or superior to net loss prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety and not rely on any single financial measure.

The table below sets forth a reconciliation of adjusted net loss to net loss for the periods indicated:

 

     For the Year Ended December 31     For the Three Months Ended March 31,  
     2018     2019     2020     2020     2021  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (773,652     (773,282     (605,076     (92,731     (282,720     (267,248     (40,790

Share-based compensation expenses

     —         —         58,263       8,929       58,263       18,377       2,805  

Adjusted net loss

     (773,652     (773,282     (546,813     (83,802     (224,457     (248,871     (37,985

 

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Selected Operating Data

The following table presents certain of our key operating data for the periods indicated. Our management uses these operating data to monitor the vitality and attractiveness of our platform as well as users’ level of activity, which reflect our ability to attract and retain users, maintain and enhance user engagement, and convert users into paying users. Therefore, our management constantly evaluates these operating data and implements measures to optimize our business plans and operations, accordingly. We believe these operating data provide useful indicators to investors of the developmental trajectory of our business, the size of our user base and their engagement level and willingness to pay. The operating metrics disclosed in this prospectus are subject to inherit limitations and risks of inaccuracy. See “Risk Factors—Our operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may harm our reputation and our business.”

 

    For the Three Months Ended  
    Mar 31,
2018
    Jun 30,
2018
    Sep 30,
2018
    Dec 31,
2018
    Mar 31,
2019
    Jun 30,
2019
    Sep 30,
2019
    Dec 31,
2019
    Mar 31,
2020
    Jun 30,
2020
    Sep 30,
2020
    Dec 31,
2020
    March 31,
2021
 

MAUs(1) (in millions)