0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 false 2021 FY 0001783407 2010-10-01 http://fasb.org/us-gaap/2021-01-31#FinanceLeaseLiability http://fasb.org/us-gaap/2021-01-31#FinanceLeaseLiability The movement in valuation allowances were due to the changes of deferred tax assets recognized for net operating tax loss carry forwards, advertising expenses in excess of deduction limit and deferred revenue. 0001783407 2021-12-31 0001783407 2020-12-31 0001783407 2019-01-01 2019-12-31 0001783407 2020-01-01 2020-12-31 0001783407 2021-01-01 2021-12-31 0001783407 2018-01-01 2018-12-31 0001783407 2019-01-01 0001783407 2019-12-31 0001783407 2020-01-01 0001783407 2021-04-01 0001783407 2021-04-01 2021-04-30 0001783407 2018-12-31 0001783407 us-gaap:CommonClassBMember 2020-12-31 0001783407 us-gaap:CommonClassAMember 2020-12-31 0001783407 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2020-12-31 0001783407 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2020-12-31 0001783407 us-gaap:CopyrightsMember 2020-12-31 0001783407 lizi:SoftwareMember 2020-12-31 0001783407 lizi:TrademarkAndOthersMember 2020-12-31 0001783407 lizi:ElectronicEquipmentMember 2020-12-31 0001783407 lizi:FurnitureAndOfficeEquipmentMember 2020-12-31 0001783407 us-gaap:VehiclesMember 2020-12-31 0001783407 us-gaap:LeaseholdImprovementsMember 2020-12-31 0001783407 lizi:TwoThousandAndNineteenIncentivePlanAmendedAndRestatedTwoThousandAndNineteenShareIncentivePlanMember 2020-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementEmployeeMember 2020-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementNonemployeeMember 2020-12-31 0001783407 us-gaap:SupplierConcentrationRiskMember lizi:AdvertisingAndPromotionalServiceExpenseMember 2020-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember 2020-12-31 0001783407 lizi:AlipayAndWechatPayMember 2020-12-31 0001783407 srt:SubsidiariesMember 2020-12-31 0001783407 srt:SubsidiariesMember lizi:CashAndCashEquivalentsTotalMember 2020-12-31 0001783407 us-gaap:CommonStockMember 2020-12-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2020-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2020-12-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2020-12-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember 2020-12-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember 2020-12-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2020-12-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2020-12-31 0001783407 currency:CNY 2020-12-31 0001783407 currency:USD 2020-12-31 0001783407 lizi:OtherCurrencyMember 2020-12-31 0001783407 us-gaap:FairValueMeasurementsRecurringMember 2020-12-31 0001783407 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2020-12-31 0001783407 us-gaap:FairValueMeasurementsNonrecurringMember 2020-12-31 0001783407 us-gaap:CommonClassBMember 2021-12-31 0001783407 us-gaap:CommonClassAMember 2021-12-31 0001783407 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2021-12-31 0001783407 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2021-12-31 0001783407 us-gaap:CopyrightsMember 2021-12-31 0001783407 lizi:SoftwareMember 2021-12-31 0001783407 lizi:TrademarkAndOthersMember 2021-12-31 0001783407 lizi:ElectronicEquipmentMember 2021-12-31 0001783407 lizi:FurnitureAndOfficeEquipmentMember 2021-12-31 0001783407 us-gaap:VehiclesMember 2021-12-31 0001783407 us-gaap:LeaseholdImprovementsMember 2021-12-31 0001783407 lizi:TwoThousandAndNineteenIncentivePlanAmendedAndRestatedTwoThousandAndNineteenShareIncentivePlanMember 2021-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementEmployeeMember 2021-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementNonemployeeMember 2021-12-31 0001783407 us-gaap:IPOMember 2021-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember us-gaap:SupplierConcentrationRiskMember 2021-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember 2021-12-31 0001783407 lizi:BankBalanceMember 2021-12-31 0001783407 us-gaap:CreditCardMember 2021-12-31 0001783407 lizi:LocalAuthoritiesMember 2021-12-31 0001783407 lizi:AlipayAndWechatPayMember 2021-12-31 0001783407 srt:SubsidiariesMember 2021-12-31 0001783407 lizi:VieMember lizi:CashAndCashEquivalentsTotalMember 2021-12-31 0001783407 lizi:WuhanLizhiNetworkTechnologyCoLtdMember 2021-12-31 0001783407 lizi:HuaianLizhiNetworkTechnologyCoLtdMember 2021-12-31 0001783407 lizi:ChongqingPiwanNetworkTechnologyCoLtdMember 2021-12-31 0001783407 lizi:LizhiHoldingLimitedMember 2021-12-31 0001783407 lizi:LizhiIncMember 2021-12-31 0001783407 lizi:TiyainctiyacaymanMember 2021-12-31 0001783407 lizi:BeijingHongyiyichuangInformationTechnologyCoLtdMember 2021-12-31 0001783407 lizi:TiyaInctiyaBviMember 2021-12-31 0001783407 lizi:TiyaHoldingLimitedMember 2021-12-31 0001783407 lizi:TiyaIncMember 2021-12-31 0001783407 lizi:GuangzhouTiyaInformationTechnologyCoLtdMember 2021-12-31 0001783407 lizi:NashorPteLtdMember 2021-12-31 0001783407 lizi:TiyaPteLtdMember 2021-12-31 0001783407 lizi:ChangshaLimangInteractionEntertainmentCoLtdMember 2021-12-31 0001783407 lizi:GuangzhouHuanliaoNetworkTechnologyCoLtdMember 2021-12-31 0001783407 lizi:GuangzhouLizhiNetworkTechnologyCoLtdMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinOneYearMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinTwoYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinThreeYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinFourYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinFiveYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinSixYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinSevenYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinEightYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinNineYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsWithinTenYearsMember 2021-12-31 0001783407 lizi:OperatingLossCarryForwardsMember 2021-12-31 0001783407 currency:CNY 2021-12-31 0001783407 currency:USD 2021-12-31 0001783407 lizi:OtherCurrencyMember 2021-12-31 0001783407 lizi:CreditFacilityAgreementWithBanksMember 2021-12-31 0001783407 lizi:GuangzhouLizhiMember 2021-12-31 0001783407 us-gaap:FairValueMeasurementsNonrecurringMember 2021-12-31 0001783407 us-gaap:CommonClassAMember lizi:FutuSecuritiesHongKongLimitedMember 2021-12-31 0001783407 us-gaap:CommonClassAMember lizi:KastleLimitedMember 2021-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember us-gaap:SupplierConcentrationRiskMember 2019-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember 2019-12-31 0001783407 lizi:AmericanDepositorySharesMember 2019-01-01 2019-12-31 0001783407 lizi:AmericanDepositarySharesMember 2019-01-01 2019-12-31 0001783407 lizi:AudioEntertainmentMember 2019-01-01 2019-12-31 0001783407 lizi:PodcastAdvertisingAndOthersMember 2019-01-01 2019-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementEmployeeMember 2019-01-01 2019-12-31 0001783407 us-gaap:RestrictedStockMember 2019-01-01 2019-12-31 0001783407 country:CN us-gaap:StateAdministrationOfTaxationChinaMember 2019-01-01 2019-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001783407 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2019-01-01 2019-12-31 0001783407 us-gaap:InlandRevenueHongKongMember country:HK srt:MinimumMember 2019-01-01 2019-12-31 0001783407 us-gaap:RetainedEarningsMember 2019-01-01 2019-12-31 0001783407 us-gaap:TreasuryStockMember 2019-01-01 2019-12-31 0001783407 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2019-01-01 2019-12-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2019-01-01 2019-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2019-01-01 2019-12-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2019-01-01 2019-12-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2019-01-01 2019-12-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember 2019-01-01 2019-12-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember 2019-01-01 2019-12-31 0001783407 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-12-31 0001783407 us-gaap:CostOfSalesMember 2019-01-01 2019-12-31 0001783407 us-gaap:SellingAndMarketingExpenseMember 2019-01-01 2019-12-31 0001783407 us-gaap:GeneralAndAdministrativeExpenseMember 2019-01-01 2019-12-31 0001783407 us-gaap:ResearchAndDevelopmentExpenseMember 2019-01-01 2019-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-12-31 0001783407 lizi:PreferredSharesMember 2019-01-01 2019-12-31 0001783407 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0001783407 us-gaap:RestrictedStockMember 2019-01-01 2019-12-31 0001783407 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2019-01-01 2019-12-31 0001783407 lizi:AmericanDepositorySharesMember 2020-01-01 2020-12-31 0001783407 lizi:AmericanDepositarySharesMember 2020-01-01 2020-12-31 0001783407 lizi:AudioEntertainmentMember 2020-01-01 2020-12-31 0001783407 lizi:PodcastAdvertisingAndOthersMember 2020-01-01 2020-12-31 0001783407 lizi:TwoThousandAndNineteenIncentivePlanAmendedAndRestatedTwoThousandAndNineteenShareIncentivePlanMember 2020-01-01 2020-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementEmployeeMember 2020-01-01 2020-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementNonemployeeMember 2020-01-01 2020-12-31 0001783407 us-gaap:RestrictedStockMember 2020-01-01 2020-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-12-31 0001783407 us-gaap:CostOfSalesMember 2020-01-01 2020-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001783407 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2020-01-01 2020-12-31 0001783407 lizi:CustomerBMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2020-01-01 2020-12-31 0001783407 us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember lizi:CustomerAMember 2020-01-01 2020-12-31 0001783407 us-gaap:RetainedEarningsMember 2020-01-01 2020-12-31 0001783407 us-gaap:CommonStockMember 2020-01-01 2020-12-31 0001783407 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-12-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember 2020-01-01 2020-12-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember 2020-01-01 2020-12-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2020-01-01 2020-12-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2020-01-01 2020-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2020-01-01 2020-12-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2020-01-01 2020-12-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2020-01-01 2020-12-31 0001783407 us-gaap:TreasuryStockMember 2020-01-01 2020-12-31 0001783407 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-12-31 0001783407 country:SG 2020-01-01 2020-12-31 0001783407 us-gaap:SellingAndMarketingExpenseMember 2020-01-01 2020-12-31 0001783407 us-gaap:GeneralAndAdministrativeExpenseMember 2020-01-01 2020-12-31 0001783407 us-gaap:ResearchAndDevelopmentExpenseMember 2020-01-01 2020-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-12-31 0001783407 lizi:PreferredSharesMember 2020-01-01 2020-12-31 0001783407 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-12-31 0001783407 us-gaap:RestrictedStockMember 2020-01-01 2020-12-31 0001783407 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2020-01-01 2020-12-31 0001783407 lizi:AmericanDepositorySharesMember 2021-01-01 2021-12-31 0001783407 lizi:AmericanDepositarySharesMember 2021-01-01 2021-12-31 0001783407 lizi:AudioEntertainmentMember 2021-01-01 2021-12-31 0001783407 lizi:PodcastAdvertisingAndOthersMember 2021-01-01 2021-12-31 0001783407 lizi:TwoThousandAndNineteenIncentivePlanAmendedAndRestatedTwoThousandAndNineteenShareIncentivePlanMember 2021-01-01 2021-12-31 0001783407 lizi:TwoThousandAndNineteenIncentivePlanMember us-gaap:CommonClassAMember srt:MaximumMember 2021-01-01 2021-12-31 0001783407 us-gaap:RestrictedStockMember 2021-01-01 2021-12-31 0001783407 lizi:TwoThousandAndEighteenIncentivePlanMember 2021-01-01 2021-12-31 0001783407 lizi:TwoThousandAndTwelveIncentivePlanMember 2021-01-01 2021-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementEmployeeMember 2021-01-01 2021-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:TwoThousandAndFourteenLoanMember lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2021-01-01 2021-12-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember lizi:MorningSideChinaTmtFundIiLpMember 2021-01-01 2021-12-31 0001783407 us-gaap:IPOMember 2021-01-01 2021-12-31 0001783407 srt:MinimumMember 2021-01-01 2021-12-31 0001783407 us-gaap:CostOfSalesMember 2021-01-01 2021-12-31 0001783407 country:SG 2021-01-01 2021-12-31 0001783407 us-gaap:VehiclesMember 2021-01-01 2021-12-31 0001783407 lizi:FurnitureAndOfficeEquipmentMember 2021-01-01 2021-12-31 0001783407 lizi:ElectronicEquipmentMember 2021-01-01 2021-12-31 0001783407 us-gaap:LeaseholdImprovementsMember 2021-01-01 2021-12-31 0001783407 srt:MaximumMember lizi:TrademarkAndOthersMember 2021-01-01 2021-12-31 0001783407 srt:MinimumMember lizi:TrademarkAndOthersMember 2021-01-01 2021-12-31 0001783407 srt:MaximumMember us-gaap:ComputerSoftwareIntangibleAssetMember 2021-01-01 2021-12-31 0001783407 srt:MinimumMember us-gaap:ComputerSoftwareIntangibleAssetMember 2021-01-01 2021-12-31 0001783407 srt:MaximumMember us-gaap:CopyrightsMember 2021-01-01 2021-12-31 0001783407 srt:MinimumMember us-gaap:CopyrightsMember 2021-01-01 2021-12-31 0001783407 lizi:AdvertisingAndPromotionalServiceExpenseMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001783407 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2021-01-01 2021-12-31 0001783407 lizi:ChongqingPiwanNetworkTechnologyCoLtdMember 2021-01-01 2021-12-31 0001783407 lizi:TiyaIncMember 2021-01-01 2021-12-31 0001783407 lizi:GuangzhouTiyaInformationTechnologyCoLtdMember 2021-01-01 2021-12-31 0001783407 lizi:NashorPteLtdMember 2021-01-01 2021-12-31 0001783407 lizi:TiyaPteLtdMember 2021-01-01 2021-12-31 0001783407 lizi:TiyaHoldingLimitedMember 2021-01-01 2021-12-31 0001783407 lizi:GuangzhouLizhiNetworkTechnologyCoLtdMember 2021-01-01 2021-12-31 0001783407 lizi:GuangzhouHuanliaoNetworkTechnologyCoLtdMember 2021-01-01 2021-12-31 0001783407 lizi:ChangshaLimangInteractionEntertainmentCoLtdMember 2021-01-01 2021-12-31 0001783407 lizi:TiyaInctiyaBviMember 2021-01-01 2021-12-31 0001783407 lizi:TiyainctiyacaymanMember 2021-01-01 2021-12-31 0001783407 lizi:LizhiIncMember 2021-01-01 2021-12-31 0001783407 lizi:BeijingHongyiyichuangInformationTechnologyCoLtdMember 2021-01-01 2021-12-31 0001783407 lizi:LizhiHoldingLimitedMember 2021-01-01 2021-12-31 0001783407 lizi:HuaianLizhiNetworkTechnologyCoLtdMember 2021-01-01 2021-12-31 0001783407 lizi:WuhanLizhiNetworkTechnologyCoLtdMember 2021-01-01 2021-12-31 0001783407 us-gaap:CommonClassAMember 2021-01-01 2021-12-31 0001783407 dei:AdrMember 2021-01-01 2021-12-31 0001783407 lizi:LizhiBviMember 2021-01-01 2021-12-31 0001783407 us-gaap:AccountsReceivableMember lizi:CustomerAMember us-gaap:CustomerConcentrationRiskMember 2021-01-01 2021-12-31 0001783407 us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember lizi:CustomerBMember 2021-01-01 2021-12-31 0001783407 us-gaap:RetainedEarningsMember 2021-01-01 2021-12-31 0001783407 us-gaap:CommonStockMember 2021-01-01 2021-12-31 0001783407 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-12-31 0001783407 us-gaap:TreasuryStockMember 2021-01-01 2021-12-31 0001783407 dei:BusinessContactMember 2021-01-01 2021-12-31 0001783407 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-01-01 2021-12-31 0001783407 us-gaap:SellingAndMarketingExpenseMember 2021-01-01 2021-12-31 0001783407 us-gaap:GeneralAndAdministrativeExpenseMember 2021-01-01 2021-12-31 0001783407 us-gaap:ResearchAndDevelopmentExpenseMember 2021-01-01 2021-12-31 0001783407 lizi:ServiceProviderConcentrationRiskMember 2021-01-01 2021-12-31 0001783407 us-gaap:AccountsReceivableMember 2021-01-01 2021-12-31 0001783407 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-12-31 0001783407 us-gaap:RestrictedStockMember 2021-01-01 2021-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2021-01-01 2021-12-31 0001783407 srt:MaximumMember lizi:CreditFacilityAgreementWithBanksMember lizi:GuangzhouLizhiMember 2021-01-01 2021-12-31 0001783407 lizi:CreditFacilityAgreementWithBanksMember lizi:GuangzhouLizhiMember 2021-01-01 2021-12-31 0001783407 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2021-01-01 2021-12-31 0001783407 lizi:GuangzhouLizhiMember 2021-01-01 2021-12-31 0001783407 us-gaap:IPOMember us-gaap:CommonClassAMember 2020-01-01 2020-01-01 0001783407 lizi:GuangzhouTiyaMember 2019-05-20 2019-05-20 0001783407 country:HK us-gaap:InlandRevenueHongKongMember 2018-04-01 2018-04-01 0001783407 lizi:AssessableProfitUptoTwoMillionMember country:HK us-gaap:InlandRevenueHongKongMember 2018-04-01 2018-04-01 0001783407 country:HK lizi:AssessableProfitGreaterThanTwoMillionMember us-gaap:InlandRevenueHongKongMember 2018-04-01 2018-04-01 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2011-03-01 2011-03-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember lizi:MatrixPartnersChinaIHongKongLimitedMember 2011-03-01 2011-03-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2018-07-01 2018-07-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2018-07-01 2018-07-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2018-07-01 2018-07-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2018-07-01 2018-07-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2018-07-01 2018-07-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember lizi:TwoThousandAndFourteenLoanMember 2018-07-01 2018-07-31 0001783407 lizi:MorningSideChinaTmtFundIiLpMember lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2018-07-01 2018-07-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember lizi:MorningSideChinaTmtFundIiLpMember 2018-07-31 0001783407 lizi:TwoThousandAndFourteenLoanMember lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2018-07-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2012-03-01 2012-03-31 0001783407 lizi:MorningSideChinaTmtFundIiLpMember lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2012-03-01 2012-03-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember lizi:MatrixPartnersChinaIHongKongLimitedMember 2012-03-01 2012-03-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember lizi:MorningSideChinaTmtFundIiLpMember 2014-02-01 2014-02-28 0001783407 lizi:TwoThousandAndFourteenLoanMember lizi:SeriesBConvertibleRedeemablePreferredSharesMember lizi:MorningSideChinaTmtFundIiLpMember 2014-02-01 2014-02-28 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2014-12-01 2014-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember lizi:MatrixPartnersChinaIHongKongLimitedMember lizi:TwoThousandAndFourteenLoanMember 2014-12-01 2014-12-31 0001783407 lizi:TwoThousandAndFourteenLoanMember lizi:MorningSideChinaTmtFundIiLpMember lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2014-12-01 2014-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember lizi:TwoThousandAndFourteenLoanMember 2014-12-01 2014-12-31 0001783407 lizi:MatrixPartnersChinaIHongKongLimitedMember lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2014-12-01 2014-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember lizi:MorningSideChinaTmtFundIiLpMember 2014-12-01 2014-12-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2015-01-01 2015-01-31 0001783407 lizi:PeopleBetterLimitedMember lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2015-01-01 2015-01-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember lizi:ShunweiInternetLimitedMember 2015-01-01 2015-01-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2017-12-01 2017-12-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember lizi:CyberDreamerLimitedMember 2017-06-01 2017-06-30 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember lizi:CyberDreamerLimitedMember 2017-07-01 2017-07-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember lizi:EvolutionMediaChinaLpMember 2017-07-01 2017-07-31 0001783407 lizi:CyberDreamerLimitedMember 2019-10-18 2019-10-18 0001783407 us-gaap:RestrictedStockMember 2011-03-07 2011-03-07 0001783407 lizi:TwoThousandAndNineteenIncentivePlanMember us-gaap:CommonClassAMember 2020-03-17 0001783407 lizi:TwoThousandAndNineteenIncentivePlanMember us-gaap:CommonClassAMember 2020-03-18 0001783407 us-gaap:CommonClassBMember 2022-02-28 0001783407 us-gaap:CommonClassAMember 2022-02-28 0001783407 us-gaap:WarrantMember 2021-04-01 2021-04-30 0001783407 lizi:RestatedMember us-gaap:CommonClassAMember lizi:TwoThousandAndNineteenIncentivePlanMember 2021-09-17 0001783407 us-gaap:CommonClassAMember lizi:TwoThousandAndNineteenIncentivePlanMember 2021-09-17 0001783407 us-gaap:ShareBasedPaymentArrangementEmployeeMember 2018-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementNonemployeeMember 2018-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementEmployeeMember 2019-12-31 0001783407 us-gaap:ShareBasedPaymentArrangementNonemployeeMember 2019-12-31 0001783407 us-gaap:RestrictedStockMember 2018-12-31 0001783407 us-gaap:RestrictedStockMember 2019-12-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember 2018-12-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2018-12-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember 2018-12-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2018-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2018-12-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2018-12-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2018-12-31 0001783407 us-gaap:CommonStockMember 2018-12-31 0001783407 us-gaap:TreasuryStockMember 2018-12-31 0001783407 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001783407 us-gaap:RetainedEarningsMember 2018-12-31 0001783407 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001783407 lizi:SeriesCConvertibleRedeemablePreferredSharesMember 2019-12-31 0001783407 lizi:SeriesC1ConvertibleRedeemablePreferredSharesMember 2019-12-31 0001783407 lizi:SeriesC1PlusConvertibleRedeemablePreferredSharesMember 2019-12-31 0001783407 lizi:SeriesDConvertibleRedeemablePreferredSharesMember 2019-12-31 0001783407 lizi:SeriesBConvertibleRedeemablePreferredSharesMember 2019-12-31 0001783407 lizi:SeriesD1ConvertibleRedeemablePreferredSharesMember 2019-12-31 0001783407 lizi:SeriesAConvertibleRedeemablePreferredSharesMember 2019-12-31 0001783407 us-gaap:CommonStockMember 2019-12-31 0001783407 us-gaap:TreasuryStockMember 2019-12-31 0001783407 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001783407 us-gaap:RetainedEarningsMember 2019-12-31 0001783407 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2019-12-31 0001783407 us-gaap:RestrictedStockMember 2020-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2020-12-31 0001783407 us-gaap:TreasuryStockMember 2020-12-31 0001783407 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001783407 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-12-31 0001783407 us-gaap:RetainedEarningsMember 2020-12-31 0001783407 us-gaap:RestrictedStockMember 2021-12-31 0001783407 us-gaap:RestrictedStockUnitsRSUMember 2021-12-31 0001783407 us-gaap:CommonStockMember 2021-12-31 0001783407 us-gaap:TreasuryStockMember 2021-12-31 0001783407 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001783407 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2021-12-31 0001783407 us-gaap:RetainedEarningsMember 2021-12-31 iso4217:USD iso4217:CNY xbrli:shares xbrli:pure utr:Year utr:Day utr:Month iso4217:CNY xbrli:shares iso4217:USD xbrli:shares lizi:Number
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
20-F
(Mark One)

☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021.
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ___________
For the transition period from _________ to ___________
Commission file number:
001-39177
LIZHI INC.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Yangcheng Creative Industry Zone,
No. 309 Middle Huangpu Avenue,
Tianhe District, Guangzhou 510655,
People’s Republic of China
(Address of principal executive offices)
Ms. Chengfang Lu
Acting Chief Financial Officer
Tel: +86 (20) 3866-4265
E-mail:
luchengfang@lizhi.fm
Yangcheng Creative Industry Zone,
No. 309 Middle Huangpu Avenue,
Tianhe District, Guangzhou 510655,
Republic of China People’s Republic of China
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol |  | Name of each exchange on which registered
American depositary shares, each ADS represents 20 Class A ordinary shares, par value US$0.0001 per share |  | LIZI |  | The Nasdaq Global Market
Class A ordinary shares, par value US$0.0001 per share * |  | N/A |  | The Nasdaq Global Market

* | Not for trading, but only in connection with the listing of the American depositary shares on the Nasdaq Global Market.

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of February 28, 2022, there were 1,014,356,010 ordinary
shares outstanding, being the sum of
783,141,010
Class A ordinary shares (excluding 9,020,630 Class A ordinary shares held by Kastle Limited) and 231,215,000 Class B ordinary shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No
☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.

Large a ccelerated f iler |  | ☐ |  | Accelerated filer |  | ☒ |  | Non-accelerated f iler |  | ☐
|  |  |  |  |  |  |  | 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 13(a) of the Exchange 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.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

| ☒ | U.S. GAAP

| ☐ | International Financial Reporting Standards as issued by the International Accounting Standards Board

| ☐ | Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
Yes ☐
No
☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐
No
☐

Table of Contents

|  | Page |
INTRODUCTION |  |  | 1 |
FORWARD-LOOKING INFORMATION |  |  | 3 |
PART I |  |  | 4 |
ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |  |  | 4 |
ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE |  |  | 4 |
ITEM 3. |  | KEY INFORMATION |  |  | 4 |
ITEM 4. |  | INFORMATION ON THE COMPANY |  |  | 70 |
ITEM 4A |  | UNRESOLVED STAFF COMMENTS |  |  | 103 |
ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |  |  | 103 |
ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |  |  | 124 |
ITEM 7. |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |  |  | 133 |
ITEM 8. |  | FINANCIAL INFORMATION |  |  | 134 |
ITEM 9. |  | THE OFFER AND LISTING |  |  | 135 |
ITEM 10. |  | ADDITIONAL INFORMATION |  |  | 135 |
ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |  |  | 145 |
ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |  |  | 146 |
PART II |  |  | 148 |
ITEM 13. |  | ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |  |  | 148 |
ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |  |  | 148 |
ITEM 15. |  | CONTROLS AND PROCEDURES |  |  | 149 |
ITEM 16.A. |  | AUDIT COMMITTEE FINANCIAL EXPERT |  |  | 150 |
ITEM 16.B. |  | CODE OF ETHICS |  |  | 150 |
ITEM 16.C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES |  |  | 151 |
ITEM 16.D. |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |  |  | 151 |
ITEM 16.E. |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |  |  | 151 |
ITEM 16.F. |  | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |  |  | 151 |
ITEM 16.G. |  | CORPORATE GOVERNANCE |  |  | 151 |
ITEM 16.H. |  | MINE SAFETY DISCLOSURE |  |  | 152 |
ITEM 16.I. |  | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |  |  | 152 |
PART III |  |  | 152 |
ITEM 17. |  | FINANCIAL STATEMENTS |  |  | 152 |
ITEM 18. |  | FINANCIAL STATEMENTS |  |  | 152 |
ITEM 19. |  | EXHIBITS |  |  | 152 |

1

Table of Contents
INTRODUCTION
Except where the context otherwise indicates and for the purpose of this annual report only:
“ACG” refers to animation, comics and games;
“AI” refers to artificial intelligence;
“active users” or “users” is used interchangeably in this annual report and refers to users who visited our platforms at least once in a given period, measured by the number of mobile devices that launched our mobile apps in a given period. The number of active users is calculated by treating each distinguishable mobile device as a separate user even though some individuals may access our platforms using more than one mobile device and multiple individuals may access our services using the same mobile device. An active user is not necessarily a registered user, since one does not have to register with our apps in order to access our audio content;
“ADSs” refers to the American depositary shares, each representing 20 of our Class A ordinary shares, par value US$0.0001 per share;
“average total mobile MAUs” refers to the average monthly number of active users across our platforms and apps in a given period, calculated by dividing (i) the sum of mobile active users for each month of such period, by (ii) the number of months in the same period;
“audio entertainment mobile MAUs” refers to the number of active users who have accessed our audio entertainment products in a given month on our apps;
“audio entertainment paying user” refers to a paying user that has purchased virtual items for our audio entertainment products at least once during the relevant period on our apps;
“average audio entertainment paying users” refers to the monthly average number of audio entertainment paying users in a given period on our apps, calculated by dividing (i) the total number of audio entertainment paying users in each month of such period by (ii) the number of months in the same period;
“average total monthly paying users” refers to the monthly average number of paying users in a given period across our platforms and apps, calculated by dividing (i) the total number of paying users in each month of such period by (ii) the number of months in the same period;
“China” or “PRC” refer to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan, Hong Kong and Macau;
“Class A ordinary shares” refers to our Class A ordinary shares, par value US$0.0001 per share;
“Class B ordinary shares” refers to our Class B ordinary shares, par value US$0.0001 per share;
“Founders” refers to Mr. Jinnan (Marco) Lai, Mr. Ning Ding and the entities that hold shares on behalf of and are controlled by Mr. Jinnan (Marco) Lai and Mr. Ning Ding, as Mr. Jinnan (Marco) Lai and Mr. Ning Ding so designate;
“guild” refers to an organized group of hosts that recruit, manage, train and support its member hosts;
“host” and “content creator” refer to a user who has posted a podcast or hosted an audio entertainment program on our apps;
“MAUs” refers to the number of active users in a given month across our platforms and apps;
“MENA” refers to the Middle East and North Africa;
1

Table of Contents
“ordinary shares” refers to our Class A ordinary shares and Class B ordinary shares, par value US$0.0001 per share;
“paying user” refers to an user that has purchased virtual items or subscribed for paid podcasts at least once during the relevant period. A paying user is not necessarily a unique user, however, as a unique user may set up multiple user accounts on our platforms. The number of paying users we present in this annual report may not be equal to the number of unique individuals who actually purchase or consume virtual items or subscribe for paid podcasts on our platforms for any given period;
“RMB” or “Renminbi” refers to the legal currency of the PRC;
“Second Amended and Restated Memorandum and Articles of Association” refers to the second amended and restated memorandum and articles of association of our company adopted on October 23, 2019 which has become effective upon our initial public offering;
“total mobile MAUs” refers to the number of active users across our platforms and apps in a given month;
“US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States; and
“We,” “us,” “our company,” and “our,” refer to LIZHI INC., its subsidiaries and, in the context of describing our operations and consolidated financial information, its variable interest entities (“ VIEs”). As described elsewhere in this annual report, we do not own the VIEs, and the results of the VIEs’ operations only accrue to us through contractual arrangements between the VIEs, and the VIEs’ nominee shareholders, and certain of our subsidiaries. Accordingly, in appropriate contexts we will describe the VIEs’ activities separately from those of our direct and indirect owned subsidiaries and our use of the terms “we,” “us,” and “our” may not include the VIEs in those contexts.
We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals or percentages may not be an arithmetic calculation of the figures that preceded them.
Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report are made at RMB6.3726 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2021. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. On April 15, 2022, the noon buying rate for Renminbi was RMB6.3705 to US$1.00.
2

Table of Contents
FORWARD-LOOKING INFORMATION
This annual report contains statements that constitute forward-looking statements. Many of the forward- looking statements contained in this annual report can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.
Forward-looking statements appear in a number of places in this annual report and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified under the section entitled “Item 3. Key Information—3.D. Risk Factors” in this annual report. These risks and uncertainties include factors relating to:
our goals and growth strategies;
our future business development, results of operations and financial condition;
relevant government policies and regulations relating to our business and industry;
our expectation regarding the use of proceeds from our initial public offering in January 2020;
general economic and business condition in China and overseas countries and regions where we operate;
assumptions underlying or related to any of the foregoing;
the length and severity of the recent
COVID-19
outbreak and its impact on our business and industry;
any recurrence of the
COVID-19
pandemic and scope of related government orders and restrictions and the extent of the impact of the
COVID-19
pandemic on the global economy
other factors that may affect our financial condition, liquidity and results of operations; and
other risk factors discussed under “Item 3. Key
Information-3.D.
Risk Factors.”
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
3

Table of Contents
PART I

ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. | KEY INFORMATION

Our Corporate Structure and Contractual Arrangements
Our Company, a Cayman Islands holding company, conducts operations in China through its PRC subsidiaries and the VIEs. However, we and our direct and indirect subsidiaries do not, and it is virtually impossible for them to, have any equity interests in the VIEs in practice as current PRC laws and regulations restrict foreign investment in companies that engage in value-added telecommunication services and other internet related business. As a result, we depend on certain contractual arrangements with the VIEs to operate a significant portion of our business. This structure allows us to exercise effective control over the VIEs, and is designed to replicate substantially the same economic benefits as would be provided by direct ownership. The VIEs are owned by certain nominee shareholders, not us. All of these nominee shareholders are also beneficial owners and directors of the Company. Investors in our ADSs are purchasing equity securities of a Cayman Islands holding company rather than equity securities issued by our subsidiaries and the VIEs. Investors who are
non-PRC
residents may never directly hold equity interests in the VIEs under current PRC laws and regulations.
Beijing Hongyiyichuang Information Technology Co., Ltd. (“Hongyi Technology”) and Guangzhou Tiya Information Technology Co., Ltd. (“Guangzhou Tiya”) (our wholly-owned subsidiaries in China) are considered foreign-invested enterprises, or WFOEs. To comply with PRC laws and regulations, our WFOEs conduct our business in China mainly through Guangzhou Lizhi Network Technology Co., Ltd. (“Guangzhou Lizhi”) and Guangzhou Huanliao Network Technology Co., Ltd. (“Guangzhou Huanliao”), the VIEs, and their respective subsidiaries, based on a series of contractual arrangements by and among our WFOEs, the VIEs and the respective shareholders of the VIEs.
Our corporate structure involves unique risks to investors in the ADSs. In 2019, 2020 and 2021, the amount of revenues generated by the VIEs accounted for 99.9%, 96.7% and 93.0%, respectively, of our total net revenues. As of December 31, 2020 and 2021, total assets of the VIEs, excluding amounts due from other companies in the Group, equaled to 61.1% and 39.8% of our consolidated total assets as of the same dates, respectively. Our contractual arrangements with the VIEs have not been tested in court. If the PRC government deems that our contractual arrangements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to material penalties or be forced to relinquish our interests in those operations or otherwise significantly change our corporate structure. We and our investors face significant uncertainty about potential future actions by the PRC government that could affect the legality and enforceability of the contractual arrangements with the VIEs and, consequently, significantly affect our ability to consolidate the financial results of the VIEs and the financial performance of our company as a whole. Our ADSs may decline in value or become worthless if we are unable to effectively enforce our contractual control rights over the assets and operations of the VIEs that conduct a significant portion of our business in China. See “Item 3. Key Information—3.D. Risk Factor—Risks Related to Our Corporate Structure” for detailed discussion.
We face various legal and operational risks and uncertainties as a company based in and primarily operating in China. The PRC government has significant authority to exert influence on the ability of a China-based company, like us, to conduct its business, accept foreign investments or be listed on a U.S. stock exchange. For example, we face risks associated with regulatory approvals of offshore offerings, anti-monopoly regulatory actions, cybersecurity and data privacy, as well as the lack of inspection from the U.S. Public Company Accounting Oversight Board, or PCAOB, on our auditors. The PRC government may also intervene with or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new policies that significantly affected our industry and we cannot rule out the possibility that it will in the future further release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations. Any such action, once taken by the PRC government, could cause the value of such securities to significantly decline or in extreme cases, become worthless.
4

Table of Contents
Permissions Required from the PRC Authorities for Our Operations
We conduct our business primarily through our PRC subsidiaries, the VIEs and their subsidiaries. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries and the VIEs have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company, the VIEs in China, including, among others, the ICP License and the Internet Culture Operating License. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry— If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected.”
Furthermore, in connection with our issuance of securities to foreign investors, under current PRC laws, regulations and regulatory rules, as of the date of this annual report, we, our PRC subsidiaries and the VIEs, (i) are not required to obtain permissions from the China Securities Regulatory Commission, or the CSRC, (ii) are not required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC, and (iii) have not received or been denied such requisite permissions by any PRC authority.
However, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.”
Cash Flows through Our Organization
Under relevant PRC Laws and regulations, we are permitted to provide funding from the proceeds of our offshore fund raising activities to our PRC subsidiaries only through loans or capital contributions, and to the VIEs only through loans.
As of December 31, 2021, LIZHI Inc. had made cumulative capital contributions of US$57.5 million to our PRC subsidiaries through intermediate holding company, and were accounted as long-term investments of LIZHI Inc.. These funds have been used by our PRC subsidiaries and the VIEs for their operations. In 2019, 2020 and 2021, the VIEs transferred nil, RMB5.9 million and RMB26.4 million (US$4.1 million), respectively, to our PRC subsidiaries as payment of service fees.
Hongyi Technology and Guangzhou TIYA, our PRC subsidiaries, maintained certain personnel for research and development and general and administrative functions to support the operations of the VIEs.
Apart from services charges and loans among the VIEs and our PRC subsidiaries, there were no other assets transferred between the VIEs and Non-VIEs in 2019, 2020 and 2021.
5

Table of Contents
As advised by our PRC legal counsel, for any amounts owed by the VIEs to our PRC subsidiaries under the VIE agreements, unless otherwise required by PRC governmental authorities, we are able to settle such amounts without limitations under the current effective PRC laws and regulations, provided that the VIEs have sufficient funds to do so. LIZHI Inc. has not previously declared or paid any cash dividend or dividend in kind, and has no plan to declare or pay any dividends in the near future on our shares or the ADSs representing our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. See “Item 8.—Financial Information—8.A. Consolidated Statements and Other Financial Information—Dividend Policy.”
For the purpose of illustration, the below table reflects the hypothetical taxes that might be required to be paid within China, assuming that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future:

|  | Taxation Scenario (1) |
|  | Statutory Tax and Standard Rates |
Hypothetical pre-tax earnings (2) |  |  | 100 | %
Tax on earnings at statutory rate of 25% |  |  | -25 | %
Net earnings available for distribution |  |  | 75 | %
Withholding tax at standard rate of 10% (3) |  |  | -7.5 | %
Net distribution to Parent/Shareholders |  |  | 67.5 | %

Notes:

(1) | The tax calculation has been simplified for the purpose of this example. The hypothetical book pre-tax earnings amount, which does not consider timing differences, is assumed to equal the taxable income in the PRC.

(2) | Under the terms of agreements, technical development and technical service fees are charged by our PRC subsidiaries to the VIEs. For all the periods presented, these fees are recognized as cost of revenues, research and development expenses of the VIEs, with a corresponding amount as service income by our PRC subsidiaries and eliminated in consolidation. For income tax purposes, our PRC subsidiaries and the VIEs file income taxes on a separate company basis. The fees paid are recognized as a tax deduction by the VIEs and as income by our PRC subsidiaries and are tax neutral.

(3) | China’s Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a Foreign Invested Enterprises (“FIE”) to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the FIE’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For the purpose of this hypothetical example, this table has been prepared based on a taxation scenario under which the full withholding tax would be applied.

The table above has been prepared under the assumption that all profits of the VIEs will be distributed as fees to our PRC subsidiaries under tax neutral contractual arrangements. If in the future, the accumulated earnings of the VIEs exceed the fees paid to our PRC subsidiaries, or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities, we have other tax-planning strategies that can be deployed on a tax neutral basis.
Should all tax planning strategies fail, the VIEs could, as a matter of last resort, make a non-deductible transfer to our PRC subsidiaries for the amounts of the stranded cash in the VIEs. This would result in the double taxation of earnings: one at the VIE level (for non-deductible expenses) and one at the PRC subsidiary level (for presumptive earnings on the transfer). Such a transfer and the related tax burdens would reduce our after-tax income to approximately 50.6% of the pre-tax income. Our management is of the view that the likelihood that this scenario would happen is remote.
6

Table of Contents
Condensed Consolidating Schedule
The following tables present the summary statements of operations for our Company’s WFOEs, the VIEs and other entities for the periods presented.

|  | For the Year Ended December 31, 2019 |
|  | L IZHI INC. |  |  | O ther Subsidiaries |  |  | W FOEs |  |  | V IEs and VIEs’ Subsidiaries |  |  | E limination |  |  | C onsolidated |
|  | (RMB in thousands) |
Third-party revenues |  |  | — |  |  |  | 1,129 |  |  |  | — |  |  |  | 1,179,468 |  |  |  | — |  |  |  | 1,180,597 |
Inter-company revenues (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Cost of revenues |  |  | — |  |  |  | (3,957 | ) |  |  | (1,078 | ) |  |  | (905,120 | ) |  |  | — |  |  |  | (910,155 | )
Gross profit |  |  | — |  |  |  | (2,828 | ) |  |  | (1,078 | ) |  |  | 274,348 |  |  |  | — |  |  |  | 270,442 |
Selling and marketing expenses |  |  | — |  |  |  | (3,054 | ) |  |  | (640 | ) |  |  | (204,856 | ) |  |  | — |  |  |  | (208,550 | )
General and administrative expenses |  |  | — |  |  |  | (1,986 | ) |  |  | (4,900 | ) |  |  | (38,828 | ) |  |  | — |  |  |  | (45,714 | )
Research and development expenses |  |  | — |  |  |  | (12 | ) |  |  | (2,803 | ) |  |  | (155,200 | ) |  |  | — |  |  |  | (158,015 | )
Loss from subsidiaries and the VIEs (2) |  |  | (132,947 | ) |  |  | (125,293 | ) |  |  | (116,891 | ) |  |  | — |  |  |  | 375,131 |  |  |  | — |
(Loss)/income from non-operations |  |  | (10 | ) |  |  | 226 |  |  |  | 1,019 |  |  |  | 7,645 |  |  |  | — |  |  |  | 8,880 |
Loss before income tax expenses |  |  | (132,957 | ) |  |  | (132,947 | ) |  |  | (125,293 | ) |  |  | (116,891 | ) |  |  | 375,131 |  |  |  | (132,957 | )
Less: income tax expenses |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Net loss |  |  | (132,957 | ) |  |  | (132,947 | ) |  |  | (125,293 | ) |  |  | (116,891 | ) |  |  | 375,131 |  |  |  | (132,957 | )
Net loss attributable to LIZHI INC.’s ordinary shareholders |  |  | ( 1,073,143 | ) |  |  | (132,947 | ) |  |  | (125,293 | ) |  |  | (116,891 | ) |  |  | 375,131 |  |  |  | ( 1,073,143 | )

|  | For the Year Ended December 31, 2020 |
|  | LIZHI INC. |  |  | Other Subsidiaries |  |  | WFOEs |  |  | VIEs and VIEs’ Subsidiaries |  |  | Elimination |  |  | Consolidated |
|  | (RMB in thousands) |
Third-party revenues |  |  | — |  |  |  | 45,315 |  |  |  | 4,056 |  |  |  | 1,453,537 |  |  |  | — |  |  |  | 1,502,908 |
Inter-company revenues (1) |  |  | — |  |  |  | — |  |  |  | 26,941 |  |  |  | 2,653 |  |  |  | (29,594 | ) |  |  | — |
Cost of revenues |  |  | — |  |  |  | (27,860 | ) |  |  | (6,125 | ) |  |  | (1,115,806 | ) |  |  | 15,113 |  |  |  | (1,134,678 | )
Gross profit |  |  | — |  |  |  | 17,455 |  |  |  | 24,872 |  |  |  | 340,384 |  |  |  | (14,481 | ) |  |  | 368,230 |
Selling and marketing expenses |  |  | (1,554 | ) |  |  | (8,466 | ) |  |  | — |  |  |  | (132,714 | ) |  |  | — |  |  |  | (142,734 | )
General and administrative expenses |  |  | (14,321 | ) |  |  | (519 | ) |  |  | (7,770 | ) |  |  | (66,246 | ) |  |  | — |  |  |  | (88,856 | )
Research and development expenses |  |  | — |  |  |  | (719 | ) |  |  | (5,864 | ) |  |  | (233,227 | ) |  |  | 14,481 |  |  |  | (225,329 | )
Loss from subsidiaries and the VIEs (2) |  |  | (67,158 | ) |  |  | (73,707 | ) |  |  | (84,441 | ) |  |  | — |  |  |  | 225,306 |  |  |  | — |
Income/(loss) from non-operations |  |  | 849 |  |  |  | (203 | ) |  |  | (504 | ) |  |  | 7,362 |  |  |  | — |  |  |  | 7,504 |
Loss before income tax expenses |  |  | (82,184 | ) |  |  | (66,159 | ) |  |  | (73,707 | ) |  |  | (84,441 | ) |  |  | 225,306 |  |  |  | (81,185 | )
Less: income tax expenses |  |  | — |  |  |  | (999 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (999 | )
Net loss |  |  | (82,184 | ) |  |  | (67,158 | ) |  |  | (73,707 | ) |  |  | (84,441 | ) |  |  | 225,306 |  |  |  | (82,184 | )
Net loss attributable to LIZHI INC.’s ordinary shareholders |  |  | (236,250 | ) |  |  | (67,158 | ) |  |  | (73,707 | ) |  |  | (84,441 | ) |  |  | 225,306 |  |  |  | (236,250 | )

7

Table of Contents

|  | For the Year Ended December 31, 2021 |
|  | LIZHI INC. |  |  | Other Subsidiaries |  |  | WFOEs |  |  | VIEs and VIEs’ Subsidiaries |  |  | Elimination |  |  | Consolidated |
|  | (RMB in thousands) |
Third-party revenues |  |  | — |  |  |  | 137,299 |  |  |  | 10,109 |  |  |  | 1,972,106 |  |  |  | — |  |  |  | 2,119,514 |
Inter-company revenues (1) |  |  | — |  |  |  | — |  |  |  | 9,568 |  |  |  | 3,652 |  |  |  | (13,220 | ) |  |  | — |
Cost of revenues |  |  | — |  |  |  | (110,101 | ) |  |  | (11,714 | ) |  |  | (1,391,598 | ) |  |  | 10,908 |  |  |  | (1,502,505 | )
Gross profit |  |  | — |  |  |  | 27,198 |  |  |  | 7,963 |  |  |  | 584,160 |  |  |  | (2,312 | ) |  |  | 617,009 |
Selling and marketing expenses |  |  | (1,452 | ) |  |  | (34,941 | ) |  |  | (667 | ) |  |  | (349,144 | ) |  |  | — |  |  |  | (386,204 | )
General and administrative expenses |  |  | (17,558 | ) |  |  | (12,019 | ) |  |  | (2,121 | ) |  |  | (72,919 | ) |  |  | — |  |  |  | (104,617 | )
Research and development expenses |  |  | — |  |  |  | (1,774 | ) |  |  | (13,678 | ) |  |  | (251,566 | ) |  |  | 2,312 |  |  |  | (264,706 | )
Loss from subsidiaries and the VIEs (2) |  |  | (109,046 | ) |  |  | (86,280 | ) |  |  | (81,551 | ) |  |  | — |  |  |  | 276,877 |  |  |  | — |
Income/(loss) from non-operations |  |  | 806 |  |  |  | (854 | ) |  |  | 3,774 |  |  |  | 7,918 |  |  |  | — |  |  |  | 11,644 |
Loss before income tax expenses |  |  | (127,250 | ) |  |  | (108,670 | ) |  |  | (86,280 | ) |  |  | (81,551 | ) |  |  | 276,877 |  |  |  | (126,874 | )
Less: income tax expenses |  |  | — |  |  |  | (376 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (376 | )
Net loss |  |  | (127,250 | ) |  |  | (109,046 | ) |  |  | (86,280 | ) |  |  | (81,551 | ) |  |  | 276,877 |  |  |  | (127,250 | )
Net loss attributable to LIZHI INC.’s ordinary shareholders |  |  | (127,250 | ) |  |  | (109,046 | ) |  |  | (86,280 | ) |  |  | (81,551 | ) |  |  | 276,877 |  |  |  | (127,250 | )

(1) | It represents the inter-company service charged among the WFOEs and the VIEs. The cost of the charges is reflected in the “Cost of revenues” and “Research and development expenses” of the WFOEs and the VIEs. All amounts are eliminated in consolidation.

(2) | It represents the elimination of the investment loss among LIZHI Inc., other subsidiaries, WFOEs, and the VIEs and VIEs’ subsidiaries.

The following tables present the summary balance sheet data for our Company’s WFOEs, the VIEs and other entities as of the dates presented.

|  | As of December 31, 2020 |
|  | LIZHI INC. |  |  | Other Subsidiaries |  |  | WFOEs |  |  | VIEs and VIEs’ Subsidiaries |  |  | Elimination |  |  | Consolidated |
|  | (RMB in thousands) |
Cash and cash equivalents |  |  | 145,268 |  |  |  | 18,175 |  |  |  | 3,037 |  |  |  | 148,979 |  |  |  | — |  |  |  | 315,459 |
Short term investment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 73,022 |  |  |  | — |  |  |  | 73,022 |
Restricted cash |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,695 |  |  |  | — |  |  |  | 3,695 |
Accounts receivable, net |  |  | — |  |  |  | — |  |  |  | 5,719 |  |  |  | 2,642 |  |  |  | — |  |  |  | 8,361 |
Prepayments and other current assets |  |  | 2,605 |  |  |  | 2,276 |  |  |  | 1,300 |  |  |  | 13,190 |  |  |  | — |  |  |  | 19,371 |
Amounts due from Lizhi Group Companies (1) |  |  | 174,425 |  |  |  | 113,095 |  |  |  | 247,997 |  |  |  | 500 |  |  |  | (536,017 | ) |  |  | — |
Property, equipment and leasehold improvement, net |  |  | — |  |  |  | 1 |  |  |  | 175 |  |  |  | 34,342 |  |  |  | — |  |  |  | 34,518 |
Intangible assets, net |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,929 |  |  |  | — |  |  |  | 2,929 |
Deficit in subsidiaries and the VIEs (2) |  |  | (116,312 | ) |  |  | (119,967 | ) |  |  | (370,163 | ) |  |  | — |  |  |  | 606,442 |  |  |  | — |
Lease assets |  |  | — |  |  |  | — |  |  |  | 441 |  |  |  | 3,841 |  |  |  | — |  |  |  | 4,282 |
Other non-current assets |  |  | 1,470 |  |  |  | — |  |  |  | — |  |  |  | 711 |  |  |  | — |  |  |  | 2,181 |
Total assets |  |  | 207,456 |  |  |  | 13,580 |  |  |  | (111,494 | ) |  |  | 283,851 |  |  |  | 70,425 |  |  |  | 463,818 |
Accounts payable |  |  | — |  |  |  | 3,056 |  |  |  | 1,225 |  |  |  | 73,986 |  |  |  | — |  |  |  | 78,267 |
Deferred revenue |  |  | — |  |  |  | 775 |  |  |  | — |  |  |  | 16,226 |  |  |  | — |  |  |  | 17,001 |
Salary and welfare benefits payable |  |  | 1,678 |  |  |  | — |  |  |  | 3,146 |  |  |  | 88,464 |  |  |  | — |  |  |  | 93,288 |
Taxes payable |  |  | — |  |  |  | 999 |  |  |  | 251 |  |  |  | 4,559 |  |  |  | — |  |  |  | 5,809 |
Short term borrowing |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 39,508 |  |  |  | — |  |  |  | 39,508 |
Accrued expenses and other current liabilities |  |  | 4,058 |  |  |  | 3,452 |  |  |  | 1,978 |  |  |  | 41,559 |  |  |  | — |  |  |  | 51,047 |
Lease liabilities |  |  | — |  |  |  | — |  |  |  | 167 |  |  |  | 4,129 |  |  |  | — |  |  |  | 4,296 |
Other non-current liabilities |  |  | 5,411 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,411 |
Amounts due to Lizhi Group Companies (1) |  |  | 27,118 |  |  |  | 121,610 |  |  |  | 1,706 |  |  |  | 385,583 |  |  |  | (536,017 | ) |  |  | — |
Total liabilities |  |  | 38,265 |  |  |  | 129,892 |  |  |  | 8,473 |  |  |  | 654,014 |  |  |  | (536,017 | ) |  |  | 294,627 |
Total shareholders’ equity/(deficit) (2) |  |  | 169,191 |  |  |  | (116,312 | ) |  |  | (119,967 | ) |  |  | (370,163 | ) |  |  | 606,442 |  |  |  | 169,191 |
Total liabilities and shareholders’ equity/(deficit) |  |  | 207,456 |  |  |  | 13,580 |  |  |  | (111,494 | ) |  |  | 283,851 |  |  |  | 70,425 |  |  |  | 463,818 |

8

Table of Contents

|  | As of December 31, 2021 |
|  | LIZHI INC. |  |  | Other Subsidiaries |  |  | WFOEs |  |  | VIEs and VIEs’ Subsidiaries |  |  | Elimination |  |  | Consolidated |
|  | (RMB in thousands) |
Cash and cash equivalents |  |  | 224,779 |  |  |  | 70,761 |  |  |  | 46,204 |  |  |  | 191,549 |  |  |  | — |  |  |  | 533,293 |
Restricted cash |  |  | — |  |  |  | 1,132 |  |  |  | — |  |  |  | 3,023 |  |  |  | — |  |  |  | 4,155 |
Accounts receivable, net |  |  | — |  |  |  | — |  |  |  | 6,457 |  |  |  | 1 |  |  |  | — |  |  |  | 6,458 |
Prepayments and other current assets |  |  | 3,417 |  |  |  | 7,222 |  |  |  | 2,720 |  |  |  | 20,245 |  |  |  | — |  |  |  | 33,604 |
Amounts due from Lizhi Group Companies (1) |  |  | 278,553 |  |  |  | 104,372 |  |  |  | 208,549 |  |  |  | 197 |  |  |  | (591,671 | ) |  |  | — |
Property, equipment and leasehold improvement, net |  |  | — |  |  |  | 2,497 |  |  |  | 2,314 |  |  |  | 28,580 |  |  |  | — |  |  |  | 33,391 |
Intangible assets, net |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,245 |  |  |  | — |  |  |  | 2,245 |
Deficit in subsidiaries and the VIEs (2) |  |  | (223,293 | ) |  |  | (203,024 | ) |  |  | (453,641 | ) |  |  | — |  |  |  | 879,958 |  |  |  | — |
Lease assets |  |  | — |  |  |  | 11,420 |  |  |  | 7,868 |  |  |  | 9,653 |  |  |  | — |  |  |  | 28,941 |
Other non-current assets |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 799 |  |  |  | — |  |  |  | 799 |
Total assets |  |  | 283,456 |  |  |  | (5,620 | ) |  |  | (179,529 | ) |  |  | 256,292 |  |  |  | 288,287 |  |  |  | 642,886 |
Accounts payable |  |  | — |  |  |  | 5,898 |  |  |  | 4,256 |  |  |  | 70,639 |  |  |  | — |  |  |  | 80,793 |
Deferred revenue |  |  | — |  |  |  | 1,539 |  |  |  | — |  |  |  | 19,118 |  |  |  | — |  |  |  | 20,657 |
Salary and welfare benefits payable |  |  | 1,330 |  |  |  | 288 |  |  |  | 5,253 |  |  |  | 116,204 |  |  |  | — |  |  |  | 123,075 |
Taxes payable |  |  | — |  |  |  | 624 |  |  |  | — |  |  |  | 4,940 |  |  |  | — |  |  |  | 5,564 |
Short term borrowing |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 68,999 |  |  |  | — |  |  |  | 68,999 |
Accrued expenses and other current liabilities |  |  | 3,021 |  |  |  | 4,372 |  |  |  | 3,290 |  |  |  | 42,803 |  |  |  | — |  |  |  | 53,486 |
Lease liabilities |  |  | — |  |  |  | 12,408 |  |  |  | 8,698 |  |  |  | 9,899 |  |  |  | — |  |  |  | 31,005 |
Other non-current liabilities |  |  | 4,452 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 4,452 |
Amounts due to Lizhi Group Companies (1) |  |  | 19,798 |  |  |  | 192,544 |  |  |  | 1,998 |  |  |  | 377,331 |  |  |  | (591,671 | ) |  |  | — |
Total liabilities |  |  | 28,601 |  |  |  | 217,673 |  |  |  | 23,495 |  |  |  | 709,933 |  |  |  | (591,671 | ) |  |  | 388,031 |
Total shareholders’ equity/(deficit) (2) |  |  | 254,855 |  |  |  | (223,293 | ) |  |  | (203,024 | ) |  |  | (453,641 | ) |  |  | 879,958 |  |  |  | 254,855 |
Total liabilities and shareholders’ equity/(deficit) |  |  | 283,456 |  |  |  | (5,620 | ) |  |  | (179,529 | ) |  |  | 256,292 |  |  |  | 288,287 |  |  |  | 642,886 |

(1) | It represents the elimination of inter-company balances among LIZHI Inc., other subsidiaries, WFOEs, the VIEs and VIEs’ subsidiaries.

(2) | It represents the elimination of the investment among LIZHI Inc., other subsidiaries, WFOEs, the VIEs and VIEs’ subsidiaries.

The VIEs hold assets with no carrying value in the consolidated balance sheet that are important to the Company’s ability to produce revenue (referred to as unrecognized revenue-producing assets). Unrecognized revenue-producing assets held by the VIEs mainly include the ICP License and the Internet Culture Operating License. Recognized revenue-producing assets held by the VIEs include copyrights, trademarks and domain names.
9

Table of Contents
The following tables present the summary cash flow data for our Company’s WFOEs, the VIEs and other entities for the periods presented.

|  | For the Year Ended December 31, 2019 |
|  | LIZHI INC. |  |  | Other Subsidiaries |  |  | WFOEs |  |  | VIEs and VIEs’ Subsidiaries |  |  | Elimination |  |  | Consolidated |
|  | (RMB in thousands) |
Net cash used in operating activities (1) |  |  | (6,622 | ) |  |  | (7,858 | ) |  |  | (8,258 | ) |  |  | (73,015 | ) |  |  | — |  |  |  | (95,753 | )
Investments in and loans to Group companies (2) |  |  | (1,395 | ) |  |  | (22,066 | ) |  |  | (38,854 | ) |  |  | — |  |  |  | 62,315 |  |  |  | — |
Other investing activities |  |  | — |  |  |  | — |  |  |  | (206 | ) |  |  | (29,164 | ) |  |  | — |  |  |  | (29,370 | )
Net cash used in investing activities |  |  | (1,395 | ) |  |  | (22,066 | ) |  |  | (39,060 | ) |  |  | (29,164 | ) |  |  | 62,315 |  |  |  | (29,370 | )
Capital contribution and loans received from Group companies (2) |  |  | — |  |  |  | 1,395 |  |  |  | 22,066 |  |  |  | 38,854 |  |  |  | (62,315 | ) |  |  | — |
Cash transferred from subsidiaries to parent company for reorganization |  |  | 10,434 |  |  |  | (10,434 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Net cash generated from/(used in) financing activities |  |  | 10,434 |  |  |  | (9,039 | ) |  |  | 22,066 |  |  |  | 38,854 |  |  |  | (62,315 | ) |  |  | — |
|  | For the Year Ended December 31, 2020 |
|  | LIZHI INC. |  |  | Other Subsidiaries |  |  | WFOEs |  |  | VIEs and VIEs’ Subsidiaries |  |  | Elimination |  |  | Consolidated |
|  | (RMB in thousands) |
Net cash (used in)/generated from operating activities (1) |  |  | (7,745 | ) |  |  | 29,684 |  |  |  | 632 |  |  |  | 17,425 |  |  |  | — |  |  |  | 39,996 |
Investments in and loans to Group companies (2) |  |  | (120,281 | ) |  |  | (129,130 | ) |  |  | (148,751 | ) |  |  | — |  |  |  | 398,162 |  |  |  | — |
Other investing activities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (94,559 | ) |  |  | — |  |  |  | (94,559 | )
Net cash used in investing activities |  |  | (120,281 | ) |  |  | (129,130 | ) |  |  | (148,751 | ) |  |  | (94,559 | ) |  |  | 398,162 |  |  |  | (94,559 | )
Capital contribution and loans received from Group companies (2) |  |  | — |  |  |  | 120,281 |  |  |  | 129,130 |  |  |  | 148,751 |  |  |  | (398,162 | ) |  |  | — |
Cash transferred from subsidiaries to parent company for reorganization |  |  | 16,683 |  |  |  | (16,683 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
IPO and other financing activities |  |  | 259,045 |  |  |  | — |  |  |  | — |  |  |  | 39,001 |  |  |  | — |  |  |  | 298,046 |
Net cash generated from financing activities |  |  | 275,728 |  |  |  | 103,598 |  |  |  | 129,130 |  |  |  | 187,752 |  |  |  | (398,162 | ) |  |  | 298,046 |
|  | For the Year Ended December 31, 2021 |
|  | LIZHI INC. |  |  | Other Subsidiaries |  |  | WFOEs |  |  | VIEs and VIEs’ Subsidiaries |  |  | Elimination |  |  | Consolidated |
|  | (RMB in thousands) |
Net cash (used in)/generated from operating activities (1) |  |  | (15,728 | ) |  |  | (27,949 | ) |  |  | 20,974 |  |  |  | (17,723 | ) |  |  | — |  |  |  | (40,426 | )
Investments in and loans to Group companies (2) |  |  | (83,661 | ) |  |  | — |  |  |  | (3,222 | ) |  |  | — |  |  |  | 86,883 |  |  |  | — |
Other investing activities |  |  | — |  |  |  | (222 | ) |  |  | — |  |  |  | 52,323 |  |  |  | — |  |  |  | 52,101 |
Cash repayment from Group companies |  |  | — |  |  |  | — |  |  |  | 25,415 |  |  |  | — |  |  |  | (25,415 | ) |  |  | — |
Net cash (used in)/generated from investing activities |  |  | (83,661 | ) |  |  | (222 | ) |  |  | 22,193 |  |  |  | 52,323 |  |  |  | 61,468 |  |  |  | 52,101 |
Capital contribution and loans received from Group companies (2) |  |  | — |  |  |  | 83,661 |  |  |  | — |  |  |  | 3,222 |  |  |  | (86,883 | ) |  |  | — |
Cash repayment to Group companies |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (25,415 | ) |  |  | 25,415 |  |  |  | — |
Follow-on public offering and other financing activities |  |  | 183,191 |  |  |  | — |  |  |  | — |  |  |  | 29,491 |  |  |  | — |  |  |  | 212,682 |
Net cash generated from financing activities |  |  | 183,191 |  |  |  | 83,661 |  |  |  | — |  |  |  | 7,298 |  |  |  | (61,468 | ) |  |  | 212,682 |

(1) | For the years ended December 31, 2019, 2020 and 2021, cash paid by the VIEs to our PRC subsidiaries for technical development service fees were nil, RMB5.9 million and RMB26.4 million (US$4.1 million), respectively.

10

Table of Contents

(2) | Represents the investment in and loans to WFOEs and other subsidiaries by the Parent, and intercompany loans among WFOEs, other subsidiaries, and VIEs, and the elimination among them. The Parent transfers cash to other subsidiaries by making capital contributions or providing loans, and other subsidiaries transfer cash to the WFOEs by making capital contributions or providing loans to them. The WFOEs also have intercompany loans with certain VIEs as part of our cash management program.

3.A. [Reserved]
3.B. Capitalization and Indebtedness
Not applicable.
3.C. Reason for the Offer and Use of Proceeds
Not applicable.
3.D. Risk Factors
Summary Risk Factors
You should carefully consider all of the information in this annual report before making an investment in the ADSs. Below please find a summary of the principal risks and uncertainties we face, organized under relevant headings. In particular, as we are a China-based company incorporated in the Cayman Islands, you should pay special attention to subsections headed “Item 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China” and “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure.”
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to, risks related to:
11

Table of Contents
Risks Related to Doing Business in China

| • |  | Uncertainties with respect to PRC laws and regulations, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in policies, laws and regulations in China, could have a material and adverse effect on our business and results of operations, limit the legal protections available to you and us or otherwise adversely affect us.

| • |  | Regulation and censorship of information disseminated over the mobile and internet in China may adversely affect our business and subject us to liability for content on our platforms.

| • |  | Adverse changes in global or China’s economic, political or social conditions or government policies could have a material adverse effect on our business, financial condition and results of operations.

| • |  | Our business is subject to complex and evolving Chinese and international laws and regulations, including those regarding data privacy and cybersecurity. Many of these laws and regulations are subject to change and uncertain interpretation.

| • |  | The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.

| • |  | Any failure or perceived failure by us to comply with Anti-monopoly Guidelines for Internet Platforms and other Anti-monopoly laws and regulations may result in governmental investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and results of operations.

| • |  | Our ADSs will be delisted and prohibited from trading in the over-the-counter market under the Holding Foreign Companies Accountable Act, if the PCAOB continues to be unable to inspect or fully investigate auditors located in China. On December 16, 2021, the PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely. Under the current law, delisting and prohibition from over-the-counter trading in the U.S. would take place in 2024. If this happens there is no certainty that we will be able to list our ADS or shares on a non-U.S. exchange or that a market for our shares will develop outside of the U.S. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.

| • |  | The potential enactment of the Accelerating Holding Foreign Companies Accountable Act would decrease the number of non-inspection years from three years to two, thus reducing the time period before our ADSs will be prohibited from over-the-counter trading or delisted. If this bill were enacted, our ADS could be delisted from the exchange and prohibited from over-the-counter trading in the U.S. in 2023.

Risks Related to Our Business and Industry

| • |  | If we fail to retain our existing users, to keep them engaged, to further grow our user base or to increase paying ratio, our business, operation, profitability and prospects may be materially and adversely affected.

| • |  | The PRC government may further tighten the regulation on online audio and entertainment platforms, which may materially and negatively affect our reputation, business, financial condition and results of operations.

| • |  | We may fail to attract, cultivate and retain talented and popular hosts, which may materially and negatively affect our user retention and thus our business and operations.

| • |  | Our content monitoring system may not be effective in preventing misconduct by our platforms’ users and misuse of our platforms and such misconduct or misuse may materially and adversely impact our business, financial condition and results of operations.

| • |  | We may fail to offer attractive audio content on our platforms.

| • |  | We have limited experience in international markets. If we fail to meet the challenges presented by our expansion overseas, our business, financial condition and results of operations may be materially and adversely affected.

12

Table of Contents
Risks Related to Our Corporate Structure

| • |  | There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the agreements that establish the VIE structure for our operations in China, including potential future actions by the PRC government, which could affect the enforceability of our contractual arrangements with the VIEs and, consequently, significantly affect the financial condition and results of operations performance of Lizhi. If the PRC government finds such agreements non-compliant with relevant PRC laws, regulations and rules, or if these laws, regulations and rules or their interpretation thereof change in the future, we could be subject to severe penalties or be forced to relinquish our interests in the VIEs.

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

| • |  | The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.

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

| • |  | We may lose the ability to use and enjoy assets held by the VIEs and their subsidiaries that are important to our business if the VIEs and their subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.

Risks Related to our American Depositary Shares

| • |  | Our ADSs have experienced and may continue to experience price and volume fluctuations regardless of our operating performance, which could lead to costly litigation for us and make an investment in us less appealing.

| • |  | Under our dual-class share structure with different voting rights, holders of Class B ordinary shares have complete control of the outcome of matters put to a vote of shareholders, which may limit ability of holders of our Class A ordinary shares and the ADSs to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial.

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

| • |  | 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 which are represented by your ADSs.

Risks Related to Doing Business in China
Uncertainties with respect to PRC laws and regulations, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in policies, laws and regulations in China, could have a material and adverse effect on our business and results of operations, limit the legal protections available to you and us or otherwise adversely affect us.
The PRC legal system is based on written statutes where prior court decisions have limited value as precedents. Our PRC subsidiaries, the VIEs and our WFOEs, are subject to laws and regulations applicable to foreign-invested enterprises as well as various Chinese laws and regulations generally applicable to companies incorporated in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
13

Table of Contents
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems.
The PRC government has significant oversight and discretion over the conduct of our business and may intervene with or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new policies that adversely affected our industry and our business, and we cannot rule out the possibility that it will in the future further release regulations or policies regarding our industry that could further adversely affect our business, financial condition and results of operations. Furthermore, the PRC government has also recently indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted overseas and foreign investment in China-based companies like us. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless.
However, as there are still regulatory uncertainties in this regard, we cannot assure you that we will be able to comply with new laws and regulations in all respects, and we may be ordered to rectify, suspend or terminate any actions or services that are deemed illegal by the regulatory authorities and become subject to material penalties, which may materially harm our business, financial condition, results of operations and prospects.
Furthermore, the PRC legal system is based in part on government policies and internal rules that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
Regulation and censorship of information disseminated over the mobile and internet in China may adversely affect our business and subject us to liability for content on our platforms.
Internet companies in China are subject to a variety of existing and new rules, regulations, policies, and license and permit requirements. In connection with enforcing these rules, regulations, policies and requirements, relevant government authorities may suspend services by, or revoke licenses of, any internet or mobile content service provider that is deemed to provide illicit content online or on mobile devices, and such activities may be intensified in connection with any ongoing government campaigns to eliminate prohibited content online. For example, in 2016, the Office of the Anti-Pornography and Illegal Publications Working Group, the State Internet Information Office, the MIIT, the Ministry of Culture and the Ministry of Public Security jointly launched a “Clean Up the Internet 2016” campaign. Based on publicly available information, the campaign aims to eliminate pornographic information and content in the internet information services industry by, among other things, holding liable individuals and corporate entities that facilitate the distribution of pornographic information and content. Publicly traded companies voluntarily initiated self-investigations to filter and remove content from their websites and cloud servers. Furthermore, as of the date of this annual report, two more campaigns, the “Clean Up the Internet 2021”and “Clean Up the Internet 2022”, have then been launched, which are reported to be aiming at, among others, rectifying a number of illegal activities in the internet information services industry.
We endeavor to eliminate illicit content from our platforms. We have made substantial investments in resources, including artificial intellectual technology to work together with a team of specialized individuals, to monitor content that users post on our platforms and the way in which our users engage with each other through our platforms. We use a variety of methods to ensure our platforms remains a healthy and positive experience for our users. See “Item 4. Information of the Company—4.B. Business Overview—Content Monitoring System.” Although we employ these methods to filter content posted on our platforms, we cannot be sure that our internal content control efforts will be sufficient to remove all content that may be viewed as indecent or otherwise
non-compliant
with PRC law and regulations. Government standards and interpretations as to what constitutes illicit online content or behavior are subject to interpretation and may change in a manner that could render our current monitoring efforts insufficient. The Chinese government has wide discretion in regulating online activities and, irrespective of our efforts to control the content on our platforms, government campaigns and other actions to reduce illicit content and activities could subject us to negative press or regulatory challenges and sanctions, including fines, suspension or revocation of our licenses to operate in China or a suspension or ban on our mobile or online platforms, including suspension or closure of one or more parts of or our entire business. Further, our senior management could be held criminally liable if we are deemed to be profiting from illicit content on our platforms. Although our business and operations have not been materially and adversely affected by government campaigns or any other regulatory actions in the past, we cannot assure you that our business and operations will be immune from government actions or sanctions in the future. If government actions or sanctions are brought against us, or if there are widespread rumors that government actions or sanctions have been brought against us, our reputation could be harmed, we may lose users and customers, our revenues and results of operation may be materially and adversely affected and the value of our ADSs could be dramatically reduced.
14

Table of Contents
Adverse changes in global or China’s economic, political or social conditions or government policies could have a material adverse effect on our business, financial condition and results of operations.
Our revenues are substantially sourced from China. Accordingly, our business, 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 40 years, growth has been uneven across different regions and among different economic sectors and the rate of growth has been slowing.
China’s economic conditions are sensitive to global economic conditions. The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The global macroeconomic environment is facing new challenges and there is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies. Recent international trade disputes, including tariff actions announced by the United States, the PRC and certain other countries, and the uncertainties created by such disputes may cause disruptions in the international flow of goods and services and may adversely affect the Chinese economy as well as global markets and economic conditions. There have also been concerns about the economic effect of the military conflicts and political turmoil or social instability in the Middle East, Europe, Africa and other places. Recently, the Russia-Ukraine war has caused, and continues to intensify, significant geopolitical tensions in Europe and across the global. The resulting sanctions are expected to have significant impacts on the economic conditions of the targeted countries and markets. Any severe or prolonged slowdown in the global economy may adversely affect the Chinese economy which in turn may adversely affect our business and operating results.
The PRC government exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Although the PRC economy has grown significantly in the past decade, that growth may not continue, as evidenced by the slowing of the growth of the PRC economy since 2012. 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.
Currently there is no law or regulation specifically governing virtual asset property rights and therefore it is not clear what liabilities, if any, online platform operator may have for virtual assets.
While participating on our platforms, our users acquire, purchase and accumulate some virtual assets, such as gifts or certain status. Such virtual assets can be important to users and have monetary value and, in some cases, are sold for actual money. In practice, virtual assets can be lost for various reasons, often through unauthorized use of the user account of one user by other users and occasionally through data loss caused by delay of network service, network crash or hacking activities. Currently, there is no PRC law or regulation specifically governing virtual asset property rights (except for online game virtual currency and single purpose commercial prepaid cards). As a result, there is uncertainty as to who the legal owner of virtual assets is, whether and how the ownership of virtual assets is protected by law, and whether an operator of online platform such as us would have any liability, whether in contract, tort or otherwise, to users or other interested parties, for loss of such virtual assets. Based on recent PRC court judgments, the courts have typically held online platform operators liable for losses of virtual assets by platform users, and ordered online platform operators to return the lost virtual items to users or pay damages and losses if the online platform operators fail to fulfill their obligations as the service provider. In case of a loss of virtual assets, we may be sued by our users and held liable for damages, which may negatively affect our reputation and business, financial condition and results of operations.
15

Table of Contents
Our business is subject to complex and evolving Chinese and international laws and regulations, including those regarding data privacy and cybersecurity. Many of these laws and regulations are subject to change and uncertain interpretation.
We are required by privacy and data protection laws in China and other jurisdictions, including, without limitation, the PRC Cyber Security Law, to ensure the confidentiality, integrity and availability of the information of our users, third-party agents, content providers and other data, which is also essential to maintaining their confidence in our services. However, the interpretation and application of such laws in China and elsewhere are often uncertain and in flux.
Regulatory authorities in China have implemented and are considering a number of legislative and regulatory proposals concerning cybersecurity and data protection. The interpretation and application of cybersecurity, information security, privacy and data protection laws in China are often uncertain and in flux. It is possible that existing or newly-introduced laws and regulations, or their interpretation, application or enforcement, could significantly affect our business practice and force us to change our business practices. For example, the Standing Committee of the National People’s Congress of China, promulgated the Cyber Security Law in November 2016, which requires network operators to perform certain functions related to cyber-security protection and strengthened network information management through taking technical and other necessary measures as required by laws and regulations to safeguard the operation of networks, respond to network security effectively, prevent illegal and criminal activities, and maintain the integrity and confidentiality and usability of network data. The Cyber Security Law further provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on critical information infrastructures operator. In addition, in June 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law, which took effect on September 1, 2021. The Data Security Law introduces a data classification and hierarchical protection system based on the importance of data and provides a national security review procedure for those data activities, which may affect national security and imposes export restrictions on certain data and information. In July 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law, which were available to the public on July 6, 2021 and further emphasized to strengthen the cross-board regulatory collaboration, to improve relevant laws and regulations on data security, cross-border data transmission, and confidential information management. Furthermore, on August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which provides detailed rules on how to handle personal information and sets forth legal responsibilities.
On December 28, 2021, the CAC, the NDRC, the MIIT, and several other PRC governmental authorities jointly issued the Cybersecurity Review Measures, or the Cybersecurity Review Measures, which took effect on February 15, 2022. Pursuant to Cybersecurity Review Measures, in addition to “critical information infrastructure operators”, network platform operators engaging in data processing activities that affect or may affect national security are subject to cybersecurity review under the Cybersecurity Review Measures. On November 14, 2021, the CAC published Measures on Network Data Security Management (Draft for Comment), or the Draft Measures for Internet Data Security, which provides that data processors conducting certain activities must apply for cybersecurity review, including, among others, merger, reorganization or separation of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests affects or may affect national security and listing abroad of data processors processing over one million users’ personal information. The Draft Measures for Internet Data Security also provides that data processors processing important data or going public overseas shall conduct an annual data security assessment by themselves or entrust a data security service institution to do so. The Draft Measures for Internet Data Security have not been adopted and it remains unclear whether the formal version adopted in the future will have any further material changes, it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect us. We cannot predict the impact of the draft measures, if any, at this stage. If a final version of the Draft Measures for Internet Data Security is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing. In addition, if the enacted version of the Draft Measures for Internet Data Security mandates clearance of cybersecurity review and other specific actions to be completed by China-based companies that have been listed on overseas stock exchange, such as us, we face uncertainties as to whether we could obtain such clearance in a timely manner, or at all. Any failure or delay in the completion of the cybersecurity review procedures may prevent us from using or providing certain network products and services, and may result in penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
16

Table of Contents
Compliance with the above PRC laws and regulations including the Cyber Security Law, the Cybersecurity Review Measures and the Data Security Law, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, including laws and regulations regarding the cybersecurity, information security, privacy and data protection, may result in additional expenses to us and subject us to negative publicity, which could harm our reputation and business operations. There are also uncertainties with respect to how such laws and regulations will be implemented and interpreted in practice. PRC regulators, including the Department of Public Security, the MIIT, the SAMR and the CAC, have been increasingly focused on regulation in the areas of data security and data protection, and are enhancing the protection of privacy and data security by rule-making and enforcement actions at central and local levels. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection.
While we have taken various measures to comply with all applicable laws and regulations regarding cybersecurity, information security, privacy and data protection in China, we cannot assure you that the measures we have taken or will take are adequate under the Cyber Security Law, and we may be held liable in the event of any breach of the relevant requirements under the Cyber Security Law or other relevant laws and regulations. Any failure or perceived failure by us to prevent information security breaches or to comply with data security and privacy policies or related legal obligations, or any compromise of security that results in the unauthorized use, release or transfer of personally identifiable information or other data, could cause our users to lose trust in us and could expose us to legal claims or penalties. Any perception by the public that privacy of user information or data security are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of our products and services generally. We may also be held liable in the event of any breach of general clauses on our compliance with such statutory requirements as well as some other specific requirements related to data protection under the relevant contracts. We may have to spend much more personnel cost and time evaluating and managing these risks and challenges in connection with our products and services in the ordinary course of our business operations, and cooperated and will keep cooperating in the future with the competent regulators in these respects. If further changes in our business practices are required under China’s evolving regulatory framework for the protection of information in cyberspace, our business, financial condition and results of operations may be adversely affected. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.
We conduct our business primarily through our subsidiaries, the VIEs and their subsidiaries in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and discretion over the conduct of our business, and it may influence our operations, which could result in a material adverse change in our operation and/or the value of our ADSs. Also, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. For example, on July 6, 2021, the relevant PRC government authorities made public the Opinions on Strictly Scrutinizing Illegal Securities Activities in accordance with the Law, or the Opinions. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. On December 28, 2021, the CAC issued the measures for Cybersecurity Review, or the Cybersecurity Review Measures 2021, which required that, among others, network platform operators holding over one million users’ personal information shall apply with the cybersecurity Review Office for a cybersecurity review before any listing in a foreign country. On November 14, 2021, the CAC released the Regulations on the Network Data Security, or the Draft Regulations, for public comments, which stipulates, among others, that a prior cybersecurity review is required for listing abroad of data processors which process over one million users’ personal information, and the listing of data processors in Hong Kong which affects or may affect national security. Since the Draft Regulations are in the process of being formulated and the Opinions and the Cybersecurity Review Measures 2021 remain unclear on how it will be interpreted, amended and implemented by the relevant PRC governmental authorities, it remains uncertain how PRC governmental authorities will regulate overseas listing in general and whether we are required to obtain any specific regulatory approvals from the CSRC, CAC or any other PRC governmental authorities for our offshore offerings. If the CSRC, CAC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for our future offshore offerings, we may be unable to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
17

Table of Contents
Any failure or perceived failure by us to comply with Anti-monopoly Guidelines for Internet Platforms and other Anti-monopoly laws and regulations may result in governmental investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and results of operations.
In recent years, PRC Anti-monopoly enforcement agencies have strengthened enforcement under the PRC Anti-monopoly Law. In March 2018, the SAMR was formed as a new governmental agency to take over, among other things, the anti-monopoly enforcement functions from the relevant departments under the MOFCOM, the NDRC and the SAIC (the predecessor of the SAMR), respectively. Since its inception, the SAMR has continued to strengthen anti-monopoly enforcement. In December 2018, the SAMR issued the Notice on Anti-monopoly Enforcement Authorization, which grants authorities to its province-level branches to conduct anti-monopoly enforcement within their respective jurisdictions. In November 2021, the National Anti-monopoly Bureau was inaugurated by the State Council, which aims to further implement the fair competition policies, and strengthen anti-monopoly supervision in the PRC, especially to strengthen oversight and law enforcement in areas involving platform economy, innovation, science and technology, information security and people’s livelihood.
The PRC anti-monopoly regulators may also issue implementation rules or guidelines from time to time to reinforce their regulation on certain industrial sectors. In February 2021, the Anti-monopoly Committee of the State Council published the Anti-monopoly Guidelines for Internet Platforms. This guideline prohibits monopolistic conduct such as entering into monopoly agreements, abusing market dominance and concentration of undertakings that may have the effect to eliminate or restrict competition in the field of platform economy. More specifically, the Anti-monopoly Guidelines for Internet Platforms outlines certain practices that may, if without justifiable reasons, constitute abuse of a dominant position, including without limitation, discriminating customers in terms of pricing and other transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements, using technology means to block competitors’ interface, using bundle services to sell services or products, and compulsory collection of users’ unnecessary data. The Anti-monopoly Guidelines for Internet Platforms further expressly states that concentration involving VIE will also be subject to antitrust filing requirements, and therefore will also fall within the scope of the antitrust review. In addition, Anti-monopoly Guidelines for Internet Platforms reinforces antitrust merger review for internet platform related transactions to safeguard market competition. Since the Anti-monopoly Guidelines for Internet Platforms is relatively new and may be subject to interpretation by the regulators in the process of implementing such guidelines, we cannot assure you that our business operations will comply with such regulation in all respects, and any failure or perceived failure by us to comply with such regulation may result in governmental investigations, fines and/or other sanctions on us. Furthermore, on October 23, 2021, the Standing Committee of the National People’s Congress issued a discussion draft of the amended Anti-monopoly Law, which proposes to increase the fines for illegal concentration of business operators to no more than ten percent of its last year’s sales revenue if the concentration of business operator has or may have an effect of excluding or limiting competitions; or a fine of up to RMB5 million if the concentration of business operator does not have an effect of excluding or limiting competition. The draft also proposes that the relevant authority shall investigate a transaction where there is any evidence that the concentration has or may have the effect of eliminating or restricting competitions, even if such concentration does not reach the filing threshold. See “Item 4. Information of the Company—4.B. Business Overview—Regulation.”
18

Table of Contents
We may be involved in investigations, inquiries, claims, complaints or other administrative requirements in relation to anti-monopoly laws and regulations in the PRC from time to time. In the case of our failure or perceived failure to comply with these laws and regulations and new legislations or guidelines to be promulgated from time to time, governmental agencies and regulators may, among other things, prohibit or rescind our acquisitions, divestitures, or combinations, impose significant fines or penalties, require divestiture of certain of our assets, or impose other restrictions that limit or require us to modify our operations. Any anti-monopoly related lawsuit, regulatory investigations or administrative proceedings initiated against us could also result in our being subject to regulatory actions and constraints on our investments and acquisitions, which could include forced termination of any agreements or transactions, required divestitures, and business practices or significant fines.
Moreover, any incompliance or associated inquiries, investigations and other governmental actions may divert significant management time and attention and our financial resources, bring negative publicity, subject us to liabilities or administrative penalties, and materially and adversely affect our financial conditions, results of operations, and business prospects.
Under the PRC enterprise income tax law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and ADS holders and have a material adverse effect on our results of operations and the value of your investment.
Under the PRC enterprise income tax law that became effective on January 1, 2008 and last amended on December 29, 2018, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. On April 22, 2009, the State Taxation Administration, or the SAT, issued the Circular Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a
PRC-controlled
enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on August 3, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, which became effective on September 1, 2011, to provide more guidance on the implementation of SAT Circular 82.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC tax resident enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) not less than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 provides further rules on residence status determination, post-determination administration as well as competent tax authorities procedures.
Although SAT Circular 82 and SAT Bulletin 45 apply only to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise group and not those controlled by PRC individuals or foreigners, Fangda Partners, our legal counsel as to PRC law, has advised us that the determination criteria set forth therein may reflect SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
We do not meet all of the conditions set forth in SAT Circular 82. Therefore, we believe that we should not be treated as a “resident enterprise” for PRC tax purposes even if the standards for “de facto management body” prescribed in the SAT Circular 82 applied to us. For example, our minutes and files of the resolutions of our board of directors and the resolutions of our shareholders are maintained outside the PRC.
19

Table of Contents
However, it is possible that the PRC tax authorities may take a different view. Fangda Partners, our legal counsel as to PRC law, has advised us that if the PRC tax authorities determine that our Cayman Islands holding company or any British Virgin Islands or Hong Kong subsidiary is a PRC resident enterprise for PRC enterprise income tax purposes, its world-wide income could be subject to PRC tax at a rate of 25%, which could reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Although dividends paid by one PRC tax resident to another PRC tax resident should qualify as
“tax-exempt
income” under the enterprise income tax law, we cannot assure you that dividends paid by our PRC subsidiaries to us or any of our Hong Kong subsidiaries will not be subject to a 10% withholding tax if we or any of our Hong Kong subsidiaries were treated as a PRC resident enterprise, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
If we are treated as a resident enterprise,
non-PRC
resident ADS holders and shareholders may also be subject to PRC withholding tax on dividends paid by us and PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC. The tax would be imposed at the rate of 10% in the case of
non-PRC
resident enterprise ADS holders and shareholders and 20% in the case of
non-PRC
resident individual ADS holders and shareholders. In the case of dividends, we would be required to withhold the tax at source. Although our holding company is incorporated in the Cayman Islands, it remains unclear whether dividends received and gains realized by our
non-PRC
resident ADS holders and shareholders will be regarded as income from sources with the PRC if we are classified as a PRC resident enterprise. Any PRC tax liability may be reduced under applicable tax treaties or similar arrangements, but it is unclear whether our
non-PRC
ADS holders and shareholders would be able to obtain the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such PRC tax liability will reduce the returns on your investment in our ADSs.
There are uncertainties with respect to indirect transfers of PRC taxable properties.
We face uncertainties on the reporting and consequences on private equity financing transactions, private share transfers and share exchange involving the transfer of shares in our company by
non-resident
investors. According to the Notice on Several Issues Concerning Enterprise Income Tax for Indirect Share Transfer by
Non-PRC
Resident Enterprises, issued by the State Taxation Administration on February 3, 2015, or SAT Circular 7, an “indirect transfer” of assets of a PRC resident enterprise, including a transfer of equity interests in a
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 PRC taxable properties, if such transaction lacks reasonable commercial purpose and was undertaken for the purpose of reducing, avoiding or deferring PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and tax filing or withholding obligations may be triggered, depending on the nature of the PRC taxable properties being transferred. According to SAT Circular 7, “PRC taxable properties” include assets of a PRC establishment or place of business, real properties in the PRC, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a
non-PRC
resident enterprise, would be subject to PRC enterprise income taxes. When determining if there is a “reasonable commercial purpose” of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable properties; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable properties have a real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable properties; and the tax situation of such indirect transfer outside China and its applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment or place of business of a foreign enterprise, the resulting gain is to be included with the annual enterprise filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to PRC real properties or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a
non-resident
enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payer fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the competent tax authority by itself within the statutory time limit. Currently, SAT Circular 7 does not apply to the sale of shares or ADSs by investors through a public stock exchange where such shares or ADSs were acquired in a transaction on a public stock exchange.
20

Table of Contents
We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing and withholding or tax payment obligations and associated penalties with respect to any internal restructuring, and our PRC subsidiaries may be requested to assist in the filing. Any PRC tax imposed on a transfer of our shares not through a public stock exchange, or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in our company.
Implementation of the labor laws and regulations in China may adversely affect our business and results of operations.
Pursuant to the Labor Contract Law of PRC that took effect in January 2008, its implementation rules that took effect in September 2008 and its amendment that took effect in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. Due to lack of detailed interpretative rules and uniform implementation practices and broad discretion of the local competent authorities, it is uncertain as to how the labor contract law and its implementation rules will affect our current employment policies and practices. Our employment policies and practices may violate the labor contract law or its implementation rules, and we may thus be subject to related penalties, fines or legal fees. Compliance with the labor contract law and its implementation rules may increase our operating expenses, in particular our personnel expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the labor contract law and its implementation rules may also limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. On October 28, 2010, the Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011 and was last amended in December 2018. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees.
We expect our labor costs to increase due to the implementation of these new laws and regulations. As the interpretation and implementation of these new laws and regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in full compliance with labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.
We have accrued in the financial statements but not made full contributions to the social insurance plans and the housing provident fund for employees as required by the relevant PRC laws and regulations. As of the date of this annual report, we are not aware of any notice from regulatory authorities or any claim or request from these employees in this regard.
Further, labor disputes, work stoppages or slowdowns at our company or any of our third-party service providers could significantly disrupt our daily operation or our expansion plans and have a material adverse effect on our business, financial condition and results of operations.
21

Table of Contents
China’s M&A Rules and certain other PRC regulations establish complex procedures for certain 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 Enterprises by Foreign Investors, or the M&A Rules, and other recently adopted 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. For example, the M&A Rules require that MOFCOM be notified in advance of any
change-of-control
transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the PRC Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress effective 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeds RMB10 billion and at least two of these operators each had a turnover of more than RMB400 million within China, or (ii) the total turnover within China of all the operators participating in the concentration exceeded RMB2 billion, and at least two of these operators each had a turnover of more than RMB400 million within China) must be cleared by the anti-monopoly enforcement authority before they can be completed. In addition, in 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, also known as Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, effective 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under the foregoing MOFCOM regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to a security review, it will submit it to the Inter- Ministerial Panel, an authority established under Circular 6 led by the National Development and Reform Commission, and MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merging or acquisition of a company engaged in the internet content business requires security review, and there is no requirement that acquisitions completed prior to the promulgation of the Security Review Circular are subject to MOFCOM review.
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 MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. We believe that it is unlikely that our business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, MOFCOM or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in China, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.
PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.
The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip 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. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
22

Table of Contents
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 requested PRC residents who, to our knowledge, hold direct or indirect interest in us to make the necessary applications, filings and amendments as required under SAFE regulations. However, we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make such registrations, and we cannot compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain 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 or affect our ownership structure, which could adversely affect our business and prospects.
PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of our initial public offering to make additional capital contributions or loans to our PRC subsidiaries.
We are an offshore holding company conducting our operations in China through our PRC subsidiaries, the VIEs and their subsidiaries. We may make loans to our PRC subsidiaries, the VIEs and their subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.
Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiaries, including from the proceeds of our initial public offering, are subject to PRC regulations. For example, none of our loans to a PRC subsidiary can exceed the difference between its total amount of investment and its registered capital approved under relevant PRC laws, or certain amount calculated based on elements including capital or net assets and the cross-border financing leverage ratio and the loans must be registered with the local branch of SAFE and the competent development and reform commission in case of any debts of more than one year. Our capital contributions to our PRC subsidiaries must be approved by or filed with the MOFCOM or its local counterpart.
On March 30, 2015, SAFE issued the Circular on the Reforming of the Management Method of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect on June 1, 2015. On October 23, 2019, SAFE issued the Circular of Further Facilitating Cross-border Trade and Investment, or SAFE Circular 28, which took effect on October 23, 2019. Under SAFE Circular 19 and Circular 28, a foreign-invested enterprise, within the scope of business, may choose to convert its registered capital from foreign currency to RMB on a discretionary basis, and the RMB capital so converted can be used for equity investments within PRC, provided that certain requirements and procedures shall be complied with, which will be regarded as the reinvestment of foreign- invested enterprise. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Related to Foreign Exchange.”
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 registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our PRC subsidiaries’ liquidity and its ability to fund its working capital and expansion projects and meet its obligations and commitments.
Our PRC subsidiaries and PRC VIEs are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.
We are a holding company incorporated in the Cayman Islands. In 2019, 2020 and 2021, our subsidiaries and the VIEs (including their subsidiaries) located in the PRC have not paid dividends. However, the payment of dividends by our PRC subsidiaries and PRC VIEs is an important source of income for us to meet our financing need, and such payment is and may be subject to various restrictions. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated
after-tax
profits upon satisfaction of relevant statutory condition and procedures, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its accumulated profits each year, if any, to fund certain surplus or reserve funds until the total amount set aside reaches 50% of its registered capital. As of December 31, 2021, we had not made appropriations to statutory surplus fund or general reserve fund as our subsidiaries and the VIEs (including their subsidiaries) reported accumulated loss. Furthermore, if our PRC subsidiaries, the VIEs and their 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 payments to us, which may restrict our ability to satisfy our liquidity requirements. In addition, the EIT Law, and its implementation rules provide that withholding tax rate of 10% will be applicable to dividends payable by Chinese companies to
non-PRC-resident
enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the
non-PRC-resident
enterprises are incorporated.
23

Table of Contents
Our ADSs will be delisted and prohibited from trading in the
over-the-counter
market under the Holding Foreign Companies Accountable Act, if the PCAOB continues to be unable to inspect or fully investigate auditors located in China. On December 16, 2021, the PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely. Under the current law, delisting and prohibition from
over-the-counter
trading in the U.S. would take place in 2024. If this happens there is no certainty that we will be able to list our ADS or shares on a
non-U.S.
exchange or that a market for our shares will develop outside of the U.S. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is 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 not currently inspected by the PCAOB.
This lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our 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.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, the HFCAA has been signed into law on December 18, 2020. The HFCAA 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 for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADS from being traded on a national securities exchange or in the over-the counter trading market in the U.S.
On September 22, 2021, the PCAOB adopted Rule 6100 to establish a framework for making determinations under the HFCAA that whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction (“PCAOB Rule 6100”). PCAOB Rule 6100 establishes the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information the PCAOB will consider when assessing whether a determination is warranted; the form, public availability, effective date and duration of such determinations; and the process by which the PCAOB will reaffirm, modify or vacate any such determinations. The SEC approved PCAOB Rule 6100 on November 5, 2021.
24

Table of Contents
On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA (the “Final Amendments”). The Final Amendments clarify how the requirements apply to variable interest entities. Second, the Final Amendments include requirements to disclose information, including the auditor name and location, the percentage of shares of the issuer owned by governmental entities, whether governmental entities in the applicable foreign jurisdiction with respect to the auditor has a controlling financial interest with respect to the issuer, the name of each official of the Chinese Communist Party who is a member of the board of the issuer, and whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party. The Final Amendments also establish procedures the SEC will follow in identifying issuers and prohibiting trading by certain issuers under the HFCAA.
On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations. In March 2022, the SEC issued “Conclusive list of issuers identified under the HFCAA” indicating that certain companies are now formally subject to the delisting provisions if they remain on the list for three consecutive years. We anticipate being added to the list shortly after the filing of this annual report on Form
20-F.
Accordingly, the SEC shall prohibit our shares or ADS from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. in 2024. This date would be accelerated to 2023, if the Accelerating Holding Foreign Companies Accountable Act becomes law.
This legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs could be adversely affected. Additionally, whether the PCAOB will be able to conduct inspections of our auditors before the issuance of our financial statements on Form
20-F
for the year ended December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on factors out of our and our auditor’s control. If our auditor is unable to be inspected in time, we will be delisted from the Nasdaq and our ADSs will not be permitted for trading
“over-the-counter”
either. 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 delisting would have a negative impact on the price of our ADSs. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.
The potential enactment of the Accelerating Holding Foreign Companies Accountable Act would decrease the number of
non-inspection
years from three years to two, thus reducing the time period before our ADSs will be prohibited from
over-the-counter
trading or delisted. If this bill were enacted, our ADS could be delisted from the exchange and prohibited from
over-the-counter
trading in the U.S. in 2023.
On June 22, 2021, the U.S. Senate passed a bill known as the Accelerating Holding Foreign Companies Accountable Act, to amend Section 104(i) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7214(i)) to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded
over-the-counter
if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as currently enacted in the HFCAA. On February 4, 2022, the U.S. House of Representatives passed the America Competes Act of 2022 which includes the exact same amendments as the bill passed by the Senate. The America Competes Act however includes broader range of legislation not related to the HFCAA in response to the U.S. Innovation and Competition Act passed by the Senate in 2021. The U.S. House of Representatives and U.S. Senate will need to agree on amendments to these respective bills to align the legislation and pass their amended bills before the President can sign into law. It is unclear when the U.S. Senate and U.S. House of Representatives will resolve the differences in the U.S. Innovation and Competition Act and the America Competes Act of 2022 bills currently passed, or when the U.S. President will sign on the bill to make the amendment into law, or at all. In the case that the bill becomes the law, it could reduce the time period before our ADSs will be delisted from the exchange and prohibited from
over-the-counter
trading in the U.S. from 2024 to 2023.
Risks Related to Our Business and Industry
If we fail to retain our existing users, to keep them engaged, to further grow our user base or to increase paying ratio, our business, operation, profitability and prospects may be materially and adversely affected.
The size of our user base and the level of our user engagement are critical to our success. We generate substantially all of our net revenues from virtual gift sales for our audio entertainment. Therefore, our success in monetization primarily depends on our ability to maintain and increase the size of our user base and user engagement level. If our user base decreases or stops growing, our users become less active or interested, or the quality and quantity of our paying user base deteriorate, it is probable that they would spend less on our platforms or access our platforms less often in general. As a result, our business, financial condition and results of operations will be materially and adversely impacted.
25

Table of Contents
Maintaining and improving the current size of user base and level of user engagement are critical to our continued success. To do so, we would have to ensure, among other things, that we adequately and timely respond to changes in user preferences, attract and retain popular hosts, continue to provide user-friendly experience and improve user experience, and curate our hosts to offer new and high-quality features and content that attract new users while keep the existing users interested. There is no guarantee that we could meet all of these goals. A number of factors could negatively affect user retention, growth and engagement, including if:

| • |  | we fail to provide sufficient, high-quality user-generated audio content that keep our users interested and draw them to our platforms;

| • |  | we are unable to provide user-friendly experience to our hosts or users or continue innovating our products to improve user experience;

| • |  | we fail to identify key changes in user preferences in a timely manner or effectively respond to the changing user preferences;

| • |  | we fail to keep pace with changes in technologies;

| • |  | technical or other problems prevent us from delivering our services in a rapid and reliable manner or otherwise adversely affect the user experience;

| • |  | we fail to comply with applicable laws and regulations, including those related to illegal or inappropriate content;

| • |  | our hosts fail to keep our users engaged with our services or platforms;

| • |  | we suffer from negative publicity, fail to maintain our brand or if our reputation is damaged;

| • |  | we fail to address user concerns related to privacy and communication, safety, security or other factors; and

| • |  | there are adverse changes in our services that are mandated by, or that we elect to make to address, legislation, regulations, government mandates or app store policies.

The PRC government may further tighten the regulation on online audio and entertainment platforms, which may materially and negatively affect our reputation, business, financial condition and results of operations.
The PRC government has closely regulated the online audio and entertainment 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 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 MIIT, the Ministry of Public Security, the Ministry of Culture and Tourism, the National Radio and Television Administration and the Cyberspace Administration of China 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 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 platforms in the future. If we were required to implement a more rigid real-name registration system for users on our platforms, potential users may be deterred from registering with our platforms, which may in turn negatively affect the growth of our user base and prospect. Furthermore, on June 1, 2021, the Law of the PRC on the Protection of Minors (2020 Revision) took effect, which provides that, among others, live streaming service providers are not allowed to provide minors under age 16 with an online live streaming host account registration service, and must obtain the consent from parents or other guardians and verify the identity of the minors before allowing minors aged 16 or above to register live streaming host accounts.
26

Table of Contents
We also do not have full control over the behaviors of our hosts and users and the content generated by them, and therefore cannot assure you that our platforms 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 platforms. 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.
We may fail to attract, cultivate and retain talented and popular hosts, which may materially and negatively affect our user retention and thus our business and operations.
Certain hosts are able to attract a large follower base. Hosts are rewarded usually for their high-quality content, which are the primary contributors to user stickiness on our platforms and are hard to be replicated by other hosts. Certain of our top hosts received a large portion of their virtual gifts from a limited number of paying users.
Although we have signed contracts with some of our hosts or guilds that contain
non-compete
clauses, popular hosts may still choose to depart us when their contract period ends, and their departure may cause a corresponding decline in our user base. Sometimes, our hosts may leave us to join a competing platform, whereas hosts from a competing platform may also choose to join us, in both of which scenarios legal and commercial dispute may arise. These disputes may distract management and impose additional costs on us. Departures of our hosts, particularly popular hosts, will have a negative impact on our user retention and reputation which may be material to our operations. To retain popular hosts, we must devise better compensation schemes, improve our monetization capabilities and help the popular hosts reach a wider audience. Although we strive to improve ourselves in these respects, we cannot guarantee that our hosts will not leave us even if we do our best to retain them. We launched a short-term incentive program in the third quarter of 2019 to provide additional shared revenue to the hosts to encourage content creation, enhance user spending and attract more hosts and users to our new podcasts and interactive audio products and features. Such program has been gradually scaled down since February 2020.
We may continue to launch such incentive programs at our discretion in the future. However, we cannot assure you that such incentive program will achieve the anticipated effect, or be effective at all. Our competitors may adopt similar incentive programs, and the incentive activities we provide to hosts may become less attractive, thereby impairing the effectiveness of our incentive program. Even if we continue to implement such incentive activities in the future, there is no guarantee that we will be able to attract or retain hosts through these activities. We may terminate such short-term incentive activities in the future, which may discourage hosts from engaging with users on our platforms and therefore have an adverse impact on our results of operations. In the event we
re-launch
such incentive program in the future, there will be no assurance that it will achieve the anticipated effect to attract talents and enhance user spending.
Meanwhile, we strive to discover and cultivate promising hosts. We cannot guarantee that the performance metrics and technology we use to track promising hosts will enable us to identify future popular hosts. We have developed AI technologies to identify the audio content that may become a hit and discover those hosts with unique and high-quality content. Then we train those hosts with necessary skillsets and, sometimes via guilds, promote those hosts on our platforms. Some of the hosts we identify as promising may turn out to be underperforming, and we may also fail to spot truly promising hosts in early stages of their career. In addition to a waste of resources, either one of these scenarios could prevent us from cultivating top hosts, which could weaken our core competitive strength against competing platforms and thus cause an outflow of users to those platforms.
27

Table of Contents
Our content monitoring system may not be effective in preventing misconduct by our platforms’ users and misuse of our platforms and such misconduct or misuse may materially and adversely impact our business, financial condition and results of operations.
Our platforms allow hosts to publish and users to listen to podcasts, participate in audio entertainment activities and engage in interactions with each other. Our audio entertainment provides a virtual space for our users and hosts to discuss, share, comment and express themselves. Because we do not have timely or sufficient control over the activities conducted by our hosts and users and the content generated by them, our platforms 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 or unauthorized content is found on or linked to our platforms, we as the service provider may be held liable for infringement of the rights of our hosts or users 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 platforms.
We have deployed
AI-based
technologies supplemented by a team primarily consisting of staff outsourced from third parties, to monitor content for any illegal, fraudulent or inappropriate content or activities on our platforms. See “Item 4. Information of the Company—4.B. Business Overview— Content Monitoring System.” If our AI system fails 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 platforms 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 platforms and the actions of the hosts and users, our platforms were 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 all inappropriate content stored on our platforms. See “—The PRC government may further tighten the regulation on online audio and entertainment platforms, which may materially and negatively affect our reputation, business, financial condition and results of operations.” 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 platforms.
We may also face tortious liabilities to third party for infringement of their rights. See “—We may be liable for intellectual property infringement relating to intellectual properties of third parties, which may materially and adversely affect our business, financial condition and prospects” and “—We may be held liable for information or content displayed on, retrieved from or linked to our platforms, if such content is deemed to violate any PRC laws or regulations, or for improper or fraudulent activities conducted on our platforms, and PRC authorities may impose legal sanctions on us and our reputation may be damaged.”
We may fail to offer attractive audio content on our platforms.
In response to users’ growing interests, we have been devoted to expanding and diversifying our content offerings. If we fail to continue to expand and diversify our audio content offerings, identify trending and popular genres, or maintain the quality of our content, we may experience decreased user traffic and engagement, which may materially and adversely affect our business, financial condition and results of operations.
In addition, we largely rely on our hosts to create high-quality audio content as almost all of our audio content offerings are generated by users. We have in place a revenue sharing mechanism to encourage hosts to supply content that are attractive to our users. However, we may not be able to provide the most competitive compensation to hosts under this mechanism. We launched a short-term incentive program in the third quarter of 2019 to provide additional shared revenue to the hosts to encourage content creation, enhance user spending and attract more hosts and users to our new podcasts and interactive audio products and features, while it was gradually scaled down such program since February 2020.
We cannot guarantee you that the hosts attracted to our platforms due to the short-term incentive program will remain active after we terminate such program. For details, please refer to “—We may fail to attract, cultivate and retain talented and popular hosts, which may materially and negatively affect our user retention and thus our business and operations.” If we fail to observe the latest trends and timely guide hosts and guilds accordingly, or fail to attract or maintain a good relationship with hosts who are capable of creating content based on popular genres, or if hosts fail to produce popular content, our users number may decline and our business, financial condition and results of operations may be materially and adversely affected.
28

Table of Contents
We have incurred net losses in the past, and we may continue to incur losses in the future.
In 2019, 2020 and 2021, we incurred a net loss of RMB133.0 million, RMB82.2 million and RMB127.3 million (US$20.0 million), respectively. Our net loss has decreased in 2020 as compared to 2019 and increased in 2021 as compared to 2020. We may continue to be unprofitable or incur further net losses for the foreseeable future. The time it will take for us to eventually achieve profitability hinges on our ability to grow rapidly in a cost-effective way, and we may not be able to grow this way successfully.
Our ability to sustain profitability is affected by various external factors, many of which are beyond our control, such as the continual development of online audio and entertainment in China. We cannot assure you that we will be able to improve profitability in the future.
We may again incur losses in the near future due to our continued investment in services, products, technologies, research and development and our continued sales and marketing initiatives. Changes in the macroeconomic and regulatory environment or competitive dynamics and our inability to respond to these changes in a timely and effective manner may also impact our profitability. Accordingly, we cannot assure you that our company will turn profitable in the short term.
Our limited operating history with a relatively new business model in a relatively new market could make it difficult to evaluate our business and growth prospects.
Our LIZHI App commenced operations in 2013 and we have experienced a rapid growth in the number of total mobile MAUs, paying users and net revenue since 2017. However, our growth in the recent years may not be indicative of our future performance, as our operating results represent a limited size of samples of operating results and may be hard to be repeated in the future.
Many of the elements of our business are unique and evolving. The markets for online audio platforms are relatively new and rapidly developing and are subject to significant challenges, especially in terms of maintaining a stable paying user base and attracting new paying users, as well as complying with changes in regulatory requirements on online audio content and social interactions. There is no guarantee that we may succeed in adapting to such changes in the markets.
As the online audio industry in China is relatively young, there are few proven methods of projecting user demand or available industry standards on which we can rely. Some of our current monetization methods are relatively recent innovations of the online audio industry and their long-term sustainability have not been tested. Meanwhile, we have explored and will continuously explore new monetization methods and client retention strategies, which may or may not be a success. Due to the initial success of the interactive audio products, we plan to continue to strengthen and expand our interactive audio product offerings. Since December 2020, we collaborated with a number of automobile manufacturers in China including XPeng Motors, Li Auto, and WM Motor, as well as various Internet of Vehicles platforms in China, including BYD DiLink, Tencent WeScenario, Huawei Mobile Services for Car and Huawei HarmonyOS. Currently, our
in-car
audio product together with our extensive audio content are available on certain models of such automobile companies via their
in-car
audio systems. In October 2020, we launched TIYA App in the United States, a voice-based social networking app, and are in the process of developing other social networking products and features. In January 2021, we also launched the LIZHI Podcast app, a new podcast app to provide high-quality curated podcast content drawn from our extensive content library built over the years as well as new podcasts to be provided by selected content creators. Currently, users can access our content library via LIZHI App and LIZHI Podcast app installed on their mobile devices as well as via our
in-car
audio products. We cannot assure you that our efforts will continue to achieve satisfactory results. Neither could we assure you that our ongoing and future attempts to innovate our communities and monetize our users will always be successful, profitable or accepted, and therefore the income potential of our business is difficult to gauge. In addition, any new and experimental products that we may develop and launch in the future may not be well received by our targeted users and may be affected by adverse industry trends such as evolving development, interpretation and implementation of applicable laws and regulations. See “— The PRC government may further tighten the regulation on online audio and entertainment platforms, which may materially and negatively affect our reputation, business, financial condition and results of operations.”
29

Table of Contents
Our growth prospects should be considered in light of the risks and uncertainties that fast-growing early-stage companies with limited operating history in an evolving industry may encounter, including, among others, risks and uncertainties regarding our ability to:

| • |  | develop new monetization methods;

| • |  | provide new content that is appealing to our users;

| • |  | adapt to and comply with the evolving regulatory framework on online audio and entertainment;

| • |  | compete with other innovative forms of entertainment for our users’ time;

| • |  | maintain stable relationships with popular hosts;

| • |  | expand to new geographic markets with high growth potential; and

| • |  | cope with the COVID-19 and its impact on our business, operation and financial condition.

Addressing these risks and uncertainties will require significant capital expenditures and allocation of valuable management and employee resources. For risks related to the
COVID-19,
see “— We face risks related to the outbreak of
COVID-19.”
If we fail to successfully address any of the above risks and uncertainties, the size of our user base, our revenue and operating margin may decline.
We face risks related to the outbreak of
COVID-19.
The outbreak of the
COVID-19
pandemic and subsequent outbreaks driven by new variants of
COVID-19
have brought uncertainties and interruptions to China’s macroeconomics and the global economy and may have adverse effects on our operations. The Chinese government as well as many other countries in the world have taken various measures to constrain the outbreak. The
COVID-19
pandemic has caused, and may continue to cause, companies in China, including us, to implement temporary adjustment of work schemes allowing employees to work from home and other measures that may impact our operation. We prioritize the health and safety of our employees, and have taken various preventative and quarantine measures across the Company soon after the outbreak. As a result of the
COVID-19
outbreak and its continued influence, our normal work schedule and results of operations may continue to be subject to potential adverse impact caused by
COVID-19,
and our revenues for the periods during which the
COVID-19
pandemic continues to have an impact may be difficult to predict. In addition, the disposable income of certain of our users may decrease or have decreased as a result of the impact of the
COVID-19
pandemic, which may also adversely affect our performance. Over the course of 2020 and 2021, since various measures that the Chinese government implemented to constrain the
COVID-19
outbreak had been gradually relaxed, many aspects of daily life in China gradually returned to normal routine for certain period of time, while regional breakouts has continued to occur from time to time and respective control measures would apply. However, the situation in China and other countries and regions is still evolving, bringing with it unprecedented levels of macroeconomic disruption and uncertainties across the globe. For instance, recently certain areas or cities in China have tightened the
COVID-19
quarantine policies including measures such as lockdown restrictions. The extent to which
COVID-19
impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including the possibility of a resurgence of the
COVID-19
outbreak in China, the duration and severity of the pandemic, the actions taken to contain the virus or treat its impact, the development and efficiency of vaccine programs and other actions taken by governments, companies and individuals in response to the virus and resulting economic disruption.
If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected.
The internet industry in China is highly regulated, which requires certain licenses, permits, filings and approvals to conduct and develop business. Currently, the VIEs have obtained valid ICP License for provision of internet information services, Internet Culture Operation License for operating online music products and online performances, Radio and Television Program Production and Operating Permit for producing radio program through our PRC VIEs. We have also been accepted to register on National Internet Visual-Audio Platform System.
30

Table of Contents
Due to the uncertainties of interpretation and implementation of existing and future laws and regulations, the 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, 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.
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.
On May 14, 2019, the Internal Office of Department of Culture and Tourism issued a notice that local culture and tourism authority will no longer be in charge of issuing approvals for Internet Culture Operation License to companies with the business scope in online gaming and publication of virtual currency. It is not clear from this notice or other applicable laws and regulations whether a second government office will regulate the online gaming and publication of virtual currency by form of an approval license or other methods. Our Internet Culture Operation Licenses were respectively renewed in July 2019, October 2019, June 2020 and June 2021. We currently plan to apply for permit or approval on virtual currency operation from the applicable authority once the regulatory body is clarified.
Moreover, according to the Measures for Online Publication Service Administration, or Online Publication Measures, which was jointly promulgated by the SAPPRFT and Ministry of Industry and Information Technology of the PRC, or the MIIT, came into effect on March 10, 2016, or Online Publication Measures, an Online Publishing Service License is required for the provision of online publishing services. Currently, we allow hosts to upload their recorded podcasts on our platforms, which may be considered as the “internet publications.” As of the date of this annual report, we have not obtained an Online Publishing Service License. However, we have been accepted to register on National Internet Visual-Audio Platform System and enterprises having obtained such registration in practice have been in the past tolerated by SAPPRFT to operate in online visual-audio business without such 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 of the website, deletion of all relevant online publications, confiscation of income and major equipment and special tools relating to podcasts 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, on April 7, 2021, the State Council published the Regulations on the Implementation of the Law for Promoting Private Education of the PRC (2021 revision), which became effective on September 1, 2021. It remains uncertain whether and how local governments would promulgate rules related to the licensing requirement applicable to online education services. Furthermore, on July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council jointly promulgated the Opinions on Further Reducing Homework and
Off-Campus
Training Burden for Students in Compulsory Education Stage, or the Opinions. Pursuant to the Opinions, a series of restrictions have been imposed on training institutions providing subject-based after-school tutoring for students during compulsory education stage, or the disciplinary training institutions, including but not limited to (i) the existing disciplinary training institutions shall be registered as
non-profit
institutions in a unified manner; (ii) no disciplinary training institution may raise funds by listing on the stock market, and it shall be strictly prohibited from capitalization operation; (iii) a system for record-filing and supervision of training contents is imperative to be established; and
(iv) non-disciplinary
training institutions are strictly prohibited from engaging in disciplinary training or providing overseas education courses. Although we do not expect the audio content provided on our platform, such as certain audioized picture books, to fall under these regulatory requirements, there remains uncertainty as to how the new regulation will be implemented. If we were to be required to effect further operational adjustment by regulatory authorities for compliance reasons, our results of operations could be harmed. 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 or obtain the regulatory licenses 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.
31

Table of Contents
As of the date of this annual report, we have not been subject to any material penalties from the relevant government authorities for failure to obtain any 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 business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or expand our user and customer base, or our ability to increase their level of engagement.
In China, we market our key services under the brand “LIZHI”. Our business and financial performance are highly dependent on the strength and the market perception of our brand and services. A well-recognized brand is critical to increasing our user base and, in turn, facilitating our efforts to monetize our services and enhancing our attractiveness to customers. Since we operate in a highly competitive market, brand maintenance and enhancement directly affect our ability to maintain our market position. From time to time, we conduct marketing activities across various media to enhance our brand and to guide public perception of our brand and services, and may further increase our marketing expenditures in the future. Also, we must continuously exercise strict quality control of our platforms to ensure that our brand image is not tarnished by substandard products or services. We must also find ways to distinguish our platforms from those of our competitors. If for any reason we are unable to maintain and enhance our brand recognition, or if we incur excessive expenses in this effort, our business, results of operations and prospects may be materially and adversely affected.
In addition, we must actively protect and maintain the legal ownership of our trademarks under which we market our brand and operate our platforms and business. Any failure to register or maintain the registration of our trademarks in any geographic region in which we operate our business may result in an adverse and material effect on our operation and financial conditions. We currently have pending trademark applications that may be subject to governmental scrutiny or third-party objection. Although we have taken measures to reduce our risks of infringement, we cannot assure you that we would not be subject to trademark infringement claims due to such trademark uses by us, or that we have duly registered all the trademarks necessary for our operations with competent governmental authorities. We may also be subject to other intellectual property infringement claims. As competition intensifies and as litigation becomes a more common method for resolving commercial disputes in China, we face a higher risk of intellectual property infringement claims.
If we are unsuccessful in obtaining trademark protection for our trademarks, we may be required to change our brand names and may incur substantial costs in diverting the existing users and potential users to the entrance under a new name and may lose audience traffic to a material extent during the process. Any potential conflict over the usage of “LIZHI” brand may expose us to substantial legal costs and take up the time and energy of our management which could have been used on development of our business.
32

Table of Contents
We may not effectively achieve our rapid growth in the past or manage the associated expenditures, and our brand, business and results of operations may be materially and adversely affected.
We have experienced a period of significant rapid growth and expansion at the early stage of our development that impose a challenge on our management to maintain such growth in the future. In recent years we continued to actively expand and evolve our business operation in China and globally. However, given our limited operating history and the rapidly evolving market in which we operate, we may encounter difficulties as we establish and expand our operations, research and development, sales and marketing, and general and administrative capabilities. We cannot assure you that level of growth in the past will be sustainable or achieved at all in the future. We believe that our continued growth will depend on our ability to attract and retain users and high quality hosts, develop an infrastructure to service and support an expanding body of users and hosts, explore new monetization avenues, adapt to and comply with evolving regulatory framework, convert
non-paying
users to paying users, increase user engagement level and compete effectively in the online audio industry. We cannot assure you that we will be successful with any of the above.
To manage our growth and maintain profitability, we expect our costs and expenses to continue to increase in the future as we anticipate that we will need to continue to implement, from time to time, a variety of new and upgraded operational, informational and financial systems, procedures and controls on an
as-needed
basis. We will also need to further expand, train, manage and motivate our workforce and manage our relationships with hosts and users. All of these endeavors involve risks and will require substantial management efforts and skills and significant additional expenditures. Continued growth could end up straining our ability to maintain reliable service levels for all of our users and hosts, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Managing our growth will require significant expenditures and the allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as we grow, our business, operating results and financial condition could be harmed. In addition, the impact brought by the
COVID-19
pandemic on our business, operating results and financial condition in the foreseeable future is highly uncertain and cannot be predicted. See “— We face risks related to the outbreak of
COVID-19.”
Our existing revenue model may not remain effective and our business may suffer if we fail to successfully implement our monetization strategies.
Our apps are free to access, and we generate substantially all of our net revenues from virtual gift sales to users of our audio entertainment products. As a result, our revenue is affected by our ability to increase user engagement and convert
non-paying
users into paying users, which in turn depends on our ability to increase user base, cultivate and maintain hosts, and provide high-quality content and other services. If we are not successful in enhancing our ability to monetize our existing services or developing new approaches to monetization, we may not be able to maintain or increase our revenues and profits or recover any associated costs. We monitor market developments and may adjust our monetization strategies accordingly from time to time, which may result in decreases of our overall revenue or revenue contributions from some monetization channels. In addition, we may in the future introduce new services to further diversify our revenue streams, including services with which we have little or no prior development or operating experience. If these new or enhanced services fail to engage customers or platforms’ partners, we may fail to generate sufficient revenues to justify our investments, and our business and operating results may suffer as a result.
We mainly compete with other online audio and entertainment platforms. If we are unable to compete effectively, our business and operating results may be materially and adversely affected.
Our major competitors include other online audio and entertainment platforms with an established presence in the industry, and competition in our industry remains intense. As it is unlikely that users will listen to audio programs on two platforms simultaneously, and certain top hosts sign exclusive contracts with only one platform, we compete mainly for user traffic and top hosts. If we are not able to effectively compete with our competitors, our overall user base and level of user engagement may decrease, which may result in loss of top hosts to other platforms.
To better compete with competitors which may have more cash, traffic, technological advantages, top hosts, business networks and other resources than us, we may be required to spend additional resources, which may adversely affect our profitability. Furthermore, if we are involved in disputes with any of our competitors that result in negative publicity to us, such disputes, regardless of their veracity or outcome, may harm our reputation or brand image and in turn lead to reduced number of users and hosts. Our competitors may unilaterally decide to adopt a wide range of measures targeted at us, including approaching our top hosts, filing complaint against our platforms to remove our apps from application stores, or even attacking our platforms. Any legal proceedings or measures we take in response to competition and disputes with our competitors may be expensive, time-consuming and disruptive to our operations and divert our management’s attention.
33

Table of Contents
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:

| • |  | the popularity, usefulness, ease of use, performance and reliability of our services compared to those of our competitors, and the research and development abilities of us and our competitors;

| • |  | the unique content, services, products and interactive community we offer on our platforms that distinguish ourselves from other competing platforms;

| • |  | changes mandated by, or that we elect to make to address, legislation, regulations or government policies, some of which may have a disproportionate effect on us;

| • |  | acquisitions or consolidation within our industry, which may result in more formidable competitors; and

| • |  | our reputation and brand strength relative to our competitors.

In addition, our users have a vast array of entertainment choices. Other forms of entertainment, such as online video streaming, social networking, traditional PC and console games, as well as more traditional mediums such as television, movies and sports, are much more well-established in mature markets and may be perceived by our users to offer greater variety, affordability, interactivity and enjoyment. Our platforms compete against these other forms of entertainment for the discretionary time and spending of our users. If we are unable to sustain sufficient interest in our platforms in comparison to other forms of entertainment, including new forms of entertainment that may emerge in the future, our business model may no longer be viable.
Our revenue growth is heavily dependent on our paying user base. If we fail to grow our paying user base, our revenue may not increase, which may materially and adversely affect our business operation and financial results.
The number of our paying users had generally increased since 2017. Our average total monthly paying users increased from approximately 422,400 in the fourth quarter of 2020 to 497,300 in the fourth quarter of 2021, and increased from approximately 446,100 in 2020 to approximately 488,000 in 2021. Whether we can continue this trend of growth depends on many factors, and many of them are out of our control. For example, our paying users may have less disposable income as they need to meet financial obligations elsewhere, they may decide to no longer support a particular host that they used to follow financially, and an overall worsening economic condition can lower disposable income for all existing paying users, causing them to spend less on our platforms. We expect that our business will continue to be heavily dependent on revenue collected from paying users in the near future. Any decline in the number or quality of our paying user base or our paying ratio may materially and adversely affect our results of operations and financial results. See “—Our existing revenue model may not remain effective and our business may suffer if we fail to successfully implement our monetization strategies.”
Also, a material portion of our revenue is contributed by a limited amount of key paying users. If we fail to maintain the number of such key paying users or their purchase on our platforms, our operations and financial results may be materially and adversely affected.
We cooperate with various guilds to cultivate and organize our hosts. If we are not able to maintain our relationship with guilds, our operations may be materially and adversely affected.
We cooperate with guilds to cultivate and organize hosts on our platforms. As we are open platforms that welcome all hosts to register on our websites, we believe cooperation with guilds increases our operational efficiency in terms of discovering, supporting and managing hosts in a more organized and structured manner.
34

Table of Contents
We pay our hosts and their guild fees determined based on a percentage of revenue from virtual gift sales that is attributed to the hosts’ programs according to the three-party contractual arrangements among us, hosts and their guilds. From time to time, there may be contractual disputes between hosts, guilds and/or us or involving a third party. Any such disputes may not only be costly and time-consuming to solve, but may also be detrimental to the quality of the content produced by our hosts, causing our hosts or guilds to leave our platforms, decrease user engagement on our platforms or otherwise adversely affect our business, financial condition and results of operations. In addition, many of those contractual arrangements with guilds are not exclusive. If we are not able to maintain our relationship with guilds, they may choose to devote their resources to hosts who release programs on the other platforms, or they may encourage their hosts to use other platforms, which could materially and adversely affect our business, financial condition and results of operations.
We may be liable for intellectual property infringement relating to intellectual properties of third parties, which may materially and adversely affect our business, financial condition and prospects.
We do not have full control over how and what the creators of our content will share, display on or link to our platforms. As substantially all of our content is generated by users who can be any person registered on our platforms, we do not have the capacity or resources to verify the originality of each content uploaded to our platforms or distinguish if proper license has been obtained or not with respect to any given content. We have been and may continue to be subject to intellectual property infringement claims by third parties for services we provide or for content displayed on, retrieved from, linked to, recorded, stored or make accessible on our platforms, which may materially and adversely affect our business, financial condition and prospects. Although those allegations arise out of individual behaviors, platforms as service providers are often sued or investigated for any potential liabilities or misbehaviors. Under relevant PRC laws and regulations, internet service providers, which provide storage space for users to upload works or links to other services or content, could be held liable for copyright infringement under various circumstances, including situations where the internet 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 and the internet service provider failed to take necessary actions to prevent such infringement, such as deletion, blocking or disconnection. Under the Civil Code of the PRC with effect from January 1, 2021 and the Regulation on the Right to Communicate Works to the Public Over Information Networks, if an internet user infringes the civil rights, right to communicate works to the public over information networks or interests of another through using the internet, the person whose rights are infringed has the right to notify and request the internet service provider on which the infringement allegedly takes place to take necessary measures including the deletion, blocking or disconnection of an internet link. If, after being notified, the internet service provider fails to take necessary measures in a timely manner to end the infringement, it will be jointly and severally liable for any additional harm caused by its failure to act. In addition, if there is no evidence indicating that an internet service provider clearly knows the facts of infringement, or the internet service provider has taken measures to disconnect or remove relevant content after receiving notification from the owner, the internet service provider shall not be liable for compensation liability. Such defense is also referred to as the “safe harbor exemption.” However, the court practice is currently unclear whether or to what extent a platform would be liable for the unauthorized content performed or presented by hosts.
In addition, we cannot assure you that other aspects of our operations do not or will not infringe upon or violate intellectual property rights (including but not limited to trademarks, patents, copyrights,
know-how)
or other rights (including but not limited to portraiture right) owned or held by third parties. We have been involved in claims against us alleging our infringement of third-party intellectual property rights on certain computer software. Any such intellectual property rights infringement claim could result in costly remedial measures and may adversely affect our business and financial condition.
Furthermore, companies in the internet, technology and media industries are frequently involved in litigations based on allegations of infringement of intellectual property, unfair competition, invasion of privacy, defamation and other violations of other parties’ rights. Also, in China, as the internet- related industries have a relatively recent history and are constantly changing, the regulatory regimes on protection of intellectual property rights in internet-related industries, especially in our evolving online audio industry, are uncertain and still evolving. As we face increasing competition and as litigation becomes a more common method for resolving commercial disputes in China, we face a higher risk of being the subject of intellectual property infringement claims or other legal proceedings.
35

Table of Contents
We have adopted systematic methods to reduce our exposure to the risks of intellectual property infringement claims. Under our agreements with hosts, we are the owner of the intellectual property arising out of podcasts generation and live streaming activities on our platforms. When users register on our platforms, they agree to our standard agreement, under which they agree not to disseminate any content infringing on third-party copyright. We also require users to acknowledge and agree that they will not upload or perform content which may infringe upon others’ copyrights. However, we have historically allowed users to upload content without going through the registration process, and our platforms have, over the years, accumulated user- generated content for which users may not have obtained proper and complete copyright licenses. It is challenging for us to accurately identify such content and verify if proper license is obtained in each case. We also develop
AI-backed
technologies combined with manual supervision to screen for improper or illegal use of our platforms. We implant the “complaint” button on our operation interface which allows users to inform us of any risky or problematic content they are aware of. We also implement policies to take down content that has allegedly infringed a third party’s right in a timely manner to be eligible to invoke the safe harbor exemption for service providers. Our platforms also have procedures in place to block blacklisted users from uploading content for a temporary period of time or permanently. However, we cannot assure you those methods are sufficient to shield us from third party liabilities for intellectual property infringement, or our efforts will be considered favorably by a given court or relevant governmental authority. Liabilities for intellectual property infringement, or allegations of such infringement, may impose a burden on our management, cause penalties, lead to unfavorable media coverage and damage to our reputation, or even cause PRC authorities to impose sanctions on us, including, in serious cases, suspending our operation, which may materially and adversely affect our business, financial condition and prospects.
We may be held liable for information or content displayed on, retrieved from or linked to our platforms, if such content is deemed to violate any PRC laws or regulations, or for improper or fraudulent activities conducted on our platforms, and PRC authorities may impose legal sanctions on us and our reputation may be damaged.
Our online audio platforms enable users to exchange information, generate content, advertise products and services, and engage in various other online activities. Although real-name registration is required for hosts by our platforms based on their citizen identity card and other identification information, we may not be able to verify the identity information provided by our hosts as true and accurate. For registration of users before they become hosts, we verify identities primarily based on verification text messages sent to their mobile devices, which may not always be reliable. Hosts and users may engage in illegal conversations or activities, including the publishing of inappropriate or illegal content on our platforms that may be unlawful under PRC laws and regulations.
We require users to agree to our terms of service upon account registration. Our terms of service set out types of content strictly prohibited on our platforms, and we have also developed a content monitoring system. See “Item 4. Information of the Company—4.B. Business Overview—Content Monitoring System.” However, although we use our best efforts to monitor content on our platforms, it is impossible for us to detect every incident of inappropriate content on our platforms due to the immense quantity of user-generated content on our platforms. Our monitoring system, which is comprised of
AI-backed
technologies and manual scrutiny, may not detect each and every misconduct or illegal or inappropriate content. See “—Our content monitoring system may not be effective in preventing misconduct by our platforms users and misuse of our platforms and such misconduct or misuse may materially and adversely impact our business, financial condition and results of operations.”
If we are deemed to have facilitated the appearance of inappropriate content placed by third parties on our platforms under PRC laws and regulations, we may be subject to fines or other disciplinary actions, including in serious cases suspension or revocation of the licenses necessary to operate our platforms, imposed by court or government authority. We had the experience in the past of being suspended or fined by a local government authority and reported by media for improper content on our platforms. Our apps had been removed from the app stores for inappropriate content placed by third parties on our platforms. See “—The PRC government may further tighten the regulation on online audio and entertainment platforms, which may materially and negatively affect our reputation, business, financial condition and results of operations” and “—Our content monitoring system may not be effective in preventing misconduct by our platforms users and misuse of our platforms and such misconduct or misuse may materially and adversely impact our business, financial condition and results of operations.”
Meanwhile, we may face claims for fraud, defamation, libel, negligence, copyright, patent or trademark infringement, other unlawful activities or other theories and claims based on the nature and content of the information delivered on or otherwise accessed through our platforms. In addition, if any third party suffers or alleges to have suffered physical, financial or emotional harm following contact initiated on our platforms or after hearing unsettling, inappropriate, fraudulent or misleading content that our content monitoring system failed to filter out, or if any third party suffers or alleges to have suffered damages as a result of improper or fraudulent activities on our platforms, we may face civil lawsuits or other liabilities initiated by the affected third party, or governmental or regulatory actions against us.
36

Table of Contents
In response to allegations of illegal or inappropriate activities conducted through our platforms 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 or other sanctions, such as requiring us to restrict or discontinue some of the features and services provided on our website and mobile application, or even revoke our licenses or permits to provide internet content service. Defending any such actions could be costly and require significant time and attention of our management and other resources, and may cause damages to our reputation, which would materially and adversely affect our business.
We rely on our mobile application to provide services to our users which, if inaccessible, may have material adverse impact on our business, financial condition and results of operations.
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 application 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. We have experienced in the past removal or suspension of our apps by mobile application stores for reasons such as government scrutiny on our business or industry or enhanced compliance requirements by such third-party platforms. Our apps are currently available for download in all major app stores, including Apple’s and Android’s App Stores. Although there is no any suspension events in 2021, we have experienced temporary removal from various applicable stores in the past. Those incidents 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. We cannot assure you that our apps 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. In addition, we may rely on such third party platforms as our payment channels including through
in-
app purchases. Any suspension or removal of our apps from these platforms may result in material adverse impact on our results of operations due to the unavailability of such payment channels.
Increases in the costs in relation to content creators, such as higher hosts’ compensation and costs of discovering and cultivating a top host, may have an adverse effect on our business, financial condition and results of operations.
We depend upon content creators, i.e., our podcasts and live streaming hosts, to continuously provide a large variety of high-quality content on our platforms, which is a key factor of engaging and satisfactory user experience that ensures long-term user stickiness. We also rely on our interactive audio products hosts to provide fun and engaging experience to users of our interactive audio products. On one hand, we discover, curate and cultivate top hosts who self-register on our platforms as a host. On the other hand, we compete with other audio platforms for active, popular or celebrity hosts. To attract and retain top hosts and maintain the high level of content quality, we enter into contracts with our hosts under which such hosts are usually paid a certain percentage of the sales of virtual gifts or currency that they receive. The compensation to and the cost to discover, train and develop a top host may increase as the competition intensifies. If our content creators become too costly, we will not be able to produce high quality content at commercially acceptable costs. If our competitors’ platforms offer higher revenue sharing percentage with an intent to attract our popular hosts and content creators, costs to retain such hosts and content creators may increase. In addition, we launched a short-term incentive program in the third quarter of 2019 to provide additional shared revenue to the hosts and gradually scaled down such program since February 2020.
We may terminate such incentive program in the near future which may discourage hosts from engaging with users on our platforms.
For details, please refer to “—We may fail to attract, cultivate and retain talented and popular hosts, which may materially and negatively affect our user retention and thus our business and operations.” Furthermore, as our business and user base further expands, we may have to devote more resources in encouraging our hosts to produce content that meets the evolving interests of a diverse user base, which would increase the costs of content on our platforms. If we are unable to generate sufficient revenues that outpace our increased costs in relation to content creators, our business, financial condition and results of operations may be materially and adversely affected.
37

Table of Contents
Any compromise to the cyber security of our platforms could materially and adversely affect our business, reputation and results of operations.
On November 7, 2016, the Standing Committee of the National People’s Congress released the Cyber Security Law, which took effect on June 1, 2017. The Cyber Security Law requires network operators to fulfill certain obligations to safeguard security in the cyberspace and enhance network information management.
On August 17, 2021, the State Council promulgated the Regulations on Key Information Infrastructure Security Protection, which has become effective on September 1, 2021. On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, effective on September 1, 2021. On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Personal Information Protection Law, which took effect on November 1, 2021. These newly promulgated laws and regulations reflect PRC government further attempts to strengthen the legal protection for the national network security, data security, the security of key information infrastructure and the security of personal information protection.
Furthermore, certain PRC regulatory authorities recently issued the Opinions on Strictly Cracking Down on Illegal Securities Activities. These opinions call for strengthened regulation over illegal securities activities and supervision of overseas listings by China-based companies and propose to take effective measures. As of the date of this annual report, no official guidance or related implementation rules have been formally adopted in relation to such opinions and as a result, the interpretation and implementation of these opinions remain unclear at this stage. We cannot assure you that we will not be required to obtain the
pre-approval
of the CSRC and potentially other regulatory authorities to pursue an offering of securities overseas or to maintain the listing status of our ADSs on the Nasdaq. See also “–The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.”
Our products and services are generally provided through the internet and involve the storage and transmission of users’ information. Any security breach would expose us to a risk of loss of information and result in litigation and potential liability. As the techniques used to obtain unauthorized access, disable or degrade online or sabotage operating systems change frequently and often are not recognized until launched against a target, we may not be able to anticipate such techniques or implement adequate preventative measures. All of our user data is encrypted and saved in different places within our internal servers rather than client-based servers, protected by access control, and further backed up in our long-distance disaster recovery system, so as to minimize the possibility of data loss or breach. Upon a security breach, our technical team will be notified immediately and coordinate with the local supporting staff to diagnose and solve the technical problems. As of the date of this annual report, we have not experienced any material incidents of security breach.
Despite the security measures we have implemented, our facilities, systems and procedures and those of our third-party providers, may be vulnerable to security breaches, act of vandalism, software viruses, misplaced or lost data, programming or human errors or other similar events which may disrupt our delivery of services or expose the confidential information of our users and others. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed, we may lose current and potential users and may be exposed to legal and financial risks, including legal claims, regulatory fines and penalties, which in turn could adversely affect our business, reputation and results of operations.
Spammers and malicious software and applications may affect user experience, which could reduce our ability to attract users and advertisers and materially and adversely affect our business, financial condition and results of operations.
Spammers may use our platforms to send spam or illegal messages to users, which may affect user experience. As a result, our users may reduce using our products and services or stop using them altogether. In spamming activities, spammers typically create multiple user accounts for the purpose of sending a high volume of repetitive messages. Although we attempt to identify and delete accounts created for spamming purposes, we may not be able to effectively eliminate all spam messages from our platforms in a timely fashion. Any spamming activities could have a material and adverse effect on our business, financial condition and results of operations.
38

Table of Contents
In addition, malicious software and applications may interrupt the operations of our platforms and pass on such malware to our users and hosts which could adversely hinder user experience. Although we have been successfully blocking these attacks in the past, we cannot guarantee that this will always be the case, and in the incident if users experience a malware attack by using our platforms, our users may associate the malware with our websites or mobile apps, and our reputation, business, financial condition and results of operations would be materially and adversely affected.
Our operations depend on the performance of the internet infrastructure, fixed telecommunications networks and mobile operating systems in China, which may experience unexpected system failure, interruption, inadequacy or security breaches.
Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or 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. 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 the increases in traffic we anticipate from our expanding user base, and the adoption of our services may be hindered, which could adversely impact our business, financial condition and results of operations.
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 stop accessing or minimize their activities on 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.
The proper functioning of our platforms are essential to our business. Any disruption to our IT systems could materially affect our ability to maintain the satisfactory performance of our platforms.
The proper functioning of our platforms are 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 platforms and the attractiveness of content provided on our platforms. 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.
We use third-party services and technologies in connection with our business, and any disruption to the provision of these services and technologies to us could result in adverse publicity and a slowdown in the growth of our users, which could materially and adversely affect our business, financial condition and results of operations.
Our business depends upon services provided by, and relationships with, third parties. We currently engage third-party service providers in certain areas of our operation such as monitoring of our podcasts and audio entertainment. If such third-party service providers fail to detect the illegal or inappropriate activities or content in our podcasts and audio entertainment, we may be subject to regulator’s disapproval or penalties as well as adverse media exposure which could materially and adversely affect our business, financial condition and results of operations. In addition, some third-party software we use in our operations is currently publicly available without charge. If the owner of any such software decides to make claims against us, charge users, or no longer makes the software publicly available, we may need to enter into settlement with such owners, incur significant cost to license the software, find replacement software or develop it on our own. If we are unable to find or develop replacement software at a reasonable cost, or at all, our business and operations may be adversely affected.
39

Table of Contents
Our overall network relies on bandwidth connections provided by third-party operators and we expect this dependence on third parties to continue. The networks maintained and services provided by such third parties are vulnerable to damage or interruption, which could impact our business, financial condition and results of operations. See “—Our operations depend on the performance of the internet infrastructure, fixed telecommunications networks and mobile operating systems in China, which may experience unexpected system failure, interruption, inadequacy or security breaches.”
We also depend on the third party online payment systems for sales of our products and services. If any of these third-party online payment systems suffer from security breaches, users may lose confidence in such payment systems and refrain from purchasing our virtual gifts online, in which case our results of operations would be negatively impacted.
We exercise no control over the third parties with whom we have business arrangements. For some of services and technologies such as online payment systems, we rely on a limited number of third-party providers with limited access to alternative networks or services in the event of disruptions, failures or other problems. If such third parties increase their prices, fail to provide their services effectively, terminate their service or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of operations.
Concerns about the collection, use and disclosure of personal data and other privacy-related and security matters could deter customers and users from using our services and adversely affect our reputation and business.
Concerns about our practices with regard to the collection, use or disclosure of personal information or other privacy-related and security matters, even if unfounded, could damage our reputation and operations. On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the Ministry of Industry and Information Technology, the General Office of the Ministry of Public Security and the General Office of the State Administration for Market Regulation promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance. Moreover, the PRC Constitution, the PRC Criminal Law, the General Rules of the PRC Civil Law and the Cybersecurity Law protect individual privacy in general, which require 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. In particular, Amendment 7 to the PRC Criminal Law prohibits institutions, companies and their employees in the telecommunications and other industries from selling or otherwise illegally disclosing a citizen’s personal information obtained during the course of performing duties or providing services. While we strive to comply with all applicable data protection laws and regulations, as well as our own privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or private individuals, which could have an adverse effect on our business. Moreover, failure or perceived failure to comply with applicable laws and regulations related to the collection, use, or sharing of personal information or other privacy-related and security matters could result in a loss of confidence in us by customers and users, which could adversely affect our business, financial condition and results of operations. See also “–Any compromise to the cyber security of our platforms could materially and adversely affect our business, reputation and results of operations.” Furthermore, on August 20, 2021, the SCNPC promulgated the Personal Information Protection Law of the People’s Republic of China, or the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. Our mobile app only collects basic user personal information that is necessary to provide the corresponding services. We do not collect any sensitive personal information or other excessive personal information that is not related to the corresponding services. We update our privacy policies from time to time to meet the latest regulatory requirements of the CAC and other authorities and adopt technical measures to protect data and ensure cybersecurity in a systematic way. Nonetheless, the Personal Information Protection Law raises the protection requirements for processing personal information, and many specific requirements of the Personal Information Protection Law remain to be clarified by the CAC, other regulatory authorities, and courts in practice. We may be required to make further adjustments to our business practices to comply with the personal information protection laws and regulations.
40

Table of Contents
As we continue to expand overseas, foreign and international laws, regulations, standards, and other obligations, and changes in the interpretation of such laws, regulations, standards, and other obligations could result in increased regulation, increased costs of compliance and penalties for
non-compliance,
and limitations on data collection, use, disclosure, and transfer for us and our users. In 2016, the European Union (“EU”) adopted a new regulation governing data privacy called the General Data Protection Regulation (“GDPR”), which became effective in May 2018. The GDPR establishes new requirements applicable to the handling of personal data and imposes penalties for
non-compliance
of up to 4% of worldwide revenue. In addition, to the extent we deploy services of any third party supplies to support our overseas business, we must continue to seek assurances from our
sub-processors
that they are handling personal data in accordance with GDPR requirements in order to meet our own obligations under the GDPR. In addition, in June 2018, the California Consumer Privacy Act (“CCPA”), which takes effect on January 1, 2020, was enacted. The CCPA gives California consumers certain rights similar to those provided by the GDPR, and users may seek similar assurances from suppliers regarding compliance.
Unauthorized use of our intellectual property by our hosts and employees and other third parties and the expenses incurred in protecting our intellectual property rights may harm our brands and reputation and materially and adversely affect our business.
We regard our copyrights, trademarks and other intellectual properties as critical to our success, and rely on a combination of trademark and copyright laws, trade secrets protection, restrictions on disclosure and other agreements that restrict the use of our intellectual properties to protect these rights. Although our contracts with users typically prohibit the unauthorized use of our brands, images, characters and other intellectual property rights, we cannot assure you that they will always comply with these terms. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. We enter into confidentiality agreements and intellectual property ownership agreements with our employees, we cannot assure you that these confidentiality agreements will not be breached, that we will have adequate remedies for any breach, or that our proprietary technology,
know-how
or other intellectual property will not otherwise become known to third parties. In addition, third parties may independently discover trade secrets and proprietary information, limiting our ability to assert any trade secret rights against such parties.
While we actively take steps to protect our proprietary rights, such steps may not be adequate to prevent the infringement or misappropriation of our intellectual property. In addition, we cannot assure you that any of the above trademark applications will ultimately proceed to registration or will result in registration with adequate scope for our business. Some of our pending applications or registrations may be successfully challenged or invalidated by others. If our trademark applications are not successful, we may have to use different marks for affected products or services, or seek to enter into arrangements with any third parties who may have prior registrations, applications or rights, which might not be available on commercially reasonable terms, if at all.
Implementation of intellectual property laws in China has historically been lacking, primarily because of ambiguities in the laws and difficulties in enforcement. Accordingly, intellectual property right protection in China may not be as effective as in other jurisdictions with a more developed legal framework regulating intellectual property rights. Policing unauthorized use of our proprietary technology, trademarks and other intellectual property is difficult and expensive, and litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could disrupt our business, as well as materially adversely affect our financial condition and results of operations.
41

Table of Contents
Our research and development expenditure may lower our profitability. Furthermore, if we fail to anticipate or successfully implement new technologies, our proprietary technologies or platforms could become unattractive or obsolete, and our revenues and market share may decline.
Our technological capabilities and infrastructure underlying our platforms are critical to our success. We have invested and will continue investing significant resources, including financial resources, in research and development to keep pace with technological advances in order to make our development capabilities, our platforms and our services competitive in the market. In order to continue attracting hosts to generate content on our platforms, we must provide new and attractive features for creating and optimizing audio content. If we fail to anticipate or implement new features to our hosts users, we may not be able to retain existing hosts and users or attract new members to join our community. Also, our operations and development rely heavily on our AI technologies. We have developed an
AI-based
system to accomplish tasks that usually require a massive amount of manpower, such as monitoring hundreds of millions of podcasts uploaded to our platforms to protect us from improper or illegal use of our platforms. The
AI-based
system also plays a key role in content distribution and recommendation. See “Item 4. Information of the Company—4.B. Business Overview—Content Monitoring System.” If we cannot develop or maintain an effective operation of artificial intelligence to assist in those areas, or if we fail to improve our
AI-based
system to align with the fast increase of our data volume, we may not have the technologies required to support our business operations and development. We have incurred a significant amount of research and development expenses in the past and such expenses may continue to raise in future.
However, expenditures in research activities cannot guarantee a commercially practical result, or at all. Accordingly, our expenditures may not generate corresponding benefits, which in turn will reduce our profitability. Given the fast pace with which the internet technology has been and will continue to be developed, we may not be able to timely upgrade our streaming technology, our engines or the software framework for our platforms development in an efficient and cost-effective manner, or at all. New technologies in programming or operations could render our technologies, our platforms or products or services that we are developing or expect to develop in the future obsolete or unattractive, thereby limiting our ability to recover related product development costs, outsourcing costs and licensing fees, which could result in a decline in our revenues and market share.
Our business depends substantially on the continuing efforts of our executive officers, key employees and qualified personnel, and our business operations may be adversely and negatively impacted if we lose their services.
Our future success depends substantially on the continued efforts of our executive officers and key employees. In particular, we rely on the expertise, experience and vision of our founder, chief executive officer and Chairman, Mr. Jinnan (Marco) Lai, as well as other members of our senior management team. If one or more of our executive officers or key employees were unable or unwilling to continue their services with us, we might not be able to replace them easily, in a timely manner, or at all. Since the user-generated audio content industry is characterized by high demand and intense competition for talents, we cannot assure you that we will be able to attract or retain qualified staff or other highly skilled employees. In addition, as our company is relatively young, our ability to train and integrate new employees into our operations may not meet the growing demands of our business which may materially and adversely affect our ability to grow our business and hence our results of operations.
We do not have key man insurance for our executive officers or key employees. If any of our executive officers and key employees terminates their services with us, our business may be severely and adversely affected, our financial condition and results of operations may be materially and adversely affected and we may incur additional expenses to recruit, train and retain qualified personnel. If any of our executive officers or key employees joins a competitor or forms a competing company, we may lose customers,
know-how
and key professionals and staff members. Each of our executive officers and key employees has entered into an employment agreement and a
non-compete
agreement with us. However, certain provisions under the
non-compete
agreement may be deemed invalid or unenforceable under PRC laws. If any dispute arises between our executive officers and key employees and us, we cannot assure you that we would be able to enforce these
non-compete
agreements in China, where these executive officers reside, in light of uncertainties with China’s legal system.
42

Table of Contents
We rely on assumptions and estimates to calculate certain key operating metrics, such as total mobile MAUs and paying users, and real or perceived inaccuracies in such metrics may lead to inaccurate interpretation of our business operations by our management and investors, and harm our reputation and negatively affect our business.
The numbers of total mobile MAUs or paying users or certain other key operating metrics are calculated using internal company data. While these numbers are based on what we believe to be reasonable calculations for the applicable periods of measurement, there are inherent challenges in measuring users and user engagement across our large user base. The actual number of individual users, for example, is likely to be lower than that of registered user accounts, total mobile MAUs and paying users, potentially significantly, due to various reasons such as repetitive registration. Some of our user accounts may also be created for specific purposes such as to increase the number of votes for certain hosts in various contests, but the number of paying users and total mobile MAUs do not exclude user accounts created for such purposes. We measure the number of MAUs by the number of mobile devices, and we require phone number verification for registered accounts and require ID verification for live streaming host accounts. However, we have limited ability to validate or confirm the accuracy of information provided during the user registration process to ascertain whether a new user account created was actually created by an existing user who is registering duplicative accounts. The respective number of our total mobile MAUs and paying users may overstate the number of individuals who register on our platforms, sign onto our platforms, purchase virtual gifts or other products and services on our platforms and access own apps, respectively, which may lead to an inaccurate interpretation of our metric. The calculations of our active users may not accurately reflect the actual number of people using our platforms.
If the growth in the number of our registered user accounts, total mobile MAUs or paying users is lower than the actual growth in the number of individual registered, total mobile MAUs or paying users, or if our user base is overstated, our user engagement level, sales and our business may not grow as quickly as required to meet the demand of our user base, which may harm our business, financial condition and results of operations. In addition, if our other key operating metrics, such as the total number of Golden Coins spent by our paying users on hosts are not accurately calculated, it may cause inaccurate evaluation of our business operations by our management and by investors which may also materially and adversely affect our business and results of operations.
In addition, our measures of such key operating metrics may differ from estimates published by third parties or from metrics used by other companies in similar industries due to differences in methodology. As a result, such key operating metrics may not be directly comparable to those similarly titled metrics used by other companies. If others do not perceive our key operating metrics to be accurate representations of our results of operations, or if we discover material inaccuracies in our key operating metrics, our reputation may be harmed and customers and platforms’ partners may be less willing to allocate their resources or spending to us, which could negatively affect our business and operating results.
We are subject to risks relating to litigation and disputes, which could adversely affect our business, prospects, results of operations and financial condition.
We may be subject to litigation, disputes or claims of various types brought by our competitors, users, hosts, employees, or others against us in matters relating to intellectual property rights, contractual disputes and competition claims or claims and disputes involving misconducts of our hosts, users, and employees. For example, we have been subject to user complaints and disputes relating to virtual gifting transactions consummated on our platforms and may be subject to litigation or threatened proceedings with our users in the future. We cannot assure you that we will not be subject to similar disputes, complaints or legal proceedings in the future, which may damage our reputation, evolve into litigations or otherwise have a material adverse impact on our reputation and business.
Litigation is expensive, subjects us to the risk of significant damages, requires significant management time and attention and could have a material and adverse effect on our business, financial condition and results of operations. The outcomes of actions we institute may not be successful or favorable to us. Lawsuits against us may also generate negative publicity that significantly harms our reputation, which may adversely affect our user base. We may also need to pay damages or settle lawsuits with a substantial amount of cash.
We have been involved in litigation arose in the ordinary course of business. Such lawsuits may involve intellectual property infringement on our platforms or commercial disputes with certain hosts. While we do not believe that any currently pending proceedings are likely to have a material adverse effect on us, if there were adverse determinations in legal proceedings against us, we could be required to pay substantial monetary damages or adjust our business practices, which could have a material and adverse effect on our business, financial condition and results of operations.
43

Table of Contents
We and certain of our directors and officers have been named as defendants in several shareholder class action lawsuits, which could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.
We will have to defend against the putative class action lawsuits described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Litigation,” including any appeals of such lawsuits should our initial defense be unsuccessful. We are currently unable to estimate the potential loss, if any, associated with the resolution of such lawsuits, if they proceed. We anticipate that we will continue to be a target for lawsuits in the future, including putative class action lawsuits brought by shareholders. There can be no assurance that we will be able to prevail in our defense or reverse any unfavorable judgment on appeal, and we may decide to settle lawsuits on unfavorable terms. Any adverse outcome of these cases, including any plaintiffs’ appeal of the judgment in these cases, could result in payments of substantial monetary damages or fines, or changes to our business practices, and thus have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. In addition, there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters. The litigation process may utilize a significant portion of our cash resources and divert management’s attention from the
day-to-day
operations of our company, all of which could harm our business. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business or financial results.
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 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.
Negative publicity may materially and adversely affect our brand, reputation, business and growth prospects.
Negative publicity involving us, our hosts, our users, our management, our content, our platforms or our business model may materially and adversely harm our brand and our business. See “—We may be liable for intellectual property infringement relating to intellectual properties of third parties, 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, customers and platforms’ partners. For instance, Mr. Yipeng Li, who has been our independent director since our initial public offering, was named as one of the defendants in an ongoing securities class action lawsuit against Sunlands Technology Group originally filed on June 27, 2019 with United States District Court Eastern District Court of New York (case number
1:19-cv-03744-FB-SMG),
alleging misrepresentation contained in the registration statement in connection with such company’s initial public offering. No conclusive judicial decision has been made with respect to this lawsuit. There has been negative publicity about our platforms and the misuse of our services by certain hosts 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 generate a portion of our revenues from podcast, advertising and others. If we fail to maintain or grow podcast, advertising and others revenue, our financial results may be adversely affected.
In 2019, 2020 and 2021, we generated RMB12.7 million, RMB21.8 million and RMB18.0 million (US$2.8 million) of net revenues from podcast, advertising and others, representing 1.1%, 1.4% and 0.9% of our total net revenues for the same periods. While our revenue generated from podcast, advertising and others represents a small portion of our revenue, our financial results could be adversely affected if we fail to maintain or grow it in the future. In addition, one or a few of our advertising business customers may account for a large portion of the total accounts receivable. If we fail to collect our receivable balance from our key customers in our advertising business, our financial results may be adversely affected.
44

Table of Contents
Advertisements shown on our platforms may subject us to penalties and other administrative actions.
We derived a small portion of our revenue from advertising business. Under PRC advertising laws and regulations, as a publisher of internet advertisements, we are obligated to monitor the advertising content shown on our platforms to comply with applicable laws and regulations. Violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting any misleading information. In circumstances involving serious violations by us, PRC governmental authorities may force us to terminate our advertising operations or revoke our licenses.
Furthermore, On November 26, 2021, the SAMR has publicly solicited opinions on the Measures for the Administration of Online Advertising (Draft for Comments), or the Draft Internet Advertising Measures, which states that all internet advertising activities will be regulated and clearly states that livestreaming room operators and livestreaming marketers must abide by the responsibilities and obligations of internet advertising operators. The Draft Internet Advertising Measures also provides that internet advertisement publishers should not publish advertisements on vehicles or intelligence household electronic appliances without the users’ permission or request. The Draft Internet Advertising Measures further strengthens the
one-click-to-close
requirement and prohibits advertisements for certain items on Internet media that targets minors, including, among others, advertisements related to online games that are harmful to the physical or mental health of minors. The SAMR solicited comments on this Draft Internet Advertising Measures, but it has not been formally adopted. As such measures have not been adopted and it remains unclear whether the formal version to be adopted in the future will have any further material changes, it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect us.
We are subject to risks relating to our third-party online payment platforms.
Currently, we sell almost all of our products and services to our users through third-party online payment systems. We expect that an increasing amount of our sales will be conducted over the internet as a result of the growing use of online payment systems. We utilize third-party online payment platforms to receive cash proceeds from sales of our virtual currency through direct purchases on our platforms. Any scheduled or unscheduled interruption in the ability of our users to use these and other online payment platforms could adversely affect our payment collection, and in turn, our revenue. 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 platforms.
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. We could be exposed to litigation and possible liability if online transaction safety of our users is compromised in transactions involving payments for our virtual currency, which could harm our reputation and our ability to attract users and may materially adversely affect our business. We also rely on the stability of such payment transmissions to ensure the continued payment services provided to our users. If any of these third-party online payment platforms fails to process, or ensure the security of, users’ payments for any reason, our reputation will be damaged and we may lose our paying users and discourage the potential purchases, which in turn, will materially and adversely affect our business, financial condition and prospects.
Restrictions on virtual currency may adversely affect our revenues.
In 2016, we launched “Golden Coin,” the virtual currency that can be used by our users to purchase virtual gifts in relation to our audio entertainment products. Due to the relatively short history of virtual currency in China, the regulatory framework governing the industry is still under development.
The Notice on the Reinforcement of the Administration of Online Games issued by the Ministry of Culture and other governmental authorities on February 15, 2007 directs the People’s Bank of China to strengthen the administration of virtual currency to avoid any adverse impact on the PRC economic and financial system. This notice provides that the total amount of virtual currency issued by an operator and the amount of purchased by individual users should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase virtual items.
45

Table of Contents
On June 4, 2009, the Ministry of Culture and the MOFCOM jointly issued the Notice on Strengthening the Administration of Online Game Virtual Currency, or the Virtual Currency Notice. The term “virtual currency” is widely used in the live streaming industry, such term as used in our industry does not fall under the definition under the Virtual Currency Notice. Although we do not think Virtual Currency Notice applies to the operation of our live streaming platform, given the wide discretion of relevant governmental authorities and uncertainties in the regulatory environment, we cannot assure that relevant governmental authorities will not in the future interpret the Virtual Currency Notice in a different way and subject our operation to the scope of the Virtual Currency Notice or issue new rules to regulate the virtual currency in our industry. In that case, our operation may be adversely affected.
Our users may suffer from third party fraud when purchasing our virtual currency and we may suffer fraud when selling virtual currency to users.
We offer our users multiple options to purchase Golden Coin, our virtual currency. Users can purchase these virtual currencies directly on platforms, make
in-app
purchases using third-party payment channels. From time to time, certain third parties fraudulently claim that users can purchase Golden Coin through them. If our users choose to purchase our virtual currency from such third parties, they may suffer losses from such fraudulent activities by third parties. Although we are not directly responsible for such fraudulent activities conducted by third parties, our user experience may be adversely affected and they may choose to leave our platforms as a result. Such fraudulent activities by third parties might also generate negative publicity, disputes or even legal claims. The measures we take in response to such negative publicity, disputes or legal claims may be expensive, time consuming and disruptive to our operations and divert our management’s attention.
In addition, we have run into multiple incidents in the past where the users paid for our virtual currency through fraudulent methods, including illegal use of credit cards. Such incidents had not resulted in any material and adverse impact on our business and operations. While such incidents have decreased given tightened regulation, we may lose all the revenue we were supposed to generate from the sales as we were not able to collect or recover on any of it when such incidents occur. Although we have instated authentication mechanisms that help us detect such fraudulent paying methods, we still cannot guarantee that our mechanisms can prevent all fraudulent virtual currency purchases. These fraudulent transactions cause harm to our financial results and business operations.
Present and future business partnerships or acquisitions may fail and materially and adversely affect our business, reputation and results of operations.
We may enter into business partnerships, including joint ventures, minority equity investments or business collaboration agreement, with third parties from time to time in connection with our business. These partnerships could subject us to a number of risks, including risks associated with sharing proprietary information,
non-performance
by third parties and increased expenses in establishing new business partnerships, any of which may materially and adversely affect our business. 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, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business. Future acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our management and could divert resources from our existing business, which in turn could adversely affect our 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, significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired businesses. Moreover, the costs of identifying and consummating acquisitions may be significant. In addition to possible shareholder approval, we may have to obtain approvals and licenses from government authorities and comply with applicable PRC laws and regulations, which could result in increased delays and costs.
46

Table of Contents
We may be unable to obtain additional capital in a timely manner or on acceptable terms. Furthermore, our future capital needs may cause us to be bound by covenants that restrict our operations, such as our ability to incur additional indebtedness or pay dividends.
We have conducted several rounds of financing since our inception. We also issued convertible loans in the past which have been fully converted to our preferred shares. In January 2020, we completed our initial public offering. In April 2021, we completed our
follow-on
public offering. As we continue to expand our operations, we may need to raise additional capital to meet our financing demand. If we are unable to obtain such capital in a timely manner or on acceptable terms, or if we enter into financing agreements imposing restrictions on our operations, such as our ability to incur additional indebtedness or distribute dividends, our business, operation and financial conditions may be negatively affected.
COVID-19,
a novel strain of coronavirus, has spread worldwide. The
COVID-19
outbreak has brought uncertainties and interruptions to global economy and caused significant volatility across the financial markets. We believe that our current cash and cash equivalents, together with our cash generated from operating activities, financing activities, our initial public offering and
follow-on
offering, will be sufficient to meet our present anticipated working capital requirements and capital expenditures. However, if the impact of the
COVID-19
and volatility in the financial markets continue, our financing activities in future to raise additional capital may be materially and adversely affected, which may in turn have an adverse effect on our ability to meet our working capital requirement and our liquidity. For other risks related to the
COVID-19,
see “— We face risks related to the outbreak of
COVID-19.”
We have significant working capital requirements and had working capital deficits in the past. If we experience working capital deficits in the future, our business, liquidity, financial condition and results of operations may be materially and adversely affected.
As a result of the efforts in expanding our business, we had a working capital deficit in 2019. Although we have received net proceeds from our
follow-on
public offering completed in April 2021 to meet our ongoing working capital needs and fund our continuous growth and achieved a positive working capital of RMB211.0 million (US$33.1 million) as of December 31, 2021, there is no assurance that we will generate sufficient net income or operating cash flows to meet our working capital requirements and repay our liabilities as they become due in the future due to a variety of factors, some of which are beyond our control. There can be no assurance that we will be able to continue to successfully taking measures such as prudently managing our working capital or raising additional equity or debt financing on terms that are acceptable to us. Our inability to take these actions as and when necessary could materially adversely affect our liquidity, results of operations, financial condition and ability to operate.
We do not currently have business insurance to cover our main assets and business. Any uninsured occurrence of business disruption, litigation or natural disaster could expose us to significant costs, which could have an adverse effect on our results of operations.
The insurance industry in China is still at an early stage of development, and insurance companies in China currently offer limited business-related insurance products. As such, we may not be able insure against certain risks related to our assets or business even if we desire to. In addition, the costs of insuring for such risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. We do not have any business liability or disruption insurance to cover our operations. Any uninsured occurrence of business disruption, litigation or natural disaster, or significant damages to our uninsured equipment or facilities could disrupt our business operations, requiring us to incur substantial costs and divert our resources, which could have an adverse effect on our business, financial condition and results of operations.
If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of our shares may be materially and adversely affected.
Since the completion of our initial public offering, we have become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we included a report from management on our internal control over financial reporting in our annual report on Form
20-F
beginning with this annual report this year. 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 qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
47

Table of Contents
During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify 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. Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could, in turn, limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.
We identified a material weakness in our internal control over financial reporting as part of management’s assessment, and if we are unable to remediate and improve our internal controls, we may not be able to accurately or timely report our future financial results.
In the course of preparing our consolidated financial statements in the prior years, we identified one material weakness which has not been remedied in our internal control over financial reporting as of December 31, 2021. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that was identified related to our lack of sufficient financial reporting and accounting personnel with appropriate experience of U.S. GAAP and SEC reporting requirements and our failure to establish and clearly communicate acceptable policies regarding U.S. GAAP financial reporting. While we are in the process of implementing plans to remediate this material weakness, there is no assurance that we will not have material weaknesses or significant deficiencies in the future.
The SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on the effectiveness of such companies’ internal control over financial reporting in their respective annual reports. In addition, an independent registered public accounting firm for a public company may be required to issue an attestation report on the effectiveness of such company’s internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. We may be unable to timely complete our evaluation testing and any required remediation. 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 listed securities. 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.
48

Table of Contents
We have granted share-based compensations in the past and will continue to grant share-based awards in the future, which may result in increased share-based compensation expenses and have an adverse effect on our future profit. Exercise of the share options, restricted shares or restricted share units granted will increase the number of our shares in circulation, which may adversely affect the market price of our shares.
We, through a wholly owned subsidiary, adopted a share incentive plan on September 30, 2018, which has been terminated and replaced in its entirety by a new share incentive plan adopted directly by us on May 31, 2019, or the 2019 Share Incentive Plan, for the purpose of granting share-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. The maximum aggregate number of ordinary shares we are authorized to issue pursuant to all awards under the 2019 Share Incentive Plan is 40,000,000 Class A ordinary shares. In March 2020, we amended the 2019 Share Incentive Plan (the “Amended and Restated 2019 Share Incentive Plan”) to increase the maximum aggregate number of Class A ordinary shares we are authorized to issue under the Amended and Restated 2019 Share Incentive Plan to 100,000,000 Class A ordinary shares. In September 2021, we adopted the Second Amended and Restated 2019 Share Incentive Plan to replace the Amended and Restated 2019 Share Incentive Plan in its entirety, increasing the maximum aggregate number of Class A ordinary shares we are authorized to issue under the Second Amended and Restated 2019 Share Incentive Plan to 170,000,000 Class A ordinary shares. We may adopt share incentive plans in the future that permits granting of share-based compensation awards to employees and directors, which will result in significant share-based compensation expenses to us.
As of February 28, 2022, awards to purchase 65,533,900 Class A ordinary shares under the Second Amended and Restated 2019 Share Incentive Plan have been granted and outstanding. A number of awards become vested upon the completion of our initial public offering in January 2020 and we recognized a significant amount of share-based compensation expenses upon then. As of December 31, 2021, our total unrecognized share-based compensation related to the Second Amended and Restated 2019 Share Incentive Plan amounted to RMB75.3 million (US$11.9 million). We believe the granting of share-based compensation awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation awards to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.
Competition for highly skilled personnel is often intense and we may incur significant costs or not successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Our ability to attract or retain highly skilled employees may be adversely affected by declines in the perceived value of our equity or equity awards. Furthermore, there are no assurances that the number of shares reserved for issuance under our share incentive plans will be sufficient to grant equity awards adequate to recruit new employees and to compensate existing employees.
We may be the subject of allegations, harassing or other detrimental conduct by third parties, which could harm our reputation and cause us to lose market share, users and customers.
We have been subject to allegations by third parties or purported former employees, negative internet postings and other adverse public exposure on our business, operations and staff compensation. We may also become the target of harassment or other detrimental conduct by third parties or disgruntled former or current employees. Such conduct may include complaints, anonymous or otherwise, to regulatory agencies, media or other organizations. We may be subject to government or regulatory investigation or other proceedings as a result of such third-party conduct and may be required to spend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Additionally, allegations, directly or indirectly against us, may be posted on the internet, including social media platforms by anyone, whether or not related to us, on an anonymous basis. Any negative publicity on us or our management can be quickly and widely disseminated. Social media platforms and devices immediately publish the content of their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted may be inaccurate and adverse to us, and it may harm our reputation, business or prospects. The harm may be immediate without affording us an opportunity for redress or correction. Our reputation may be negatively affected as a result of the public dissemination of negative and potentially false information about our business and operations, which in turn may cause us to lose market share, users or customers.
49

Table of Contents
Non-compliance
on the part of our employees or third parties involved in our business could adversely affect our business.
Our compliance controls, policies and procedures may not protect us from acts committed by our employees, agents, contractors, or collaborators that violate the laws or regulations of the jurisdictions in which we operate, which may adversely affect our business.
In addition, our business partners or other third parties involved in our business through our business partners (such as contractors, guilds or other third parties entered into business relationship with our third-party business partners) may be subject to regulatory penalties or punishments because of their regulatory compliance failures, which may, directly or indirectly, disrupt our business. Although we conduct review of legal formalities and certifications before entering into contractual relationship with other businesses such as advertisers and guilds, and take measures to reduce the risks that we may be exposed to in case of any
non-compliance
by third parties, we cannot be certain whether such third party has infringed or will infringe any third parties’ legal rights or violate any regulatory requirements or rule out the likelihood of incurring any liabilities imposed on us due to any regulatory failures by third parties. We identify irregularities or
non-compliance
in the business practices of any parties with whom we pursue existing or future cooperation and we cannot assure you that any of these irregularities will be corrected in a prompt and proper manner. We cannot assure you that our business partners will be able to supervise and administrate those third parties actively involved in our business through these business partners in an effective way. The legal liabilities and regulatory actions on our business partners or other third parties involved in our business may affect our business activities and reputation and in turn, our results of operations.
We face risks and uncertainties to comply with the laws, regulations and rules in various aspects in overseas jurisdictions. Failure to comply with such applicable laws, regulations and rules may subject our overseas operation to strict scrutiny by local authorities, which in turn may materially and adversely affect our globalized operations
.
As we expand our operations overseas, we may have to adapt our business models or operations to the local markets due to various legal requirements and market conditions. Our international operations and expansion efforts may result in increased costs and are subject to various of risks, including content control from local authorities, uncertain enforcement of intellectual property rights and infringements, the complexity of compliance with foreign laws and regulations and cultural differences. Compliance with applicable foreign laws and regulations related to matters that are central to our business, including those related to content restrictions, data privacy, virtual gift sales, anti-corruption laws, anti-money laundry and minors protection, increases the costs and risk exposure of doing business in foreign jurisdictions. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country. As our globalized operations evolves, we cannot assure you that we are able to fully comply with the legal requirements of each foreign jurisdiction and successfully adapt our business models to local market conditions. Due to the complexity involved in our overseas business expansion, we cannot assure you that we are in compliance with all local laws or regulations, including license requirements, or that our existing licenses will be successfully renewed or expanded to cover all of our areas of operations.
In addition, cultural differences may also impose additional challenges to our efforts in content control. Therefore, such different and possibly more stringent regulatory and cultural environments may increase the risk exposure to our daily operations in foreign jurisdictions. Our failure to comply with other foreign laws, regulations and rules could materially and adversely affect our business, results of operations, global reputation and global growth efforts. In additional, each of foreign jurisdictions may have different regulatory framework, implementation and enforcement for online audio platforms, which may substantially increase our compliance costs to obtain, maintain or renew requisite licenses and permits or fulfil any required administrative procedures.
We have limited experience in international markets. If we fail to meet the challenges presented by our expansion overseas, our business, financial condition and results of operations may be materially and adversely affected.
We are exploring opportunities overseas. Starting from July 2019, we have launched certain localized tailored version of our overseas audio entertainment product in the Middle East and North Africa, or the MENA and gradually developed to reach more global audiences. In October 2020, we launched TIYA App, in the United States, an audio-based social networking product. We have limited experience in international markets and we expect to enter and expand our operations in international markets. Global expansion could expose us to a number of risks, including:
50

Table of Contents

| • |  | compliance with applicable foreign laws and regulations, including but not limited to internet content provider licenses, internet content requirements, foreign exchange controls, cash repatriation restrictions, intellectual property protection rules and data privacy requirements;

| • |  | tensions between China and the United States or among other government authorities in countries or regions where we operate;

| • |  | challenges in identifying appropriate local business partners and establishing and maintaining good working relationships with them. Our business partners primarily include popular hosts and their agencies, third parties that promote our platforms and applications and third parties that provide us technology support;

| • |  | challenges in formulating effective marketing strategies targeting users from various jurisdictions and cultures, who have a diverse range of preferences and demands;

| • |  | challenges in attracting users to generate appealing content on our overseas platforms;

| • |  | challenges associated with internet infrastructure and telecommunication network services overseas and risks of system security breaches;

| • |  | local competition;

| • |  | local employment laws and practices;

| • |  | fluctuations in currency exchange rates;

| • |  | exposure to different tax jurisdictions that may subject us to greater fluctuations in our effective tax rate and assessments in multiple jurisdictions on various tax-related assertions, including transfer pricing adjustments and permanent establishment risks;

| • |  | increased costs associated with doing business in foreign jurisdictions; and

| • |  | COVID-19 outbreaks in various overseas locations.

Our business, financial condition and results of operations may be materially and adversely affected by these and other risks associated with our global expansion.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
We may be subject to social and natural catastrophic events that are beyond our control, such as natural disasters, health epidemics or pandemic, riots, political and military upheavals and other outbreaks in the country or region where we have our operations or where a portion of our users or podcasts are located. Such events could significantly disrupt our operations and negatively impact our business, financial conditions and development.
We have incurred and will continue to incur additional costs as a result of being a public company.
As a public company, we are incurring and expect to continue to incur significant legal, accounting and other expenses that we did not incur as a private company. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the Nasdaq, may increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
51

Table of Contents
Risks Related to Our Corporate Structure
There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the agreements that establish the VIE structure for our operations in China, including potential future actions by the PRC government, which could affect the enforceability of our contractual arrangements with the VIEs and, consequently, significantly affect the financial condition and results of operations performance of Lizhi. If the PRC government finds such agreements
non-compliant
with relevant PRC laws, regulations, and rules, or if these laws, regulations, and rules or the interpretation thereof change in the future, we could be subject to severe penalties or be forced to relinquish our interests in the VIEs.
PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in internet and other related businesses, including the provision of internet content. Specifically, foreign ownership is prohibited in industries of online audio program services and internet cultural business (excluding music), foreign ownership of an internet content provider in managing value-added telecommunications business may not exceed 50%, and the major foreign investor is required to have a record of good performance and operating experience. We are a company registered in the Cayman Islands and Beijing Hongyiyichuang Information Technology Co., Ltd. (“Hongyi Technology”) and Guangzhou Tiya Information Technology Co., Ltd. (“Guangzhou Tiya”) (our wholly-owned subsidiaries in China) are considered foreign-invested enterprises, or WFOEs. To comply with PRC laws and regulations, our WFOEs conduct our business in China mainly through Guangzhou Lizhi Network Technology Co., Ltd. (“Guangzhou Lizhi”) and Guangzhou Huanliao Network Technology Co., Ltd. (“Guangzhou Huanliao”), the VIEs, and their respective subsidiaries, based on a series of contractual arrangements by and among our WFOEs, the VIEs and the respective shareholders of the VIEs. As a result of these contractual arrangements, we exert control over the VIEs and their subsidiaries, and consolidate their financial results in our financial statements under U.S. GAAP. The VIEs hold the licenses, approvals and key assets that are essential for our operations. See “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders.”
In the opinion of our PRC counsel, Fangda Partners, based on its understanding of the relevant PRC laws and regulations, each of the contractual arrangements among each of Guangzhou Lizhi and Guangzhou Huanliao, the VIEs, and their respective shareholders is valid, binding and enforceable in accordance with its terms. 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. In addition, PRC government authorities may deem that foreign ownership is directly or indirectly involved in each of the VIE’s shareholding structure. If we are found in violation of any PRC laws or regulations, or if the contractual arrangements among any of our WFOEs, the VIEs and/or their respective shareholders are determined as illegal or invalid by the PRC court, arbitral tribunal or regulatory authorities, 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;

| • |  | discontinuing or placing restrictions or onerous conditions on our operations;

| • |  | placing restrictions on our right to collect revenues;

| • |  | shutting down our servers or blocking our apps/websites;

52

Table of Contents

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

| • |  | imposing additional conditions or requirements with which we may not be able to comply; or

| • |  | taking other regulatory or enforcement actions against us that could be harmful to our business.

The imposition of any of these penalties may result in a material and adverse effect on our ability to conduct our business operations. In addition, new PRC laws, regulations, and rules may be introduced to impose additional requirements, posing additional challenges to our corporate structure and contractual arrangements. If the imposition of any of these penalties causes us to lose the rights to direct the activities of the VIEs or the right to receive their economic benefits, we would no longer be able to consolidate their financial results and/or claim our contractual control rights over the assets of the VIEs that conduct substantially all of our operations in China, which could materially and adversely affect our financial condition and results of operations and cause our ADSs to significantly decline in value or become worthless.
Any failure by the VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
Since PRC laws prohibit or restrict foreign equity ownership in certain kinds of business in China, we have relied and expect to continue to rely on the contractual arrangements with the VIEs and their shareholders to operate our business in China.
However, these contractual arrangements may not be as effective as direct ownership in providing us with control over our affiliated entities. Any of our affiliated entities, including the VIEs and its shareholders, could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. In the event that the shareholders of the VIEs breach the terms of these contractual arrangements and voluntarily liquidate the VIEs, or the VIEs declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by our affiliated entities, which could have a material adverse effect on our business financial condition and results of operations.
Most of the nominee shareholders of the VIEs are also beneficial owners of the Company. Particularly, nominee shareholders of Guangzhou Lizhi are: (i) Mr. Jinnan (Marco) Lai (84.81%), our founder, Chief Executive Officer and director, and the beneficial owner of the shares held by Voice Future Ltd, one of our shareholders; (ii) Mr. Ning Ding (7.50%), our
co-founder,
Chief Technology Officer and director, and the beneficial owner of the shares held by Voice Intelligence Ltd, one of our shareholders; and (iii) Zhuhai Dayin Ruoxi Enterprise Management Center (Limited Partnership) (formerly known as Zhuhai Dayin Ruoxi Investment Development Center (Limited Partnership) (珠海市大音若希企业管理中心(有限合伙)) (7.69%), 99.17% of whose interest is owned by Mr. Jinnan (Marco) Lai. Guangzhou Lizhi operates our LIZHI App. The enforceability of the contractual agreements between us, the VIEs and their shareholders depends to a large extent upon whether the VIEs and their shareholders will fulfill these contractual agreements. Their interests in enforcing these contractual agreements may not align with our interests or the interests of our shareholders. If their interest diverges from that of our company and other shareholders, it may potentially increase the risk that they could seek to act contrary to these contractual arrangements. If the 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. Our contractual arrangements are governed by PRC law and provide for the resolution of disputes through litigation in China. Accordingly, these agreements would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC law.
53

Table of Contents
There remain significant uncertainties regarding the ultimate outcome of such adjudication should legal action become necessary. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our affiliated entities, and our ability to conduct our business may be negatively affected.
The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC approval under the M&A Rules is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for our future issuance of securities overseas would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.
Furthermore, the recently issued Opinions on Strictly Cracking Down on Illegal Securities Activities emphasized the need to strengthen the administration over “illegal securities activities” and the supervision on overseas listings by China-based companies, and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies, although such opinions did not specify the definition of “illegal securities activities.” Such opinions further provided that the special provisions of the State Council on overseas offerings and listings by those companies limited by shares will be revised and therefore the duties of domestic industry competent authorities and regulatory agencies will be clarified.
As these opinions were newly issued and there are no further explanations or detailed rules and regulations with respect to such opinions, there are still uncertainties regarding the interpretation and implementation of such opinions. In addition, new rules or regulations promulgated in the future could impose additional requirements on us.
For example, on December 24, 2021, the CSRC released the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Enterprises (Draft for Comments), or the Draft Overseas Listing Administration Provisions, and the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Enterprises (Draft for Comments), or the Draft Overseas Listing Filing Measures for public comments, which require, among others, that PRC domestic enterprises that seek to direct and indirect list in overseas markets to file the required documents with the CSRC. However, the Draft Overseas Listing Administration Provisions and the Draft Overseas Listing Filing Measures have been released for public comments only and the final version and effective date of such regulations are subject to change with substantial uncertainty.
Furthermore, on December 28, 2021, the CAC together with other regulatory authorities officially announced the Cybersecurity Review Measures. In accordance with the Cybersecurity Review Measures, network platform operators mastering personal information of more than one million users must apply to the Cybersecurity Review Office for cybersecurity review when listing abroad. On November 14, 2021, the CAC published the Draft Measures for Internet Data Security, which provides that data processors conducting certain activities must apply for cybersecurity review, including, among others, merger, reorganization or separation of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests affects or may affect national security and listing abroad of data processors processing over one million users’ personal information.
If the CSRC or other relevant PRC regulatory agencies subsequently determine that prior approval is required for any of our future offerings of securities overseas or to maintain the listing status of our ADSs, we cannot guarantee that we will be able to obtain such approval in a timely manner, or at all. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, not to proceed with such offering or maintain the listing status of our ADSs. If we proceed with any of such offering or maintain the listing status of our ADSs without obtaining the CSRC’s approval to the extent it is required, or if we are unable to comply with any new approval requirements which might be adopted for offerings that we have completed prior to the publication of the above- referenced opinions, 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 ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from offering of securities overseas 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.
54

Table of Contents
Furthermore, if there are any other approvals, filings and/or other administration procedures to be obtained from or completed with the CSRC or other PRC regulatory agencies as required by any new laws and regulations for any of our future proposed offering of securities overseas or the listing of the ADSs, we cannot assure you that we can obtain the required approval or complete the required filings or other regulatory procedures in a timely manner, or at all. Any failure to obtain the relevant approvals or complete the filings and other relevant regulatory procedures may subject us to regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies, which may have a material adverse effect on our business, financial condition or results of operations.
We rely on contractual arrangements with the VIEs and their shareholders for our operations in China, which may not be as effective in providing operational control as direct ownership.
Due to PRC restrictions or prohibitions on foreign ownership of internet and other related businesses in China, we operate our business in China through the VIEs and their subsidiaries, in which we have no ownership interest. We rely on a series of contractual arrangements with the VIEs and their shareholders, including the powers of attorney, to control and operate business of the VIEs. These contractual arrangements are intended to provide us with effective control over the VIEs and allow us to obtain economic benefits from them. See “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders” for more details about these contractual arrangements. In particular, our ability to control the VIEs depends on the powers of attorney, pursuant to which Hongyi Technology and Guangzhou Tiya (our WFOEs) can exercise all shareholders rights in the VIEs. We believe these powers of attorney are legally enforceable but may not be as effective as direct equity ownership.
Although we have been advised by our PRC counsel, Fangda Partners, that each of the contractual arrangements among each of our WFOEs, the VIEs, and shareholders of the VIEs is valid, binding and enforceable under existing PRC laws and regulations, these contractual arrangements may not be as effective in providing control over the VIEs and their subsidiaries as direct ownership. If the VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may incur substantial costs and expend substantial resources to enforce our rights. Although Hongyi Technology or Guangzhou Tiya has an option, subject to the registration process with PRC governmental authorities, to purchase the equity of the VIEs, if the shareholders of VIEs do not cooperate or there are any disputes relating to these contractual arrangements, we will have to enforce our rights under these contracts under PRC laws through arbitration, litigation and other legal proceedings, the outcome of which is uncertain. These contractual arrangements are governed by and interpreted in accordance with PRC law, and disputes arising from these contractual arrangements will be resolved through arbitration in China. However, the legal system in China, particularly as it relates to arbitration proceedings, is not as developed as the legal system in many other jurisdictions, such as the United States. There are very few precedents and little official guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of arbitration should legal action become necessary. These uncertainties could limit our ability to enforce these contractual arrangements. In addition, arbitration awards are final and can only be enforced in PRC courts through arbitration award recognition proceedings, which could cause additional expenses and delays. In the event we are unable to enforce these contractual arrangements or we experience significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over the VIEs and may lose control over the assets owned by the VIEs. As a result, we may be unable to consolidate the financial results of such entities in our consolidated financial statements, our ability to conduct our business may be negatively affected, and our operations could be severely disrupted, which could materially and adversely affect our business, financial condition and results of operations.
55

Table of Contents
We may lose the ability to use and enjoy assets held by the VIEs and their subsidiaries that are important to our business if the VIEs and their subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.
The VIEs and their subsidiaries hold certain assets that are important to our operations, including the ICP License, the Internet Culture Operation License and Radio and Television Program Production and Operating Permit. Under our contractual arrangements, the shareholders of the VIEs may not voluntarily liquidate the VIEs or approve them to sell, transfer, mortgage or dispose of their assets or legal or beneficial interests exceeding certain threshold in the business in any manner without our prior consent. However, in the event that the shareholders breach this obligation and voluntarily liquidate the VIEs, or the VIEs declare bankruptcy, or all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our operations, which could materially and adversely affect our business, financial condition and results of operations. Furthermore, if the VIEs or their subsidiaries undergo a voluntary or involuntary liquidation proceeding, their shareholders or unrelated third-party creditors may claim rights to some or all of its assets, hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
Contractual arrangements we have entered into with the VIEs may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could negatively affect our financial condition and the value of your investment.
Pursuant to applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by PRC tax authorities. We may be subject to adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among each of our WFOEs, the VIEs, and shareholders of the VIEs are not on an arm’s length basis and therefore constitute favorable transfer pricing. As a result, the PRC tax authorities could require that the VIEs adjust their taxable income upward for PRC tax purposes. Such an adjustment could increase our WFOEs tax expenses, subject our WFOEs to late payment fees and other penalties for underpayment of taxes. As a result, our consolidated results of operations may be adversely affected.
If the chops of our PRC subsidiaries, the VIEs and their subsidiaries, are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.
In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiaries, the VIEs and their subsidiaries are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safe, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. If any of our authorized personnel obtains, misuses or misappropriates our chops for whatever reason, we could experience disruptions in our operations. We may also have to take corporate or legal action, which could require significant time and resources to resolve while distracting management from our operations. Any of the foregoing could adversely affect our business and results of operations.
Our shareholders or the shareholders of the VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business.
The shareholders of the VIEs include persons who are also our shareholders or affiliates of our shareholders, and, in some cases, our directors or officers. Conflicts of interest may arise between the roles of them as shareholders, directors or officers of our company and as shareholders of the 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 a fiduciary duty to our company 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 the VIEs have executed powers of attorney to appoint Hongyi Technology or Guangzhou Tiya (our WFOEs) to vote on their behalf and exercise voting rights as shareholders of the 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.
56

Table of Contents
Additionally, we rely on our shareholders and the shareholders of the VIEs to secure, both at the internal and external level, all the necessary approvals, permits, filings or other formalities and proceedings in relation to their respective investment in us and/or the VIEs. We cannot assure you that our shareholders and shareholders of the VIEs have obtained all of such necessary approvals, permits, filings or other formalities and proceedings. The failure to obtain such approvals, permits, filings or other formalities and proceedings may adversely affect our business and results of operation.
Certain existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.
As of February 28, 2022, our founder, Chief Executive Officer and Chairman, Mr. Jinnan (Marco) Lai, through entities controlled by him, holds 20.4% of our total outstanding ordinary shares, representing 62.6% of our total voting power, excluding 9,020,630 Class A ordinary shares held by Kastle Limited which holds such Class A ordinary shares in trust for the benefit of certain of our senior management and directors. As a result, Mr. Lai is expected to have substantial influence over our business, including significant corporate actions such as mergers, consolidations, sales of substantially all of our assets, election of directors and related party transactions.
Our controlling shareholders may take actions that are not in the best interest of us or our other shareholders and conflicts of interest between them and us may arise as a result of their operation of or investment in businesses that compete with us. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. These actions may be taken even if they are opposed by our other shareholders, including holders of our ADSs. In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise. For more information regarding our principal shareholders and their affiliated entities, see “Item 6, Directors, Senior Management and Employees—6.E. Share Ownership.”
We may rely on dividends paid by our PRC subsidiaries to fund cash and financing requirements. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.
We are a holding company, and we may rely on dividends to be paid by our PRC subsidiaries to fund our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to the holders of the ADSs and our ordinary shares and service any debt we may incur. If our PRC 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, a wholly foreign-owned enterprise in China, such as Hongyi Technology or Guangzhou Tiya, may pay dividends only out of its 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 the statutory surplus fund or general reserve fund, until the aggregate amount of such 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 discretionary surplus fund or enterprise expansion fund and staff bonus and welfare fund. These funds are not distributable as cash dividends. For more detail on those limits, see “—Risks Related to Doing Business in China—Our PRC subsidiaries and PRC VIEs are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.” Any limitation on the ability of our 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.
57

Table of Contents
Substantial uncertainties exist with respect to whether the foreign investor’s controlling PRC onshore variable interest entities via contractual arrangements will be recognized as “foreign investment” and how it may impact the viability of our current corporate structure and operations.
On March 15, 2019, the National People’s Congress of the PRC adopted the PRC Foreign Investment Law, which came into force on January 1, 2020. The PRC Foreign Investment Law defines the “foreign investment” as the investment activities in China conducted directly or indirectly by foreign investors in the following manners: (i) the foreign investor, by itself or together with other investors establishes a foreign invested enterprises in China; (ii) the foreign investor acquires shares, equities, asset tranches, or similar rights and interests of enterprises in China; (iii) the foreign investor, by itself or together with other investors, invests and establishes new projects in China; (iv) the foreign investor invests through other approaches as stipulated by laws, administrative regulations or otherwise regulated by the State Council. The PRC Foreign Investment Law keeps silent on how to define and regulate the “variable interest entities,” while adding a
catch-all
clause that “other approaches as stipulated by laws, administrative regulations or otherwise regulated by the State Council” can fall into the concept of “foreign investment,” which leaves uncertainty as to whether the foreign investor’s controlling PRC onshore variable interest entities via contractual arrangements will be recognized as “foreign investment.” Pursuant to the PRC Foreign Investment Law, PRC governmental authorities will regulate foreign investment by applying the principle of
pre-entry
national treatment together with a “negative list,” which will be promulgated by or promulgated with approval by the State Council. Foreign investors are prohibited from making any investments in the industries which are listed as “prohibited” in such negative list; and, after satisfying certain additional requirements and conditions as set forth in the “negative list,” are allowed to make investments in the industries which are listed as “restricted” in such negative list. For any foreign investor that fails to comply with the negative list, the competent authorities are entitled to ban its investment activities, require such investor to take measures to correct its
non-compliance
and impose other penalties.
The internet content service, internet audio-visual program services and online culture activities that we conduct through the VIEs are subject to foreign investment restrictions/ prohibitions set forth in the Special Administrative Measures for the Access of Foreign Investment (Negative List) (2021 Version) and the Catalog of Industries for Encouraging Foreign Investment (2020 Version) issued by MOFCOM and the National Development and Reform Commission. It is unclear whether any new “negative list” to be issued under the PRC Foreign Investment Law will be different from the foregoing lists that already exist.
The PRC Foreign Investment Law leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. It is therefore uncertain whether our corporate structure will be seen as violating foreign investment rules as we are currently using the contractual arrangements to operate certain businesses in which foreign investors are currently prohibited from or restricted to investing. Furthermore, if future laws, administrative regulations or provisions of 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 we fail to take appropriate and timely measures to comply with any of these or similar regulatory compliance requirements, our current corporate structure, corporate governance and business operations could be materially and adversely affected.
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
The value of the RMB 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. In July 2005, the PRC government changed its
decades-old
policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. While appreciating approximately by 7% against the U.S. dollar in 2017, the Renminbi in 2018 depreciated approximately by 5% against the U.S. dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
58

Table of Contents
There remains significant international pressure on the Chinese government to adopt a flexible currency policy to allow the RMB to appreciate against the U.S. dollar. Significant revaluation of the RMB may have a material adverse effect on your investment. Substantially all of our revenues and costs are denominated in RMB. Any significant revaluation of RMB 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. To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs, and if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB 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 RMB 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 control on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB.
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future. 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.
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 may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers and other employees who are PRC citizens or who are
non-PRC
residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted incentive share awards by us, may follow the Circular on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the SAFE Circular 7, promulgated by the SAFE in 2012. Pursuant to the SAFE Circular 7, PRC citizens and
non-PRC
citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a qualified PRC agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. The PRC agent shall amend the SAFE registration within three months in the event that there is any material changes to the share incentive plan, the PRC agent or the overseas entrusted institution or other material changes. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations. However, we cannot assure you that the SAFE registrations for the participants of our share incentive plan could be completed and updated in a timely manner. Failure to complete the SAFE registrations or to amend such registrations in time may subject them to fines, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Item 4. Information on the Company—4.B. Business Overview— Regulation—Regulations Related to Employee Stock Incentive Plan.”
59

Table of Contents
The SAT has issued certain circulars concerning equity incentive awards. Under these circulars, our employees working in China who exercise share options, restricted shares or restricted share units will be subject to PRC individual income tax. Each of our PRC subsidiaries has obligations to file documents related to employee share options, restricted shares or restricted share units with relevant tax authorities and to withhold individual income taxes of those employees. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations related to Employee Stock Incentive Plan.”
Our leased property interests may be defective and our right to lease the properties affected by such defects may be challenged, which could adversely affect our business.
As of December 31, 2021, we lease 15 premises in China and overseas, including our headquarters in Guangzhou. As to some of our leased properties, our landlords did not provide us with sufficient property title certificates or other supporting documents to prove ownership of the leased properties. We also lease some properties constructed on lands allocated by government on certain conditions. The lease of structures on allocated lands shall meet relevant requirements and be approved by the competent authorities. If our landlords’ ownership of the leased properties is successfully challenged by a third party or our landlords lease the relevant properties on allocated lands without approval, our lease agreements may not be enforceable and we may be forced to vacate the premise and relocate to a different premise. We cannot assure you that we will cause all of our landlords to provide sufficient property title certificates and obtain approvals in time, or at all, and if we have to relocate, our business may be disrupted and we may incur additional expenses. Some of such landlords have not registered the lease agreements with the government authorities or have not completed the registration process with respect to their ownership rights to the leased premises. We may be subject to monetary fines due to failure by the landlords to complete the registration process as required by applicable laws.
We may also be forced to relocate our operations if the landlords do not obtain valid title and approvals to or complete the required registrations with local housing authorities in a timely manner or at all. We might not be able to locate desirable alternative sites for our operations in a timely and cost-effective manner which may adversely affect our business.
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 China-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain
PRC-based
companies that are publicly traded in the United States.
60

Table of Contents
On January 22, 2014, the administrative law judge, or the ALJ, 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.
On February 6, 2015, the four China-based accounting firms each 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 audit U.S.-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 China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding
PRC-based,
United States-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 not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
Risks Related to our American Depositary Shares
Our ADSs have experienced and may continue to experience price and volume fluctuations regardless of our operating performance, which could lead to costly litigation for us and make an investment in us less appealing.
Stock markets are subject to significant price and volume fluctuations that may be unrelated to the operating performance of particular companies and the market price of our ADSs may therefore frequently change as a result. For example, during the year ended December 31, 2021, the high and low closing prices of our ADSs were US$15.8 and US$1.6 per ADS, respectively, and the closing price of our ADSs on February 28, 2022 was US$1.41 per ADS. Meanwhile, our net revenues during the fiscal year 2021 increased by 41.0% from the prior year and our net loss increased from RMB82.2 million in 2020 to RMB127.3 million in 2021. The market price of our ADSs have fluctuated and may continue to fluctuate substantially due to a variety of factors, including our financial condition, operating performance, quarterly fluctuations in our results of operations, our ability to execute on our current growth strategy in a timely fashion, announcements about technological innovations or new products or services by us or our competitors, market acceptance of new products and services offered by us, changes in our relationships with our suppliers or customers, our ability to meet analysts’ expectations, changes in the information technology environment, changes in earnings estimates by analysts, sales of our ADSs by existing holders, and the loss of key personnel. Possible exogenous incidents and trends may also impact capital markets and our own ADS prices, including but not limited to foreign and cross border altercations, political unrest, geopolitical conflict, pandemic and cyberterrorism on a global scale.
The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control or regardless of our operating performance. 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 our ADSs may be highly volatile for factors specific to our own operations, including the following:

| • |  | variations in our revenues, earnings, cash flow and data related to our user base or user engagement;

61

Table of Contents

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

| • |  | announcements of new product and service offerings, solutions and expansions by us or our competitors;

| • |  | changes in financial estimates by securities analysts;

| • |  | detrimental adverse publicity about us, our products and services or our industry;

| • |  | additions or departures of key personnel;

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

| • |  | potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade. In particular, since the
COVID-19
outbreaks, concerns over the economic slowdown resulting from the
COVID-19
have led to a significant decrease in the major indices of the U.S. capital markets and an increase in the market volatility, which have, and may continue to have, adversely affected the market price of our ADSs. For risks related to the
COVID-19,
see “—Risks Related to Our Business and Industry—We face risks related to the outbreak of
COVID-19.”
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our business, financial condition and results of operations.
Under our dual-class share structure with different voting rights, holders of Class B ordinary shares have complete control of the outcome of matters put to a vote of shareholders, which may limit ability of holders of our Class A ordinary shares and the ADSs to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial.
We have adopted a dual-class share structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 10 votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person who is not a Founder or an affiliate of a Founder, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. There is no limit on the circumstances where holders of Class B ordinary shares may transfer or otherwise dispose of their Class B ordinary shares. As of February 28, 2022, two of our directors, Mr. Jinnan (Marco) Lai and Mr. Ning Ding, beneficially own all of our issued Class B ordinary shares. They in the aggregate hold approximately 24.2% of our total issued and outstanding share capital and 75.2% of the aggregate voting power of our total issued and outstanding share capital, excluding 9,020,630 Class A ordinary shares held by Kastle Limited, which holds such Class A ordinary shares in trust for the benefit of certain of our senior management and directors as of February 28, 2022. As a result of this dual-class share structure, the holders of our Class B ordinary shares have complete control over the outcome of matters put to a vote of shareholders and have significant influence over our business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. The holders of Class B ordinary shares control the outcome of a shareholder vote (i) with respect to matters requiring an ordinary resolution which requires the affirmative vote of a simple majority of shareholder votes; and (ii) with respect to matters requiring a special resolution which requires the affirmative vote of no less than
two-thirds
of shareholder votes. The holders of Class B ordinary shares may take actions that are not in the best interest of us or our other shareholders or holders of the ADSs. It may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. This concentrated control will limit the ability of the holders of our Class A ordinary shares and the ADSs to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
62

Table of Contents
The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs.
S&P Dow Jones and FTSE Russell have recently announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.
Our ADSs may become the target of a “short squeeze”.
In recent months, securities of certain companies have increasingly experienced significant and extreme volatility in stock price due to short sellers of shares of common stock and
buy-and-hold
decisions of longer investors, resulting in what is sometimes described as a “short squeeze.” Short squeezes have caused extreme volatility in those companies and in the market and have led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company. Sharp rises in a company’s stock price may force traders in a short position to buy the stock to avoid even greater losses. Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as interest in those stocks have abated. We may be a target of a short squeeze, and investors may lose a significant portion or all of their investment if they purchase our ADSs at a rate that is significantly disconnected from our underlying value.
Because we do not expect to pay dividends in the foreseeable future, 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 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 board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. 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, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value 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.
63

Table of Contents
The sale or 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, or the perception that these sales could occur, could cause the market price of our ADSs to decline. The ADSs representing our ordinary shares sold in our initial public offering are freely transferable by persons other than our “affiliates” without restriction or further registration under the Securities Act. The remaining ordinary shares outstanding will be available for sale, upon the expiration of a
180-day
lock-up
period beginning from our initial public offering, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. To the extent ordinary shares are sold into the market, the market price of the ADSs could decline.
Certain holders of our Class A ordinary shares may cause us to register under the Securities Act the sale of their shares. 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 the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.
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 which are represented by your ADSs.
As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares representing 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 representing your ADSs in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares representing your ADSs unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. Under our Second Amended and Restated Memorandum and Articles of Association, the minimum notice period required for convening a general meeting is seven days. When a general meeting is convened, you may not receive sufficient advance notice enable you to withdraw the shares underlying your ADSs and become the registered holder of such shares prior to the record date of the general meeting to allow you to vote with respect to any specific matter. In addition, under our Second Amended and Restated Memorandum and Articles of Association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will use its best endeavors to notify you of the upcoming vote and 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 shares underlying your ADSs are not voted as you requested.
Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote the Class A ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.
Under the deposit agreement for the ADSs, if you do not timely and properly give voting instructions to the depository as to how to vote the Class A ordinary shares underlying your ADSs, the depositary will give us or our nominee a discretionary proxy to vote the Class A ordinary shares underlying your ADSs at shareholders’ meetings unless:
64

Table of Contents

| • |  | we have failed to timely provide the depositary with notice of 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;

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

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

The effect of this discretionary proxy is that if you do not timely and properly give voting instructions to the depository as to how to vote the Class A ordinary shares underlying your ADSs at shareholders’ meetings, you cannot prevent such Class A ordinary shares underlying 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.
Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.
Under the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted in a state or federal court in New York, New York, and you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding. However, the depositary may, in its sole discretion, require that any dispute or difference arising from the relationship created by the deposit agreement be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreement. The arbitration provisions in the deposit agreement do not preclude you from pursuing claims under federal securities laws in federal courts. Also, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with 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, or by a federal or state court in the City of New York, which has
non-exclusive
jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual
pre-dispute
jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be 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 investing in the ADSs.
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. 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, including outcomes that could be less favorable to the plaintiff(s) in any such action.
65

Table of Contents
Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make such rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.
You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, Class A ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class A ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that 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 in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to.
66

Table of Contents
Certain judgments obtained against us by our shareholders may not be enforceable.
We are an exempted company limited by shares 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, a majority of our directors and executive officers reside within China and are nationals of countries other than the United States, all of our directors and officers are located outside of the Cayman Islands, and most of the assets of these persons are located within China. Service of court documents on a Cayman Islands company can be effected by serving the documents at the company’s registered office and it may be possible to enforce foreign judgments in the Cayman Islands against a Cayman Islands company, subject to some exceptions. However, if investors wish to serve documents on and/or enforce foreign judgments against our directors and officers, they will need to ensure that they comply with the rules of the jurisdiction where the directors and officers are located. As a result, it may be difficult or impossible for you to effect service of process within the United States upon these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe 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 the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers, depending on where the directors and officers are located.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
Our Second Amended and Restated Memorandum and Articles of Association contain certain provisions to limit the ability of others to acquire control of our company or cause us to engage in
change-of-control
transactions, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and ADSs holders of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.
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 limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our Second Amended and Restated Memorandum and Articles of Association, the Companies Act (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are governed by the Second Amended and Restated Memorandum and Articles of Association, the Companies Act (as amended) and 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 and Wales, the decisions of the English courts are of highly persuasive authority, but are not binding, on a court in the Cayman Islands (except for those decisions handed down from the Judicial Committee of the Privy Council to the extent that these have been appealed from the Cayman Islands courts). The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are broadly similar to those in other common law jurisdictions, but there may be differences in the statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws than the United States. In addition, if shareholders want to proceed against the Company outside of the Cayman Islands, they will need to demonstrate that they have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders (not being a director) of Cayman Islands exempted companies with limited liability like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our Second Amended and Restated Memorandum and Articles of Association, to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.
We are an emerging growth company 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 various 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 Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company until the fifth anniversary from the date of our initial listing. 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.
67

Table of Contents
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. Pursuant to the JOBS Act, we have elected to take advantage of the benefits of this extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.
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, which may adversely affect our financial condition and results of operations.
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 Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form
6-K.
However, the information we are required to file with or furnish to the SEC will be less extensive and less timely 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.
As a Cayman Islands exempted company listed on Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, Nasdaq 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 Nasdaq corporate governance listing standards. For example, neither the Companies Act (As Revised) of the Cayman Islands nor our Memorandum and Articles requires a majority of our directors to be independent and we could include
non-independent
directors as members of our compensation committee and nominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. We follow home country practice with respect to annual general meetings and do not hold an annual general meeting of shareholders every year. If we choose to follow other home country practice in the future, our shareholders may be afforded less protection than they otherwise would under Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.
68

Table of Contents
We are a “controlled company” within the meaning of the rules of the Nasdaq and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
We are a “controlled company” as defined under the rules of the Nasdaq since our founders, Mr. Jinnan (Marco) Lai and Mr. Ning Ding, beneficially owns more than 50% of our total voting power. For so long as we remain a controlled company under this definition, we are permitted to elect to rely, and currently we intend to rely, on certain exemptions from corporate governance rules, including the exemption from the rule that a majority of our board of directors must be independent directors. As a result, you may not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
As an exempted company incorporated in the Cayman Islands with limited liability, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards.
As an exempted company incorporated in the Cayman Islands company with limited liability that is listed on the Nasdaq, we are subject to the Nasdaq corporate governance listing standards. However, Nasdaq 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 Nasdaq corporate governance listing standards. We have relied on and plan to rely on home country practice with respect to our corporate governance. Specifically, we do not plan to have a majority of independent directors serving on our board of directors or to establish a nominating committee and a compensation committee composed entirely of independent directors. For details, please refer to “Item 6. Directors, Senior Management and Employees—6.C. Board Practices—Board of Directors” and “Item 16.G—Corporate Governance.” As a result, our shareholders may be afforded less protection than they otherwise would enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.
Although we believe we were not a passive foreign investment company, or PFIC, for 2021, there is a significant risk that we will be a PFIC for 2022 and possibly future taxable years, which could result in adverse U.S. federal income tax consequences to U.S. investors in the ADSs or ordinary shares.
In general, a
non-U.S.
corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income; or (ii) 50% or more of the value of its assets (generally determined on an average quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a
non-U.S.
corporation that owns (or is treated as owning for U.S. federal income tax purposes), directly or indirectly, at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive asset for these purposes. Goodwill (the value of which may be determined by reference to the excess of the sum of the corporation’s market capitalization and liabilities over the value of its assets) is generally characterized as a
non-passive
or passive asset based on the nature of the income produced in the activity to which the goodwill is attributable.
Based on the composition of our income and assets and the estimated value of our assets, including goodwill, which is based on the average price of the ADSs during 2021, we believe that we were not a PFIC for our taxable year ended December 31, 2021. However, our PFIC status for any taxable year is an annual factual determination that can be made only after the end of that year and depends on the composition of our income and assets and the value of our assets from time to time. We hold a substantial amount of cash and while that continues to be the case our PFIC status for any taxable year will depend primarily on the average value of our goodwill. The value of our goodwill may be determined, in large part, by reference to our market capitalization. Because our market capitalization has generally declined since our initial public offering (including in 2021 and recent months), if the value of our goodwill is determined by reference to our market capitalization, there is a significant risk that we will be a PFIC for our taxable year 2022, and possibly future taxable years. Moreover, it is not entirely clear how the contractual arrangements between our WFOEs, the VIEs and the shareholders of the VIEs will be treated for purposes of the PFIC rules, and we may be or become a PFIC if the VIEs are not treated as owned by us for these purposes. In addition, the extent to which our goodwill should be characterized as an active asset is not entirely clear. For these reasons, there is a risk (which depending on market conditions may be substantial) that we will be a PFIC for our current or any future taxable year.
69

Table of Contents
If we were a PFIC for any taxable year during which a U.S. taxpayer holds ADSs or ordinary shares, the U.S. taxpayer generally would be subject to adverse U.S. federal income tax consequences, including increased tax liability on disposition gains and “excess distributions,” and additional reporting requirements. This would continue to be the case even if we ceased to be a PFIC for a subsequent taxable year, unless a U.S. investor made certain elections. See “Item 10. Additional Information—10.E. Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
We have incurred and will continue to incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
As a public company, we are incurring and expect to continue to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. 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. For example, as a public company, we need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We and certain of our directors and officers have been named as defendants in several shareholder class action lawsuits, which could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.” 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 business, financial condition and results of operations.

ITEM 4. | INFORMATION ON THE COMPANY

4.A. History and Development of the Company
Corporate History
We commenced operations in 2010 with the establishment of Guangzhou Lizhi.
In November and October 2010, each of Lizhi Holding Limited and LIZHI INC., our wholly owned subsidiaries, was incorporated in Hong Kong and the British Virgin Islands, respectively.
In March 2011, Beijing Hongyiyichuang Information Technology Co., Ltd., or Hongyi Technology, our wholly owned subsidiary, was established in the PRC. In March 2011, due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services and certain other businesses, Hongyi Technology entered into a series of contractual arrangements, as supplemented and amended, with Guangzhou Lizhi and then shareholders of Guangzhou Lizhi, by which Hongyi Technology may exert control over Guangzhou Lizhi and consolidate Guangzhou Lizhi’s financial statements under U.S. GAAP. For details, please refer to “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders.”
In October 2013, we launched our LIZHI App operated by Guangzhou Lizhi.
70

Table of Contents
In November and December 2015, each of Changsha Limang Interactive Entertainment Co., Ltd., or Changsha Limang, and Huai’an Lizhi Network Technology Co., Ltd., or Huai’an Lizhi, was established in the PRC, respectively. In March 2017, Wuhan Lizhi Network Technology Co., Ltd., or Wuhan Lizhi, was established in the PRC. In January, February and April 2019, each of Guangzhou Moyin Network Technology Co., Ltd., Guangzhou Teqi Network Technology Co., Ltd. and Chongqing Piwan Network Technology Co., Ltd. was established in the PRC, respectively. These entities are wholly and directly held by Guangzhou Lizhi and provide supporting services to our apps.
In July 2016, Guangzhou Huanliao Network Technology Co., Ltd., was established in the PRC by Guangzhou Lizhi. In March 2019, Guangzhou Tiya, our wholly owned subsidiary, was established in the PRC. In May 2019, Guangzhou Tiya entered into a series of contractual arrangements with Guangzhou Huanliao and then shareholder of Guangzhou Huanliao, by which Guangzhou Tiya may exert control over Guangzhou Huanliao and consolidate Guangzhou Huanliao’s financial statements under U.S. GAAP. For details, please refer to “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders.”
As such, we refer to each of Hongyi Technology and Guangzhou Tiya as our wholly foreign owned entity, or WFOE, and to each of Guangzhou Lizhi and Guangzhou Huanliao as our variable interest entity, or VIE, in this annual report.
In January 2019, LIZHI INC., our current ultimate holding company, was incorporated under the laws of the Cayman Islands as part of the restructuring transactions in contemplation of our initial public offering. In connection with its incorporation, in March 2019, we completed a share swap transaction and issued ordinary and preferred shares of LIZHI INC. to the then existing shareholders of LIZHI INC., or Lizhi BVI, a company incorporated under the laws of the British Virgin Islands, based on their then respective equity interests held in Lizhi BVI. Lizhi BVI then became our wholly owned subsidiary.
NASHOR PTE. LTD. (formerly known as SUGAR CHAT PTE. LTD.) was incorporated in April 2019 and TIYA PTE. LTD. was incorporated in July 2019 under the laws of Singapore for the purposes of carrying out our overseas operations.
We are a holding company and do not directly own any substantive business operations in the PRC. We currently focus our business operations within the PRC through the VIEs, Guangzhou Lizhi and Guangzhou Huanliao. See “Item 3. Key Information—3.D. Risk Factors —Risks Related to Our Corporate Structure.” Guangzhou Lizhi and Guangzhou Huanliao and their respective subsidiaries hold our ICP License, Internet Culture Operation License, Radio and Television Program Production and Operating Permit, and other licenses or permits that are necessary for our business operations in the PRC.
In January 2020, we completed an initial public offering in which we offered and sold an aggregate of 82,000,000 Class A ordinary shares in the form of ADSs. On January 17, 2020, the ADSs have been listed on the Nasdaq Global Market under the symbol “LIZI.”
In October 2020, we launched TIYA App operated by TIYA PTE. LTD. In January 2021, we launched LIZHI Podcast operated by Guangzhou Lizhi.
We raised approximately US$30,000,002 of gross proceeds before deducting placement agent fees and other offering expenses through a
follow-on
offering in April 2021.
Corporate Information
Our principal executive offices are located at Yangcheng Creative Industry Zone, No. 309 Middle Huangpu Avenue, Tianhe District, Guangzhou 510655, People’s Republic of China. Our telephone number at this address is +86 20 8381-8791. Our registered office in the Cayman Islands is located at the offices of Osiris International Cayman Limited, Suite
#4-210,
Governors Square, 23 Lime Tree Bay Avenue, PO Box 32311, Grand Cayman
KY1-1209,
Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc. located at 10 E. 40th Street, 10th Floor, New York, NY 10016. Our corporate website is www.lizhi.fm. The information contained in our website is not a part of this annual report.
71

Table of Contents
The SEC maintains an internet site at http://www.sec.gov that contains reports, information statements, and other information regarding issuers that file electronically with the SEC.
Recent Regulatory Development Regarding Cybersecurity
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect on September 1, 2021.The Data Security Law introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed, leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective category of data. The Data Security Law also requires data processing operators to establish a sound data security management system throughout the whole process, organize data security education and training, and take corresponding technical measures and other necessary measures to ensure data security.
On December 28, 2021, the CAC, the NDRC, the MIIT, and several other PRC governmental authorities jointly issued the Cybersecurity Review Measures, which took effect on February 15, 2022. Pursuant to Cybersecurity Review Measures, in addition to “critical information infrastructure operators”, network platform operators engaging in data processing activities that affect or may affect national security are subject to cybersecurity review under the Cybersecurity Review Measures. In addition, network platform operators who possess personal information of more than one million users, and intend to be listed at a foreign stock exchange must be subject to the cybersecurity review.
On October 29, 2021, the CAC has publicly solicited opinions on the Measures for the Security Assessment of Data Cross-border Transfer (Draft for Comments), which requires that any data processor providing important data collected and generated during operations within the territory of the PRC or personal information that should be subject to security assessment according to law to an overseas recipient shall conduct security assessment.
On November 14, 2021, the CAC published the Draft Measures for Internet Data Security, which provides that data processors conducting certain activities must apply for cybersecurity review, including, among others, merger, reorganization or separation of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests affects or may affect national security and listing abroad of data processors processing over one million users’ personal information. The Draft Measures for Internet Data Security also requires data processors processing over one million users’ personal information to comply with the regulations on important data processors, including, among others, appointing a person in charge of data security and establishing a data security management organization, filing with the competent authority within fifteen working days after identifying its important data, formulating data security training plans and organizing data security education and training for all staff every year, and that the education and training time of data security related technical and management personnel shall not be less than 20 hours per year. The Draft Measures for Internet Data Security also provides that data processors processing important data or going public overseas shall conduct an annual data security assessment by themselves or entrust a data security service institution to do so, and submit the data security assessment report of the previous year to the local branch of CAC before January 31 of each year. As advised by our PRC legal counsel, the Draft Measures for Internet Data Security have not been adopted and it remains unclear whether the formal version adopted in the future will have any further material changes, it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect us. We cannot predict the impact of the draft measures, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If a final version of the Draft Measures for Internet Data Security is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing. In addition, if the enacted version of the Draft Measures for Internet Data Security mandates clearance of cybersecurity review and other specific actions to be completed by China-based companies that have been listed on overseas stock exchange, such as us, we face uncertainties as to whether we could obtain such clearance in a timely manner, or at all. During such review, we may be required to suspend providing any existing or new services to our customers and/or experience other disruptions of our operations, and such review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources.
72

Table of Contents
As of the date of this annual report, we have not been involved in any investigations or become subject to a cybersecurity review initiated by the CAC based on the Cybersecurity Review Measures, and we have not received any inquiry, notice, warning, sanctions in such respect or any regulatory objections to our listing status from the CAC.
Potential CSRC Approval Required for the Listing of our ADSs
On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and supervision on overseas listings by China-based companies and propose to take effective measures, such as promoting the development of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies.
On December 24, 2021, the CSRC published the Draft Overseas Listing Administration Provisions and the Draft Overseas Listing Filing Measures for public comments. Pursuant to these drafts, PRC domestic companies that directly or indirectly offer or list their securities in an overseas market, including a PRC company limited by shares and an offshore company whose main business operations are in China and intends to offer shares or be listed in an overseas market based on its onshore equities, assets or similar interests, are required to file with the CSRC within three business days after submitting their listing application documents to the regulator in the place of intended listing. The Draft Measures also provide that a PRC domestic company must file with the CSRC within three business days for its follow on offering of securities or issue of securities to purchase assets after it is listed in an overseas market. However, there is no timetable as to when these drafts will be enacted.
As of the date of this annual report, the Draft Overseas Listing Administration Provisions and the Draft Overseas Listing Filing Measures have not been formally adopted, and no other official guidance and related implementation rules have been issued in relation to the aforesaid recently issued opinions and the interpretation and implementation of these opinions remain unclear at this stage. We cannot assure you that we will not be required to obtain the approval of the CSRC or of potentially other regulatory authorities to maintain the listing status of our ADSs on the Nasdaq or to conduct offerings of securities in the future. We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC, the CAC, or other PRC regulatory authorities required for overseas listings. As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory objection from the CSRC.
Contractual Arrangements and Corporate Structure
We are a Cayman Islands company and currently conduct substantially all of our business operations in the PRC through the VIEs, Guangzhou Lizhi and Guangzhou Huanliao, due to PRC legal restrictions on foreign ownership in value-added telecommunication services and other internet related business. We control Guangzhou Lizhi and Guangzhou Huanliao, the VIEs, through a series of contractual arrangements. We conduct a significant portion of our businesses in China through Guangzhou Lizhi and Guangzhou Huanliao. It is the VIEs that hold our key operating licenses, provide services to our customers, and enter into contracts with our suppliers. These contractual arrangements entered into with the VIEs allow us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests in the VIEs when and to the extent permitted by PRC law. These contractual arrangements include the operation agreement, equity pledge agreement, exclusive equity transfer option agreement, exclusive technical consulting and service agreement, etc., as the case may be. As a result of these contractual arrangements, we exert effective control over, and are considered the ultimate primary beneficiary of, the VIEs and consolidate their operating results in our financial statements under U.S. GAAP.
We do not have any equity interests in the VIEs who are owned by certain nominee shareholders. As a result, control through these contractual arrangements may be less effective than direct ownership, and we could face heightened risks and costs in enforcing these contractual arrangements, because there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the legality and enforceability of these contractual arrangements. If the PRC government finds such agreements to be illegal, we could be subject to severe penalties or be forced to relinquish our interests in the VIEs.
73

Table of Contents
Material Licenses and Permits
Our PRC subsidiaries and the VIEs have obtained all material licenses and approvals required for our operations in China, excepts as disclosed in “Item 3. Key Information—3.D. Risk Factors- Risks Related to Our Business and Industry—If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected.” If our PRC subsidiaries and the VIEs 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.
74

Table of Contents
Restrictions on Foreign Exchange and the Ability to Transfer Cash between Entities, Across Borders and to U.S. Investors
In the future, if and when we become profitable, LIZHI Inc’s ability to pay dividends, if any, to its shareholders and ADS holders and to service any debt it may incur will depend upon dividends paid by our PRC subsidiaries. Under PRC laws and regulations, our PRC subsidiaries are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets offshore to LIZHI Inc. In particular, under the current effective PRC laws and regulations, dividends may be paid only out of distributable profits. Distributable profits are the net profit as determined under PRC GAAP, less any recovery of accumulated losses and appropriations to certain surplus or reserve funds required to be made. Each of our PRC subsidiaries 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 the statutory surplus fund or general reserve fund, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our PRC subsidiaries may not have sufficient distributable profits to pay dividends to us in the near future.
Furthermore, if certain procedural requirements are satisfied, the payment of current account items, including profit distributions and trade and service related foreign exchange transactions, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange (the “SAFE”) or its local branches. However, where RMB 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, approval from or registration with competent government authorities or its authorized banks is required. The PRC government may take measures at its discretion from time to time to restrict access to foreign currencies for current account or capital 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 offshore intermediary holding companies or ultimate parent company, and therefore, our shareholders or investors in our ADSs. Further, we cannot assure you that new regulations or policies will not be promulgated in the future, which may further restrict the remittance of RMB into or out of the PRC. We cannot assure you, in light of the restrictions in place, or any amendment to be made from time to time, that our current or future PRC subsidiaries will be able to satisfy their respective payment obligations that are denominated in foreign currencies, including the remittance of dividends outside of the PRC. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to LIZHI Inc. In addition, our PRC subsidiaries are required to make appropriations to the statutory surplus fund or general reserve fund, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies.
For PRC and United States federal income tax consideration of an investment in the ADSs, see “Item 10. Additional Information—10.E. Taxation.”
Implication of the Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA 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 United States. On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditors are subject to the determinations. Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the PRC authorities, our auditor is currently not inspected by the PCAOB. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. The PCAOB is currently unable to inspect our auditors in relation to their audit work performed for our financial statements and inability of the PCAOB to conduct inspections over our auditors deprives our investors with the benefits of such inspections. For the details of the risks associated with the enactment of the HFCAA, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China— Our ADSs will be delisted and prohibited from trading in the
over-the-counter
market under the Holding Foreign Companies Accountable Act, if the PCAOB continues to be is unable to inspect or fully investigate auditors located in China. On December 16, 2021, the PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely. Under the current law, delisting and prohibition from
over-the-counter
trading in the U.S. will take place in 2024. If this happens there is no certainty that we will be able to list our ADS or shares on a
non-U.S.
exchange or that a market for our shares will develop outside of the U.S. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
75

Table of Contents
4.B. Business Overview
We have created a comprehensive audio-based social ecosystem with a global presence. Through our product portfolio and with the support of our
in-house
technology, we aim to cater to users’ interests in audio entertainment and social networking.
We have built a highly-engaged user base with our product portfolio. The average total mobile monthly active users increased to 58.4 million in 2021 from 56.2 million in 2020 and 45.7 million in 2019. The average total monthly paying users increased to 488.0 thousand in 2021 from 446.1 thousand in 2020 and 351.7 thousand in 2019. We generate net revenues through virtual gift sales in relation to audio entertainment, as well as podcast, advertising and others. Our total net revenues increased to RMB2,119.5 million in 2021 from RMB1,502.9 million in 2020 and RMB1,180.6 million in 2019. Audio entertainment services currently contributes the largest share of our revenues.
Audio Entertainment
Our audio entertainment service includes a variety of audio-centric, interactive products and features that are intended to drive user engagement and create attractive monetization opportunities. The average mobile monthly active users for audio entertainment increased to 8.99 million in 2021 from 7.81 million in 2020 and 5.73 million in 2019.
Within our product portfolio, our flagship app LIZHI App has become a leading audio entertainment platform in China. We launched audio live streaming as our first audio entertainment product feature on LIZHI App in 2016, making it possible for our users to enjoy a multi-dimensional, interactive audio experience. We offer a number of categories of audio entertainment content, such as social, talk shows, music, ACG and audio book. Our content creators or hosts can easily start an audio live streaming on our platforms, personalize and manage their channels and analyze user data with the help of our technology and data analytics. Our users are encouraged to interact with voices via our interactive audio products with hosts and with each other.
With user interactions built into every audio content, live streaming and interactive audio entertainment features and products, our users not only listen to audio contents on our platforms, but also create, store, discover, and share audio contents and interact with each other through different audio entertainment channels. Through our audio entertainment services, such as audio livestreaming and multi-user on air dialogue, users can follow their favorite content creators and channels and interact with others through various interactive features, and even become a content creator or a host themselves and create their own audio content and perform in audio live streaming programs. We believe this audio-centric interaction is a natural extension of the power of voices that connects and inspires.
Social Networking
In October 2020, we launched TIYA App, a real-time social networking product, in the United States, aiming to expand our overseas presence. TIYA App provides dynamic and interactive experience to connect friends and users with similar interests globally. Featuring a live social networking experience, TIYA App encourages real-time conversations in a relaxing atmosphere inspired by the emotion delivered by human voices. As of the date of this annual report, we have not launched TIYA App in China mainland.
We have introduced various innovative functions and features on TIYA App since its launch, such as mini games, screen sharing and interest groups. These features are designed to enable users to participate in various online social activities, including teaming up to play mobile games, sharing screens as they watch a movie or video, discussing a topic, learning a subject together or chatting online. These features are intended to reinforce users’ friendship in a virtual community and enhance the online social experience.
76

Table of Contents
Podcast and
in-car
Audio
Currently, we provide podcast services mainly via two of our platforms, LIZHI App and LIZHI Podcast. Users can access our LIZHI App and LIZHI Podcast on their mobile devices and our
in-car
audio products to listen to an abundance of audio content.
Since its launch in 2013, LIZHI App is dedicated to building an audio community that allows users to create, share, discover, and listen to audio content, and enjoy an immersive and interactive audio entertainment experience. LIZHI App is a
one-stop
mobile platform for users to discover and enjoy a wide range of content. While most of our podcasts are free, a very small portion of our content is available upon purchase. We share a portion of such revenue with content creators.
We launched the LIZHI Podcast in January 2021. LIZHI Podcast features curated content drawn from our extensive library built over the years as well as new podcasts from selected content creators. Moreover, in April 2021, we launched the Livestream Podcast feature on the LIZHI Podcast, an innovative feature that combines the podcasts with interactions and allows the content creators and audience to have organic conversations and interactions.
Apart from the mobile apps, we are also exploring the
in-car
audios as another use scenario to leverage our large content library. Since December 2020, we have entered into collaboration relationship with a number of leading automobile companies in China and provided access to an
in-car
version of LIZHI Podcast on certain of the automobiles that such companies manufacture. We also worked with the operator of various Internet of Vehicles platforms to provide access to our audio products on such platforms. Our
in-car
audio partners consist of a number of major automobile manufacturers in China, including XPeng Motors, Li Auto, and WM Motor, as well as Internet of Vehicles platforms, including BYD DiLink, Tencent WeScenario, Huawei Mobile Services for Car and Huawei HarmonyOS.
Content Creation
We strive to provide a diverse range of
pre-recorded
audio content and real-time audio content on our platforms. Our content offerings cover a wide array of categories. A significant portion of our audio content is generated by our users. By providing innovative audio technologies and enriching audio entertainment features on our platforms, we encourage users to make audio content and engage in audio entertainment activities, such as audio live streaming and interactive audio features, to connect with each other. We hope to inspire everyone to be a content creator, and promote the popularity of our content creators through online and offline activities.
In-house
Technology
DOREME, our
in-house
real-time streaming technology solution, provides real-time communication (RTC) technology support for our various products, aiming to ensure a stable and smooth audio experience. Such technology is designed to reduce voice delay, enhance the audio quality, and accordingly make real-time multi-user
on-air
interaction a smoother audio listening experience. In addition, DOREME supports the audio live streaming feature across different usage scenarios and improves compatibility of our podcast products with external
in-car
operating systems and Internet of Vehicles platforms. We have also created proprietary voice engineering features such as 3D recording, noise reduction, as well as voice beautification and synthesis.
We have also introduced VoderX in early 2022, our
in-house
instant messaging (IM) technology, to provide the technology infrastructure framework that allows tailored technology support to a growing number of interactive and social networking products.
77

Table of Contents
Monetization
We generate net revenues through virtual gift sales in relation to audio entertainment, as well as podcast, advertising and others.
Virtual gift sales
At current stage, we strategically offer most of our podcast contents for free to create a loyal and engaged audio ecosystem, which we believe is essential in expanding our user base and may provide monetization potential through audio entertainment, as well as podcast, advertising and others. We derive most of our net revenues from virtual gift sales in relation to our audio entertainment, which can be purchased by users using our virtual currency,
Golden Coins
. In 2019, 2020 and 2021, we generated RMB1,167.9 million, RMB1,481.1 million, and RMB2,101.5 million (US$329.8 million) from virtual gift sales to users of our audio entertainment products, representing 98.9%, 98.6% and 99.1% of our total net revenues for the same periods. In 2021, we had approximately 486.9 thousand average audio entertainment paying users on our apps.
Users can purchase virtual gifts on our platforms using our virtual currency and send them to content creators as a gesture of appreciation or support. Users can purchase the virtual currency on our site via various online third-party payment platforms. However, virtual currency is
non-refundable
and may not be converted back to cash.
Podcast, advertising and others
We generate a small portion of our net revenues from offering paid audio content to our users and advertising and marketing solutions to our business customers. In 2019, 2020 and 2021, we generated RMB12.7 million, RMB21.8 million and RMB18.0 million (US$2.8 million) from podcast, advertising and others, representing 1.1%, 1.4% and 0.9% of our total net revenues for the same periods.
Content Monitoring System
We have developed the following mechanisms to ensure that the content on our platforms comply with the relevant laws and regulations and promotes our core value propositions. However, the mechanisms we implement specifically will depend on the local laws and regulations in the markets we operate:

| • |  | Automatic content filtering . We utilize automatic text and audio analytical tools to identify illegal, inappropriate and potentially infringing content contained in audio pieces and texts uploaded to our platforms. Once a risk is identified, the system will send the underlying content to our content monitoring team for manual review.

| • |  | Manual review . We have a dedicated content monitoring team primarily consisting of staff outsourced from third parties, to manually review automatic detection results. The content monitoring team, managing and being complementary to the AI technology, also proactively screen all uploaded content, live streaming flows and interactive audio products.

| • |  | Real-name registration and user undertakings . We apply a real-name registration system to verify the identities of hosts primarily based on their mobile phone numbers for our apps in China. In addition, we have upgraded some of our platforms to require users to acknowledge and agree to the terms and conditions of our platforms before each upload. Pursuant to such user agreement, each user will undertake not to upload or distribute any content that violates any local laws or regulations or infringes any third-party intellectual property rights, and agree to indemnify losses claimed by any third party caused by any content uploaded or live-streamed by such user.

| • |  | Report by users . Our users may report any inappropriate, offensive or illegal content by clicking the “Report” button on the platforms. We also require hosts and guilds to monitor activities in their own broadcast rooms, to ensure that all content podcasted complies with our service terms. We also recruit frequent users to sign up as the supervisors on our platforms and report to us the illegal or improper content or activities that they encounter with.

78

Table of Contents

| • |  | Regular review of content . Apart from monitoring the day-to-day activities on our platforms, we also deploy third-party software and technology to screen and eliminate inappropriate or illegal content on our platforms. Our AI technology is also strengthened to detect inappropriate or illegal content stored on our servers. If any improper or illegal content is detected, we will permanently delete such content from our platforms.

If we detect minor violations, we will intervene and rectify by deleting relevant content and images, post warning, close or suspend user accounts, and conduct
follow-up
reviews. For severe violations, we will temporarily or permanently close down relevant user or host accounts.
User Data Security and Cyber Security
We store our user data in encrypted form, and only allows access from our company’s intranet. Access to our servers that store our user and internal data is limited to a
“need-to-know”
basis and there are strict internal rules and policy in place to govern how we may access and use user data. From time to time we check firewalls and operation systems to ensure there is no breach. We also work with leading data security companies to implement and test data security measures. As of the date of this annual report, there has not any breach of user data that has a material impact on our operations. Our data is backed up in our long-distance disaster recovery system, so as to minimize the possibility of data losses or breaches. Upon a security breach, our technical team will be notified immediately and coordinate with the local supporting staff to diagnose and solve the technical problems. As of the date of this annual report, we have not experienced any material incidents of security breach.
Sales, Branding and Marketing
We rely on organic user growth through leveraging our well-established brand and
word-of-mouth
referrals. Through our superior user experience and high-quality service offerings, we have built a strong brand awareness among users. Our sales, branding and marketing activities also comprise user acquisition activities through online marketing channels including mobile advertising platforms and other online advertising networks. We also conduct branding and promotional activities through various online and offline events.
Competition
Online audio is an emerging industry in China. As one of the leading players in this market, we face competition from providers of similar services. Other online audio platforms in the online audio market and the interactive audio entertainment market, compete directly with us for content and users. The interactive audio entertainment market is a subset of the online audio market which has interactive features. We are also facing the competition from other audio-based social networking service providers in the international markets where we operate.
In addition, we compete with other large online video platforms, social media platforms, social networking platforms and other platforms offering online entertainment services. We believe that our ability to compete effectively for users depends upon many factors, including the quality and variety of our content, user experience on our platforms, ability to retain top hosts, capability to adjust to changes in technology and customer tastes and the strength of our brands.
Intellectual Property
We regard our intellectual property rights as critical to our operations. We rely on a combination of patents, copyrights, trademarks and trade secret laws to protect our intellectual property. As of December 31, 2021, we had registered:

| • |  | 430 trademarks in China;

| • |  | 396 trademarks in Hong Kong and other jurisdictions;

79

Table of Contents

| • |  | 80 domain names, including lizhi.fm;

| • |  | 49 patents in China; and

| • |  | 99 software copyrights in China, relating to all of our online communities and other products.

As of December 31, 2021, we had 117 pending trademark applications in China and overseas. In addition, we are in the process of applying for registration of another 57 patents in China. Most of our intellectual property is owned by Guangzhou Lizhi, and certain trademarks, copyrights and domain names are owned by the subsidiaries of the VIEs, Wuhan Lizhi and Changsha Limang, for the purpose of maintaining and renewing their operating licenses as required by relevant PRC government authorities. We currently have trademark applications pending, any of which may be the subject of a governmental or third-party objection, which could prevent the registration of the same. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry—Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or expand our user and customer base, or our ability to increase their level of engagement.”
We implement comprehensive measures to protect our intellectual property in addition to making trademark and patent registration applications. Our key measures to protect our intellectual property include: (i) trademark searches prior to the launch of our new products; (ii) timely registration and filing with relevant authorities and application of intellectual property rights for our significant technologies; and (iii) overall source code protection of proprietary information.
Human Capital Resources
We value the innovation and collaboration of our employees. Our objective is to promote creativity and production by focusing on talent development, supposed by compensation, benefits and health programs.
Talent Development
We provide our employees by offering a number of learning opportunities through a variety of programs, including podcasts, training sessions, team discussion and expert lectures. We also provide onboarding sessions for new employees to meet each other and familiarize with our technology offerings. We also focus on developing management and organization skills of our new and seasoned managers through leadership programs.
Compensation and Benefits
We provide competitive compensation for our employees and benefits, including share incentive plan. See “Item 6.B. Compensation” for more information about our share incentive plan.
Health, Safety, Social, and Environmental Matters
We do not operate any manufacturing or warehousing facilities. Therefore, we are not subject to significant health, safety, social, or environmental risks. To ensure compliance with applicable laws and regulations, from time to time, our human resources department would, if necessary and after consultation with our legal advisor, adjust our human resources policies to accommodate material changes to relevant labor and safety laws and regulations. For the year ended December 31, 2021, we had not been subject to any fines or other penalties due to
non-compliance
with health, work safety, social, or environmental regulations. In response to the
COVID-19
pandemic, we have taken a number of actions focused on protecting the health and safety of our employees, including having all of our employees work from home in 2020 and early 2021 and providing flexible working schedule to support the employees through the work-from-home period.
See “Item 6.D. Employees” for more information about our employees.
Licenses and Approvals
The following table sets forth a list of material licenses and approvals, subject to further renewal, that the VIEs and subsidiaries of VIEs are required to obtain to carry out our operations in China.
80

Table of Contents

License |  | Entity Holding the License |  | Type of the Entity |  | Regulatory Authority
ICP License |  | Guangzhou Lizhi |  | VIE |  | Guangdong branch of the MIIT
Internet Culture |  | Guangzhou Lizhi |  | VIE |  | The Ministry of Culture
Operating License |  |  |  |  |  | and Tourism of the Guangdong Province
ICP License |  | Guangzhou Huanliao |  | VIE |  | Guangdong branch of the
|  |  |  |  |  | MIIT
Internet Culture |  | Guangzhou Huanliao |  | VIE |  | The Ministry of Culture
Operating License |  |  |  |  |  | and Tourism of the Guangdong Province
ICP License |  | Wuhan Lizhi |  | VIE’s Subsidiary |  | Hubei branch of the MIIT
Internet Culture |  | Wuhan Lizhi |  | VIE’s Subsidiary |  | Wuhan Branch of the
Operating License |  |  |  |  |  | Ministry of Culture and Tourism of PRC
ICP License |  | Changsha Limang |  | VIE’s Subsidiary |  | Hunan branch of the MIIT
Internet Culture |  | Changsha Limang |  | VIE’s Subsidiary |  | Changsha Branch of the
Operating License |  |  |  |  |  | Ministry of Culture and Tourism of PRC
ICP License |  | Huaian Lizhi |  | VIE’s Subsidiary |  | Jiangsu branch of the
|  |  |  |  |  | MIIT
Internet Culture |  | Huaian Lizhi |  | VIE’s Subsidiary |  | The Ministry of Culture
Operating License |  |  |  |  |  | and Tourism of the Jiangsu Province
ICP License |  | Chongqing Piwan |  | VIE’s Subsidiary |  | Chongqing branch of the
|  |  |  |  |  | MIIT
Internet Culture |  | Chongqing Piwan |  | VIE’s Subsidiary |  | The Ministry of Culture
Operating License |  |  |  |  |  | and Tourism of the Chongqing

Regulation
Regulations Related to Foreign Investment
Industry Catalogue Related to Foreign Investment
The establishment, operation and management of corporate entities in the PRC is governed by the Company Law of the PRC, or the Company Law, which was promulgated by the Standing Committee of the National People’s Congress, or the SCNPC, on December 29, 1993 and last amended and became effective on October 26, 2018. A foreign-invested company is also subject to the Company Law unless otherwise provided in the foreign investment laws.
The establishment and operations of wholly foreign-owned enterprises were mainly governed by the Law of the PRC on Wholly Foreign-Owned Enterprises, which was promulgated by the National People’s Congress, or the NPC, on April 12, 1986 and last amended by the SCNPC on September 3, 2016 and became effective on October 1, 2016. The Law of the PRC on Wholly Foreign-Owned Enterprises was repealed by the Foreign Investment Law of the People’s Republic of China promulgated by the NPC on March 15, 2019 and effective on January 1, 2020. The establishment and operations of wholly foreign-owned enterprises were also governed by the Detailed Rules for the Implementation of the Law of the PRC on Wholly Foreign-Owned Enterprises promulgated by the Ministry of Foreign Economy and Trade (now integrated into the Ministry of Commerce of the PRC, or the MOFCOM), on December 12, 1990 and last amended by the State Council on February 19, 2014 and became effective on March 1, 2014. The Detailed Rules for the Implementation of the Law of the PRC on Wholly Foreign-Owned Enterprises was repealed by the Detailed Rules for the Implementation of the Foreign Investment Law of the People’s Republic of China promulgated by the State Council on December 26, 2019 and effective on January 1, 2020.
81

Table of Contents
On December 27, 2021, the MOFCOM and NDRC promulgated the Special Administrative Measures for the Access of Foreign Investment (Negative List) (2021 Version), or the Negative List, which became effective on January 1, 2022. On December 27, 2020, the MOFCOM and NDRC promulgated the Catalog of Industries for Encouraging Foreign Investment (2020 Version), or the Encouraging Catalogue, which became effective on January 27, 2021. Pursuant to the Encouraging Catalogue and the Negative List, foreign-invested projects are categorized as encouraged, restricted and prohibited. Foreign-invested projects that are not listed in the Negative list are permitted foreign- invested projects.
Foreign Investment in Value-Added Telecommunication Business
According to the Negative List, foreign investors are prohibited from holding more than 50% of equity interests in an enterprise which provides value-added telecommunications services (except for
e-commerce
business, domestic multi-party communications services, store and forward services and call center services).
According to the Regulations on the Administration of Foreign-Invested Telecommunications Enterprises, or FITE Regulations, promulgated by the State Council on December 11, 2001 and last amended on February 6, 2016, and became effective on February 6, 2016, which set forth detailed requirements including capitalization, investor qualifications and application procedures concerning the establishment of a foreign-invested telecommunications enterprise. Pursuant to the FITE Regulations, foreign investors are prohibited from holding more than 50% of equity interest in a foreign-invested enterprise that provides value-added telecommunications services. Besides, such foreign investors of a foreign-invested telecom enterprise are required to have good performances and operation experiences in operating the value-added telecommunication businesses. On March 29, 2022, the State Council of the PRC issued the Decision to Amend and Abolish Certain Administrative Regulations, which provides to make amendments to the FITE Regulations. The amendments include, among others, removing requirements of having good performances and operation experiences in operating the value-added telecommunication businesses for foreign investors of a foreign-invested telecom enterprise. The amended FITE Regulations will take effect on May 1, 2022. There are substantial uncertainties regarding the interpretation and implementation of the newly amended regulations.
On July 13, 2006, the Ministry of Information Industry of the PRC, or the MII (the predecessor of the Ministry of Industry and Information Technology of the PRC, or the MIIT), issued the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the MII Circular, which provides that (a) foreign investors can only operate telecommunications business in China through telecommunications enterprises with valid telecommunications business operation license; (b) domestic licensees may not rent, transfer or sell telecommunications business licenses to foreign investors in any form or provide any foreign investors with resources, venues or facilities to promote unlicensed operations of telecommunications businesses in China; (c) value-added telecommunications service providers or their shareholders must directly own the domain names and registered trademarks that are used in their daily operations; (d) each value-added telecommunications service provider must have necessary facilities for its approved business operations and maintain such facilities in the geographic regions specified in its license; and (e) all value-added telecommunications service providers should improve their network and information security, establish relevant information safety system and set up emergency plans to ensure network and information safety.
Regulations Related to Telecommunications Services
According to the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated by the State Council on September 25, 2000 and last revised and came into effect on February 6, 2016, all telecommunications businesses in China have been categorized by the Telecommunications Regulations into basic telecommunications services and value-added telecommunications services. Value-added telecommunications services are defined as telecommunications and information services provided through public network infrastructures. The Catalog of Telecommunications Business, or the Catalog, which was issued as an attachment to the Telecommunications Regulations in 2003 and last revised on June 6, 2019 and became effective on the same date, further categorizes various types of telecommunications and telecommunications- related activities into basic or value-added telecommunications services. According to the Catalogue, internet information services are classified as value-added telecommunications services. Pursuant to the Telecommunications Regulations, anyone who intends to be engaged in value-added telecommunications services shall obtain an operating license from the MIIT or its provincial level counterparts prior to the commencement of such services.
82

Table of Contents
According to the Administrative Measures on Internet Information Services promulgated by the State Council on September 25, 2000 and last amended in January 8, 2011 and became effective on the same date, “internet information services” refer to the provision of information through the internet to online users, including “commercial internet information services” and
“non-commercial
internet information services.” A commercial internet information service operator must obtain an ICP License from the competent governmental authorities before engaging in commercial internet information services in China, while ICP License is not required if the operator will only provide internet information on a
non-commercial
basis. Besides, internet information service operators in respect of news, publishing, education, health, pharmaceuticals or medical apparatus shall obtain consent of the relevant PRC competent authority as required by relevant laws and regulations before applying for licenses or carrying out record-filing procedures.
The Administrative Measures for Telecommunications Business Licensing promulgated by the MIIT on December 26, 2001 and last amended on July 3, 2017 and became effective on September 1, 2017, set forth specific provisions regarding the qualifications and procedures for obtaining ICP licenses and the administration and supervision of such licenses. A commercial ICP service operator shall obtain an ICP License of such services from the MIIT or its provincial level counterparts prior to the commencement of such services, otherwise such operator might be subject to sanctions including corrective orders and warnings from the competent governmental authority, imposition of fines and confiscation of illegal gains and in serious cases, being included in the list of dishonest telecommunications business operators, suspension of business.
According to the Measures for the Administration of Record-filing of
Non-commercial
Internet Information Services promulgated by the MII on February 8, 2005, entities engaged in
non-commercial
internet information services shall go through the record-filing procedures with the provincial telecommunications administration.
In addition to the regulations and measures above, provision of internet information services via mobile internet applications, or app, are regulated by the Administrative Provisions on Information Services of Mobile Internet Applications promulgated by the State Internet Information Office on June 28, 2016 and came into effect on August 1, 2016. Information service providers of mobile internet applications are subject to these provisions, including acquiring relevant qualifications and being responsible for management of information security.
Guangzhou Lizhi currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Guangdong Province on August 2, 2019. Guangzhou Huanliao currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Guangdong Province on November 21, 2019.Wuhan Lizhi currently holds the Internet Culture Operating License issued by the Wuhan Branch of the Ministry of Culture and Tourism of PRC on April 13, 2021. Changsha Limang currently holds the Internet Culture Operating License issued by the Changsha Branch of the Ministry of Culture and Tourism of PRC on August 18, 2021. Huaian Lizhi currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Jiangsu Province on March 20, 2019. Chongqing Piwan currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Chongqing on July 23, 2019.
Regulations Related to Online Transmission of Audio-Visual Programs
On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the
Non-State-
owned Capital into the Cultural Industry. On July 6, 2005, five PRC regulatory agencies, namely, the Ministry of Culture, or the MOC, the State Administration of Radio, Film and Television, or the SARFT, the General Administration of Press and Publication, or the GAPP, the NDRC and MOFCOM, jointly promulgated the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. According to these regulations,
non-State-owned
capital and foreign investors are prohibited to conduct the business of transmitting audio-visual programs through information network.
According to the Administrative Provisions on Internet Audio-visual Program Service, or the Audio-visual Program Provisions, jointly promulgated by the SARFT and MII on December 20, 2007 and last amended by the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT, on August 28, 2015 and became effective on the same date, providers of internet audio-visual program services are required to obtain a License for Online Transmission of Audio-visual Programs, or the Audio-visual License issued by the competent department of radio, film and television or complete certain record-filing procedures. Providers of internet audio-visual program services are generally required to be either state-owned or state-controlled by the PRC government, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program service determined by the competent department of radio, film and television under the State Council.
83

Table of Contents
On May 21, 2008, the SARFT issued the Notice on Relevant Issues Concerning Application and Approval of License for Online Transmission of Audio-visual Programs, as last amended on August 28, 2015 and became effective on the same date, which further sets forth detailed provisions concerning the application and approval process regarding the Audio-visual License. The notice also stipulates that the internet audio-visual program services providers who engaged in such services prior to the promulgation of the Audio-visual Program Provisions shall also be eligible to apply for the license so long as their violation of the laws and regulations is minor and can be rectified in a timely manner and they have no records of violation during the latest three months prior to the promulgation of the Audio-visual Program Provisions.
Further, on March 31, 2009, the SARFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-visual Programs, which reiterates the requirement for the internet audio-visual programs to be published to the public through information network, where applicable, and prohibits certain types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstitious or other similarly prohibited elements.
On March 17, 2010, the SARFT issued the Internet Audio-visual Program Services Categories (Provisional), or the Provisional Categories, as amended on March 10, 2017 and became effective on the same date, which classified internet audio-visual program services into four categories. In addition, the Notice concerning Strengthening the Administration of the Streaming Service of Online Audio-Visual Programs promulgated by the SAPPRFT on September 2, 2016 emphasizes that, unless a specific license is granted, audiovisual programs service provider is forbidden from engaging in live streaming on major political, military, economic, social, cultural and sports events.
According to the Guangdong Province Letter for purpose of investigating live streaming businesses, only live streaming services on either(a) major political, military, economics, social, cultural, sports activities or reality event streaming or (b) activities such as general social group cultural activities or sports events are required to apply for an Audio-Visual License. The Guangdong Province Letter further stated that live streaming of online shows, online games and online drama performances do not require an Audio-Visual License.
In March 2018, the SAPPRFT issued the Notice on Further Regulating the Transmission Order of Internet Audio-Visual Programs, which requires that, among others, audio-visual platforms shall: (a) not produce or transmit programs intended to parody or denigrate classic works, (b) not
re-edit,
re-dub,
re-caption
or otherwise ridicule classic works, radio and television programs, or original internet audio-visual programs without authorization, not transmit
re-edited
programs which unfairly distort the original content, (d) strictly monitor the adapted content uploaded by platform users and not provide transmission channels for illicit content, (e) immediately take down unauthorized content upon receipt of complaints from copyright owners, radio and television stations, or film and television production institutions, (f) strengthen the administration of movie trailers and prevent improper broadcasting of movie clips and trailers prior to authorized release, and (g) strengthen the administration of sponsorship and endorsement for internet audio-visual programs. Pursuant to this notice, the provincial branches of SAPPRFT shall have the authority to supervise radio stations and websites that offer audio-visual programs within its jurisdiction and require them to further improve their content management systems and implement relevant management requirements.
On November 4, 2016, the State Internet Information Office promulgated the Administrative Provisions on Internet Live-Streaming Services, or Internet Live-Streaming Services Provisions. According to the Internet Live-Streaming Services Provisions, an internet live-streaming service provider shall (i) establish a live-streaming content review platform; (ii) conduct authentication registration of internet live-streaming issuers based on their identity certificates, business licenses and organization code certificates and authentication identification of the registered users based on their mobile numbers; and (iii) enter into a service agreement with internet live-streaming services user to specify both parties’ rights and obligations.
According to the Notice on Strengthening the Administration of the Internet Live Streaming Service jointly promulgated by the MIIT, the Ministry of Public Security of the PRC and other government agencies on August 1, 2018, internet live streaming service providers shall go through the procedures of filing with the competent department of telecommunications. The internet live streaming service providers engaged in telecommunications business and internet news information, network performances and internet live streaming of audio-visual programs shall apply to the relevant departments for permission to operate such telecommunication business and shall perform the procedures of record-filing with the local public security department within 30 days after the live streaming service being operated.
84

Table of Contents
According to the Circular on Strengthening the Administration of the Online Show Live Streaming and
E-commerce
Live Streaming issued by the National Radio and Television Administration, or the NRTA, on November 12, 2020, platforms providing online show live streaming or
e-commerce
live streaming services shall register their information and business operations by November 30, 2020. The overall ratio of front-line content analysts to live streaming rooms shall be 1:50 or higher on such platforms. The training for content analysts shall be strengthened and content analysts who have passed the training shall be registered in the system. A platform shall report the number of its live streaming rooms, streamers and content analysts to the provincial branch of the NRTA on a quarterly basis. Online show live streaming platforms shall tag content and streamers by category. A streamer cannot change the category of the programs offered in his or her live streaming room without prior approval from the platform. Users that are minors or without real-name registration are forbidden from virtual gifting, and platforms shall limit the maximum amount of virtual gifting per time, per day, and per month. When the virtual gifting by a user reaches half of the daily/monthly limit, a consumption reminder from the platform and a confirmation from the user by text messages or other means are required before the next transaction. When the amount of virtual gifting by a user reaches the daily/monthly limit, the platform shall suspend the virtual gifting function for such user for that day or month. To host any
e-commerce
promotion events such as
E-commerce
Festival,
E-commerce
Day or Promotion Day in the forms of live streaming, live performances, live variety shows and other live programs, the platforms shall register the information of guests, streamers, content and settings with the local branch of NRTA 14 business days in advance. Online
e-commerce
live streaming platforms shall conduct relevant qualification examination and real-name authentication on businesses and individuals providing live-streaming marketing services and keep complete examination and authentication records, and shall not enable imposters or businesses or individuals without qualification or real-name registration to conduct live-streaming marketing services.
According to the Guiding Opinions on Strengthening the Standardized Management of Network Live Broadcasting issued by CAC, Office of the National “Anti-pornography and Anti-illegal” Working Group, MIIT, the Ministry of Public Security, MCT, SAMR and NRTA on February 9, 2021, live streaming platforms that carry out business-oriented network performance activities must hold the internet cultural business license and carry out ICP filing; live streaming platforms that carry out network audio-visual program services must hold the Audio-Visual License (or complete the registration in the national network audio-visual platform information registration management system) and carry out ICP filing; live streaming platforms that carry internet news information service must hold internet news information service license. Live streaming platforms shall file with local cyberspace administration office in a timely manner, and shall cancel its filing immediately after it ceases to provide live streaming services.
Regulations Related to Online Cultural Activities
The MOC promulgated the Interim Provisions on Administration of Internet Culture, or the Internet Culture Provisions, on May 10, 2003, as most recently amended on December 15, 2017 and became effective on the same date. According to the Internet Culture Provisions, internet cultural activities include: (i) producing, reproducing, importing, publishing or broadcasting Internet cultural products; (ii) publishing cultural products on the Internet or transmission thereof to computers, fixed-line or mobile phones, radios, television sets or gaming players for the purpose of browsing, reading, reviewing, using or downloading such products by online users; and (iii) exhibitions and competitions of Internet cultural products. Internet cultural activities are categorized as two categories, namely, commercial and
non-commercial.
Entities engaged in commercial internet cultural activities shall file the application to the applicable provincial level counterpart of the MOC for approval and obtain an Internet Culture Operation License.
85

Table of Contents
According to the Measures for the Administration of Internet Performance Business Operations promulgated by the MOC on December 2, 2016, entities engaged in internet performance business operations shall, in accordance with the Internet Culture Provisions, apply to the cultural administrative department at the provincial level for an Internet Culture Operation License, and the business scope in the license shall expressly include internet performance. An internet performance business entity shall indicate the number of its Internet Culture Operation License in an
eye-catching
position on the homepage of its website. In July 2016, the MOC promulgated the Notice on Strengthening the Administration of Internet Performance, which regulates the behavior of entities conducting businesses related to internet performance and performers. Entities operating internet performances shall be responsible for the services and content posted on their website by performers. They must refine their content management mechanism and shut down the channel and stop the dissemination of any internet performance as soon as they realize that such internet performance is in violation of relevant laws and regulations. Internet performers shall be responsible for their performances and shall not perform any program containing violence, pornography, or other similarly prohibited elements.
On August 12, 2013, the MOC issued the Administrative Measures for Content Self-review by Internet Culture Business Entities, which requires internet culture business entities to review the content of products and services to be provided prior to providing such content and services to the public. An Internet culture business entity shall establish and improve its content management system. The content management system of an internet culture business entity is required to specify the responsibilities, standards and processes for content review as well as accountability measures, and is required be filed with the provincial level counterpart of the MOC.
On November 20, 2006, the MOC issued Several Suggestions of the MOC on the Development and Administration of Online Music, which stipulates that the internet service provider engaged in any business relating to online music products shall obtain an Internet Culture Operation License. In addition, foreign investors are prohibited from operating internet culture business.
On October 23, 2015, the MOC promulgated the Notice on Further Strengthening and Improving the Management of Online Music Content. According to this notice, which stipulates that the entities shall examine and verify the content of online music by themselves, while the culture management administration shall supervise in process and afterwards. Guangzhou Lizhi currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Guangdong Province on August 2, 2019. Guangzhou Huanliao currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Guangdong Province on November 21, 2019.Wuhan Lizhi currently holds the Internet Culture Operating License issued by the Wuhan Branch of the Ministry of Culture and Tourism of PRC on April 13, 2021. Changsha Limang currently holds the Internet Culture Operating License issued by the Changsha Branch of the Ministry of Culture and Tourism of PRC on August 18, 2021. Huaian Lizhi currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Jiangsu Province on March 20, 2019. Chongqing Piwan currently holds the Internet Culture Operating License issued by the Ministry of Culture and Tourism of the Chongqing on July 23, 2019.
Regulations Related to Online Publication and Cultural Products
On February 4, 2016, State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China, or the SAPPRFT, and the MIIT issued the Measures for Online Publication Service Administration, or Online Publication Measures, which took effect on March 10, 2016. The Online Publication Measures introduced an internet publishing license regime for internet publications. According to the Online Publication Measures, the term “online publications” includes games, animation, audio and video readings in literature, art, science and other fields. As of the date of this annual report, we have not obtained an internet publishing license. Currently, we allow hosts to upload their recorded audio clip on our platforms, which may be considered as the “internet publications.” Also, we entered into a business cooperation arrangement with a third-party game developer to jointly operate and promote an audio-centric online game on our platforms and share the revenues generated by such game operation. Thus, we may be required to obtain an internet publishing license issued by the authorities. For detailed analysis, see “Item 3. Key Information—3.D. Risk Factors— Risks Related to Our Business and Our Industry—If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected.”
86

Table of Contents
Regulations Related to Production and Operation of Radio and Television Programs
On July 19, 2004, the SARFT promulgated the Regulations on the Administration of Production and Operation of Radio and Television Programs, or the Radio and TV Programs Regulations, as partly amended on December 1, 2020 and became effective on the same date. Pursuant to the Radio and TV Programs Regulations, entities engaged in the production of radio and television programs shall apply for the Radio and Television Program Production and Operating Permit from the SARFT or its provincial level counterparts and shall conduct their operations strictly in compliance with the approved scope of production and operation. Guangzhou Lizhi has obtained the License for Production and Operation of Radio and TV Programs for its business.
Regulations Relating to Advertising Business
The State Administration for Market Regulation (formerly known as State Administration of Industry and Commerce, “SAMR”) is the primary governmental authority regulating advertising activities in China. Regulations that apply to the advertising business primarily include: (i) the PRC Advertisement Law, promulgated by the Standing Committee of the National People’s Congress on October 27, 1994 and most recently amended on April 29, 2021 and became effective on the same date; and (ii) the Administrative Regulations for Advertising, promulgated by the State Council on October 26, 1987 and which has been effective since December 1, 1987.
On July 4, 2016, the SAMR issued the Interim Measures for the Administration of Internet Advertising, or the Internet Advertising Measures, which became effective on September 1, 2016. According to the Internet Advertising Measures, Internet Advertising refers to commercial advertising for direct or indirect marketing goods or services in the form of text, image, audio, video, or other means through websites, web pages, Internet apps, or other Internet media. The Internet Advertising Measures specifically set out the following requirements: (a) advertisements must be identifiable and marked with the word “advertisement” enabling consumers to distinguish them from
non-advertisement
information; (b) sponsored search results must be clearly distinguished from organic search results; (c) it is forbidden to send advertisements or advertisement links by email without the recipient’s permission or induce Internet users to click on an advertisement in a deceptive manner; and (d) Internet information service providers that do not participate in the operation of Internet advertisements should stop publishing illegal advertisements if they know or should know that the advertisements are illegal.
On November 26, 2021, the SAMR has publicly solicited opinions on the Measures for the Administration of Online Advertising (Draft for Comments), or the Draft Internet Advertising Measures, which states that all Internet Advertising activities will be regulated and clearly states that livestreaming room operators and livestreaming marketers must abide by the responsibilities and obligations of Internet Advertising operators. The Draft Internet Advertising Measures also provides that Internet advertisement publishers should not publish advertisements on vehicles or intelligence household electronic appliances without the users’ permission or request. The Draft Internet Advertising Measures further strengthens the
one-click-to-close
requirement and prohibits advertisements for certain items on Internet media that targets minors, including, among others, advertisements related to online games that are harmful to the physical or mental health of minors. The AMR solicited comments on this Draft Internet Advertising Measures, but it has not been formally adopted.
Regulations Related to Anti-fatigue System, Real-name Registration System
On April 15, 2007, eight PRC government authorities, including the GAPP, the Ministry of Education, the Ministry of Public Security and the MIIT, jointly issued a circular requiring protection of minors’ physical and mental health and the implementation of an anti-fatigue system and a real- name registration system by all PRC online game operators. Under the anti-fatigue system, three hours or less of continuous playing by minors, defined as game players under 18 years of age, is considered to be “healthy,” three to five hours is deemed “fatiguing,” and five hours or more to be “unhealthy.” Game operators are required to reduce the value of
in-game
benefits to a minor player by half if the minor has reached the “fatiguing” level, and to zero once reaching the “unhealthy” level. To identify whether a game player is a minor and thus subject to the anti-fatigue system, a real-name registration system must be adopted to require online game players to register their real identity information before playing online games.
In 2011, the GAPP, together with several other government agencies, jointly issued the Notice on Initializing the Verification of Real-name Registration for the Anti-Fatigue System on Online Games, or the Real-name Registration Notice, to strengthen the implementation of the anti-fatigue and real-name registration system. The main purpose of the Real-name Registration Notice is to curb addictive online game playing by minors and protect their physical and mental health. On July 25, 2014, the SARFT issued the Notice of
In-depth
Implementation of the Anti-Fatigue System and Real-Name Registration on Online Games, which became effective on October 1, 2014, further elaborated the requirement, scope of application, supervision measures and the establishment of reporting system in the implementation of the anti-fatigue system and real-name registration on online games.
87

Table of Contents
Regulations Related to Internet Information Security and Privacy Protection
According to the Decisions on Maintaining Internet Security, or the Internet Security Decisions, promulgated by the SCNPC on December 28, 2000 and last amended on August 27, 2009 and became effective on the same date, anyone who, making use of the internet, commits any act whether or not listed in the Internet Security Decisions which constitutes a crime shall be investigated for criminal responsibility in accordance with the Criminal Law of the PRC.
Pursuant to the Several Provisions on Regulating the Market Order of Internet Information Services promulgated by the MIIT on December 29, 2011, an internet information service provider may not collect any user personal information or provide any such information to third parties without the consent of the users, unless otherwise stipulated by laws and administrative regulations. The internet information service provider must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. The internet information service provider is also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, the internet information service provider must take immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority and cooperate with relevant departments in investigation and solution.
In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the SCNPC on December 28, 2012 and the Provisions on Protecting the Personal Information of Telecommunication and Internet Users issued by the MIIT on July 16, 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. An internet information service provider must also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying any such information, or selling or illegally providing such information to other parties. An internet information service provider is required to take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage or loss.
On November 7, 2016, the SCNPC promulgated the Cybersecurity Law of the PRC, or the Cybersecurity Law, effective on June 1, 2017. The Cybersecurity Law aims to maintain the network security, safeguard the cyberspace sovereignty, national security and public interests, protect the lawful rights and interests of citizens, legal persons and other organizations, and requires that a network operator, which includes, among others, internet information services providers, take technical measures and other necessary measures in accordance with the provisions of applicable laws and regulations as well as the compulsory requirements of the national and industrial standards to safeguard the safe and stable operation of the networks. Any violation of the provisions and requirements under the Cybersecurity Law may subject the internet service provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities. On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the Ministry of Industry and Information Technology, the General Office of the Ministry of Public Security and the General Office of the State Administration for Market Regulation promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance.
On March 12, 2021, the CAC, the MIIT, the MPS and the SAMR jointly issued the Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications (the “Necessary Personal Information Rules”), which came into effect on May 1, 2021. According to the Necessary Personal Information Rules, mobile app operators shall not deny users’ access to its basic functions and services on the basis that such user disagrees with the provision of their personal information that is not necessary. The Necessary Personal Information Rules further provides relevant scopes of necessary personal information for different types of mobile apps.
88

Table of Contents
On June 1, 2021, the Law of the People’s Republic of China on the Protection of Minors (Revised in 2020) or the Minor Protection Law, promulgated by the SCNPC, has come into effect, which specifies stringent requirements for the protection of minors’ information.
On June 10, 2021, the SCNPC promulgated the Data Security Law, which took effect on September 1, 2021. The Data Security Law provides a national data security review system, under which data processing activities that affect or may affect national security shall be reviewed. In addition, it clarifies that the data security protection obligations of organizations and individuals carrying out data activities and implementing data security protection responsibility, data processors shall establish and improve the whole-process data security management rules, organize and implement data security trainings as well as take appropriate technical measures and other necessary measures to protect data security. Any organizational or individual data processing activities that violate the Data Security Law shall bear the corresponding civil, administrative or criminal liabilities depending on specific circumstances.
On July 6, 2021, the General Office of the CPC Central Committee and the General Office of the State Council jointly promulgated the Opinions on Strictly Combatting Illegal Securities Activities, which emphasizes on the prevention of illegal securities activities and tightened supervision on overseas listings by China-based companies. The opinions aim to achieve this by establishing a regulatory system and revising the existing rules and regulations for overseas listings by Chinese entities and affiliates, including potential extraterritorial application of China’s securities laws. As the opinions are new, official guidance and implementation rules have not been issued and the final interpretation of and potential impact from these opinions remain unclear at this stage.
On July 30, 2021, the State Council promulgated the CII Regulations, effective on September 1, 2021. According to the CII Regulations, a “critical information infrastructure” has the meaning of an important network facility and information system in important industries such as, among others, public communications and information services, energy, transport, water conservation, finance, public services,
e-government
affairs and national defense science, as well as other important network facilities and information systems that may seriously endanger national security, the national economy, the people’s livelihood, or the public interests in the event of damage, loss of function, or data leakage. The competent governmental authorities as well as the supervision and administrative authorities of the aforementioned important industries and sectors will be responsible for (i) organizing the identification of critical information infrastructures in their respective industries in accordance with certain identification rules, and (ii) promptly notifying the identified operators and the public security department of the State Council of the identification results.
On August 20, 2021, the SCNPC promulgated the Personal Information Protection Law, effective on November 1, 2021. The Personal Information Protection Law requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing purpose, in a method that has the least impact on personal rights and interests, and (ii) the collection of personal information should be limited to the minimum scope necessary to achieve the processing purpose to avoid the excessive collection of personal information. Different types of personal information and personal information processing will be subject to various rules on consent, transfer, and security. Entities handling personal information bear responsibilities for their activities of handling personal information, and shall adopt necessary measures to safeguard the security of the personal information that they handle. Otherwise, the entities handling personal information could be ordered to correct, or suspend or terminate the provision of services, and face confiscation of illegal income, fines or other penalties.
On October 29, 2021, the CAC has publicly solicited opinions on the Measures for the Security Assessment of Data Cross-border Transfer (Draft for Comments) (the “Draft Measures for Data Cross-border Transfer”), which requires that any data processor providing important data collected and generated during operations within the territory of the PRC or personal information that should be subject to security assessment according to law to an overseas recipient shall conduct security assessment. The Draft Measures for Data Cross-border Transfer provides five circumstances, under any of which data processors shall, through the local cyberspace administration at the provincial level, apply to the national cyberspace administration for security assessment of data cross-border transfer. These circumstances include: (i) where the data to be transferred to an overseas recipient are personal information or important data collected and generated by operators of critical information infrastructure; (ii) where the data to be transferred to an overseas recipient contains important data; (iii) where a personal information processor that has processed personal information of more than one million individuals provides personal information overseas; (iv) where the personal information of more than 100,000 individuals or sensitive personal information of more than 10,000 individuals are transferred overseas accumulatively; or (v) other circumstances under which security assessment of data cross-border transfer is required as prescribed by the national cyberspace administration. The CAC solicited comments on this Draft Measures for Data Cross-border Transfer, but it has not been formally adopted.
89

Table of Contents
On November 14, 2021, the CAC published a discussion draft of the Draft Data Security Regulations, which provides that data processors conducting the following activities shall apply for cybersecurity review: (i) merger, reorganization or separation of network platform operators that have acquired a large number of data resources related to national security, economic development or public interests affects or may affect national security; (ii) listing abroad of data processors processing over one million users’ personal information; (iii) listing in Hong Kong which affects or may affect national security; (iv) other data processing activities that affect or may affect national security. The Draft Data Security Regulations also provide that operators of large Internet platforms that set up headquarters, operation centers or research and development centers overseas shall report to the national cyberspace administration and competent authorities. The Draft Data Security Regulations also state that data processors processing important data or going public overseas shall conduct an annual data security assessment by themselves or entrust a data security service institution to do so, and submit the data security assessment report of the previous year to the local branch of CAC at the municipal level before January 31, of each year. In addition, the Draft Data Security Regulations also require network platform operators to establish platform rules, privacy policies and algorithm strategies related to data, and solicit public comments on their official websites and personal information protection related sections for no less than 30 working days when they formulate platform rules or privacy policies or makes any amendments that may have a significant impact on users’ rights and interests. Further, platform rules and privacy policies formulated by operators of large Internet platforms with more than 100 million daily active users, or amendments to such rules or policies by operators of large Internet platforms with more than 100 million daily active users that may have significant impacts on users’ rights and interests shall be evaluated by a third-party organization designated by the CAC and reported to local branch of the CAC at the provincial level for approval. The CAC solicited comments on this draft, but there is no timetable as to when it will be enacted.
On December 31, 2021, the CAC together with other regulatory authorities published Administrative Provisions on Algorithm Recommendation for Internet Information Services, to be effective on March 1, 2022 which provides, among others, that algorithm recommendation service providers shall (i) establish and improve the management systems and technical measures for algorithm mechanism and principle review, scientific and technological ethics review, user registration, information release review, data security and personal information protection, anti-telecommunications and Internet fraud, security assessment and monitoring, and security incident emergency response, formulate and disclose the relevant rules for algorithm recommendation services, and be equipped with professional staff and technical support appropriate to the scale of the algorithm recommendation service; (ii) regularly review, evaluate and verify the principle, models, data and application results of algorithm mechanisms, (iii) strengthen information security management, establish and improve a feature database for identifying illegal and bad information, and improve entry standards, rules and procedures; (iv) strengthen the management of user models and user labels, and improve the rules on points of interest recorded into user models and user label management, and shall not record illegal and harmful information keywords into the points of interest of users or use them as user labels to push information.
On December 28, 2021, twelve regulatory authorities jointly released the Cybersecurity Review Measures. The Cybersecurity Review Measures provides that: (i) network platform operators that are engaged in data processing activities which have or may have an implication on national security shall undergo a cybersecurity review; (ii) the CSRC is one of the regulatory authorities for purposes of jointly establishing the state cybersecurity review mechanism; (iii) network platform operators that master personal information of more than one million users and seek to list abroad shall file for a cybersecurity review with the Cybersecurity Review Office; and (iv) the risks of core data, material data or large amounts of personal information being stolen, leaked, destroyed, damaged, illegally used or transmitted to overseas parties, and the risks of critical information infrastructure, core data, material data or large amounts of personal information being influenced, controlled or used maliciously shall be collectively taken into consideration during the cybersecurity review process.
90

Table of Contents
Regulations related to Virtual Currency
On January 25, 2007, the Ministry of Public Security, the MOC, the MIIT and the GAPP jointly issued a circular regarding online gambling which has implications on the issuance and use of virtual currency. On February 15, 2007, fourteen PRC regulatory authorities jointly issued the Notice on the Reinforcement of the Administration of Internet Cafes and Online Games. According to these regulations, aggregate amount of virtual currency that can be issued by online game operators and the amount of virtual currency that can be purchased by an individual are limited, virtual currency issued by online game operators can only be used for purchasing virtual products and services within the online games and not for purchasing tangible or physical products and trading of virtual currency is strictly banned.
On June 4, 2009, the MOC and the MOFCOM jointly issued the Notice on Strengthening the Administration of Online Game Virtual Currency, or the Virtual Currency Notice. The Virtual Currency Notice requires that the operators who engage in issuance of online game virtual currency or offering of online game virtual currency transaction services shall apply for approval from the MOC through its provincial branches. Operators that issue virtual currency for online games are prohibited from offering services for virtual currency trading. Any company that fails to file the necessary application will be subject to sanctions, including but not limited to mandatory corrective actions and fines.
Regulations Related to Intellectual Property Rights
Copyright
According to the Copyright Law of the PRC, or the Copyright Law promulgated by the SCNPC on September 7, 1990 and last amended on February 26, 2010 and became effective on April 1, 2010, and its related Implementing Regulations issued by the State Council on August 2, 2002 and last amended on January 30, 2013 and became effective on March 1, 2013, Chinese citizens, legal persons, or other organizations shall, whether published or not, own copyright in their works, which include, among others, works of literature, art, natural science, social science, engineering technology and computer software. Copyright owners of protected works enjoy personal and property rights with respect to publication, authorship, alteration, integrity, reproduction, distribution, lease, exhibition, performance, projection, broadcasting, dissemination via information network, production, adaptation, translation, compilation and other rights shall be enjoyed by the copyright owners. The Copyright Law was further amended on November 11, 2020 and will take effect from June 1, 2021.
The PRC National Copyright Administration and MII jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet, or the Copyright Measures, on April 29, 2005, which became effective on May 30, 2005. These measures are formulated to strengthen the administrative protection of the right of communication through information network in Internet information services. Where a copyright owner finds any content communicated through Internet infringes upon his/its copyright, and sends a notice to the Internet information service provider or any other institution entrusted, the Internet information service provider shall immediately take measures to remove the relevant contents, and preserve the copyright owner’s notice for 6 months. When imposing administrative penalties upon the act which infringes upon any user’s right of communication through information networks, the Measures for Imposing Copyright Administrative Penalties, promulgated on May 7, 2009, shall be applied.
The State Council promulgated the Regulation on Protection of the Right Network Dissemination of Information on May 18, 2006 and last amended on January 30, 2013. As for a network service provider that provides information storage space or provides searching and linking services, if the owner believes that a work, performance, or audio-visual recording involved in its services has infringed upon his/its own right to communicate works to the public over information networks, or has deleted or altered his /its own electronic information management right, he/it can submit a written notification to the network service provider and require that the network service provider to delete such work, performance, or audio-visual recording or disconnect the link with the work, performance, or audio-visual recording.
91

Table of Contents
Pursuant to this regulation, an internet information service provider may be exempted from indemnification liabilities under the following circumstances:

| (i) | any internet information service provider who provides automatic internet access service upon instructions of its users or provides automatic transmission service of works, performance and audiovisual products provided by its users is not required to assume indemnification liabilities if (a) it has not chosen or altered the transmitted works, performance and audio-visual products; and (b) it provides such works, performance and audio-visual products to the designated user and prevents any person other than such designated user from obtaining the access.

| (ii) | any internet information service provider who, for the sake of improving network transmission efficiency, automatically stores and provides to its own users, based on the technical arrangement, the relevant works, performances and audio-visual products obtained from any other internet information service provider will not be required to assume the indemnification liabilities if (a) it has not altered any of the works, performance or audio-visual products that are automatically stored; (b) it has not affected such original internet information service provider in grasping the information where the users obtain the relevant works, performance and audio-visual products; and (c) when the original internet information service provider revises, deletes or shields the works, performance and audio-visual products, it will automatically revise, delete or shield the same based on the technical arrangement.

| (iii) | any internet information service provider, who provides its users with information memory space for such users to provide the works, performance and audio-visual products to the general public via the information network, will not be required to assume the indemnification liabilities if (a) it clearly indicates that the information memory space is provided to the users and publicizes its own name, contact person and web address; (b) it has not altered the works, performance and audio-visual products that are provided by the users; (c) it is not aware of or has reason to know the infringement of the works, performance and audio-visual products provided by the users; (d) it has not directly derived any economic benefit from the provision of the works, performance and audio-visual products by its users; and (e) after receiving a notice from the right holder, it has deleted such works, performance and audio-visual products as alleged for infringement pursuant to such regulation.

| (iv) | an internet information service provider, who provides its users with search services or links, will not be required to assume the indemnification liabilities if, after receiving a notice from the right holder, it has disconnected the link to the works, performance and audio-visual products as alleged for copyright infringement pursuant to this regulation. However, the internet information service provider shall be subject to joint liabilities for copyright infringement if it is aware of or has reason to know the infringement of the works, performance and audio-visual products to which it provides links.

According to the Provisions on Certain Issues Related to the Application of Law in the Trial of Civil Cases Involving Disputes over Infringement of the Right of Dissemination through Information Networks issued by the Supreme People’s Court of China on December 17, 2012, provides that disseminating works, performances or audio-video products by the internet users or the internet service providers via the internet without the permission of the copyright owners shall be deemed to have infringed the right of dissemination of the copyright owner, except as otherwise provided for by laws and administrative regulations.
Pursuant to the Computer Software Copyright Registration Measures, or the Software Copyright Measures, promulgated by the National Copyright Administration, or the NCA, on February 20, 2002, regulates registrations of software copyright, exclusive licensing contracts for software copyright and assignment agreements. The NCA administers software copyright registration and the Copyright Protection Center of China, or the CPCC, is designated as the software registration authority. The CPCC shall grant registration certificates to the Computer Software Copyrights applicants which meet the requirements of both the Software Copyright Measures and the Computer Software Protection Regulations (Revised in 2013).
92

Table of Contents
Trademark
Pursuant to the Trademark Law of the PRC promulgated by the SCNPC on August 23, 1982 and last revised on April 23, 2019 and will come into effect on November 1, 2019, and the Implementation Rules of PRC Trademark Law promulgated on August 3, 2002 and last amended on April 29, 2014 by the State Council and became effective on May 1, 2014, a registered trademark means a trademark that has been approved by and registered with the trademark office, including goods marks, service marks, collective marks and certification marks. A registered trademark is valid for 10 years commencing on the date of registration approval and can be renewed within 12 months before its expiration. For a registered trademark licensing, licensor should file the licensing of the licensed trademark with the trademark bureau, and the trademark bureau shall announce the licensing,
non-filing
of the licensing of a trademark shall not be contested against a good faith third party. The following acts shall constitute infringement of the exclusive right to use a registered trademark: (i) using a trademark that is identical to a registered trademark of the same type of commodities without a license from the registrant of that trademark; (ii) using a trademark similar to a registered trademark of the same type of commodities without a license from the trademark registrant, or using of a trademark identical or similar to the registered trademark on similar commodities which easily causes confusion; (iii) selling commodities that infringe upon the exclusive right to use a registered trademark; (iv) forging or manufacturing without authorization the marks of a registered trademark, or selling marks of a registered trademark that are forged or manufactured without authorization; (v) changing another party’s registered trademark and putting the commodities with the changed trademark into the market without the consent of the holder of that trademark; or (vi) intentionally providing facilitation for infringement upon others’ right to exclusively use a registered trademark or aiding others in committing infringement upon the right to exclusively use a registered trademark; or (vii) other conduct that would hinder another party’s exclusive right to use its registered trademark.
Patent
In accordance with the Patent Law of PRC, or the Patent Law, promulgated on March 12, 1984 and last amended on December 27, 2008 by the SCNPC and became effective on October 1,2009, and the Rules for the Implementation of the Patent Law of PRC promulgated on January 19, 1985 and last amended on January 9, 2010 by the State Council, patent is divided in to 3 categories, i.e., invention patent, design patent and utility model patent. The duration of invention patent right is 20 years, and the duration of design patent right and utility model patent right is 10 years, which all calculated from the date of filing. An individual or entity who uses patent without the license of the patent holder, counterfeits patent products or engages in patent infringement activities shall be held liable for compensation to the patent holder and may be imposed a fine, or even subject to criminal liabilities. The Patent Law was further amended on October 17, 2020 and will take effect from June 1, 2021.
Domain name
In accordance with the Measures on Administration for Internet Domain issued on August 24, 2017 by the Ministry of Industry & Information Technology and became effective on November 1, 2017, the China Internet Network Information Center Implementing Rules of Domain Names Registration issued by China Internet Network Information Center, or the CNNIC, on September 25, 2002 and last amended on May 28, 2012 and became effective on May 29, 2012, the Measures on Dispute Resolution of Domain Names of the China Internet Network Information Center issued by CNNIC on September 25, 2002 and last amended on September 1, 2014 and became effective on the same date, and the Procedural Rules of the China Internet Network Information Center for the Resolution of Country Code
Top-Level
Domain Name Disputes issued on November 21, 2014, the applicants become domain name holders upon successful registration. Domain name registrations are handled through domain name service agencies established under the relevant regulations.
Regulations Related to Internet Infringement
According to the Civil Code of the PRC came into effect on 1 January 2021, if an internet user infringes upon the civil rights or interests of another through using the internet, the person being infringed upon has the right to notify and request the internet service provider whose internet services are facilitating the infringement to take necessary measures including the deletion, blocking or disconnection of an internet link. If the internet service provider fails to take necessary measures after receiving the notice, the internet service provider shall be jointly liable for any additional harm with such internet user. If an internet service provider is aware that an internet user is infringing upon the civil right or interest of another person, and fails to take necessary measures, the internet service provider shall be jointly liable for such infringement with such internet user.
93

Table of Contents
Regulations Related to Dividend Distribution
The principal regulations governing the distribution of dividends by foreign-invested enterprises include the Company Law, the Foreign Investment Law, the Detailed Rules for the Implementation of the Foreign Investment Law, and the Enterprise Income Tax Law of the PRC, or the EIT Law, and its implementation rules.
Foreign investors of foreign-invested enterprises in the PRC may, according to these present laws and regulations, freely remit into or out of China, in RMB or any other foreign currency, their capital contributions, profits, capital gains, income from asset disposal, intellectual property royalties, lawfully acquired compensation, indemnity or liquidation income and so on within the territory of China. In addition, a foreign-invested enterprise in the PRC is required to set aside at least 10% of its
after-tax
profit, as calculated using the PRC accounting standards, each year to its statutory surplus fund until its cumulative total statutory surplus fund or general reserve fund reaches 50% of its registered capital.
Regulations Related to Foreign Exchange
According to the Regulation of the PRC on Foreign Exchange Administration issued by the State Council on January 29, 1996 and last revised on August 5, 2008, the foreign exchange income and expenditure and foreign exchange business operations of Chinese institutions and individuals, as well as the foreign exchange income and expenditure and foreign exchange business operations conducted within the territory of the PRC by overseas institutions and individuals, shall be subject to foreign exchange administration. Renminbi is freely convertible for payments of current account items such as trade and service-related foreign exchange transactions and dividend payments, but is not freely convertible for capital expenditure items such as direct investment, loans or investments in securities outside of the PRC unless the approval from the State Administration of Foreign Exchange, or the SAFE, or its local counterpart is obtained in advance.
According to the Notice of the SAFE on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment, or the Circular 13, promulgated on February 13, 2015 and became effective on June 1, 2015, the foreign exchange administration policies for direct investment are further simplified. This includes: (a) cancelling the two administrative approvals, namely the foreign exchange registration approvals under domestic and overseas direct investments, which shall be verified directly by banks instead; (b) simplifying the management of registration and confirmation of capital contribution by foreign investors under domestic direct investment; and (c) cancelling the annual foreign exchange inspection of direct investments.
According to the Notice of the SAFE on Issues concerning Foreign Exchange Administration of the Overseas Investment and Financing and the Round-tripping Investment Made by Domestic Residents through Special-Purpose Companies, or the Circular 37, promulgated by the SAFE on July 4, 2014, a domestic resident (domestic institution or domestic resident individual), which/who, for the purposes of offshore investment and financing, directly establishes or indirectly controls a special purpose company, and directly or indirectly undertakes domestic direct investment activities through such special purpose company using legitimately held domestic company assets or equities, or using legitimately held overseas company assets or equities, namely the activity of establishing a domestic foreign investment enterprise or project by merger and acquisition or incorporating a new entity while acquiring ownership title, rights of control, rights of business operation and management and so on, must apply to the SAFE for registration of foreign exchange for overseas investments.
According to the Circular 37: (i) “special-purpose vehicle” is defined as “offshore enterprise directly established or indirectly controlled by the domestic resident (including domestic institution and individual resident) with their legally owned assets or equity of the domestic enterprise, or legally owned offshore assets or equity, for the purpose of offshore investment and financing; (ii) domestic resident must register with SAFE before contributing assets or equity interests to special purpose vehicle; (iii) following the initial registration, any major changes such as change in the overseas special purpose vehicle’s domestic resident shareholders, name of the overseas special purpose vehicle and term of operation or any increase or reduction of the overseas special purpose vehicle’s registered capital, share transfer or swap, merger or division, or similar development, shall report to the SAFE for registration in time.
94

Table of Contents
Pursuant to Notice of the SAFE on Reforming the Mode of Management of Settlement of Foreign Exchange Capital of Foreign-invested Enterprises promulgated on March 30, 2015 and became effective on June 1, 2015, and partly amended on December 30, 2019, the willingness settlement of foreign exchange capital of foreign-invested enterprises shall be conducted, meaning the settlement of foreign exchange capital in the capital accounts of foreign-invested enterprises that have been subject to the confirmation of cash capital contribution at foreign exchange authorities (or the entry registration of cash contribution at banks) may be handled at banks based on the enterprises’ actual requirements for business operation. RMB funds obtained from the willingness settlement of foreign exchange capital of foreign-invested enterprises should be deposited into and managed under the account for settled foreign exchange to be paid. On June 9, 2016, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Policies for Reforming and Regulating the Control over Foreign Exchange Settlement under the Capital Account, or Circular 16, which became effective on the same date. The Circular 16 further unifies and regulates the control over discretionary settlement and payment of foreign exchange receipts under the capital account.
Regulations Related to Tax
Enterprise Income Tax Law
According to the PRC Enterprise Income Tax Law, or the EIT Law, which was issued by the NPC on March 16, 2007 and last revised by the SCNPC on December 29, 2018, and the Regulation on the Implementation of the Enterprise Income Tax Law, or the EIT Regulation, issued by the State Council on December 6, 2007 and became effective on January 1, 2008 and partly amended on April 23, 2019 and became effective on the same date, both domestic and foreign-invested enterprises established under the laws of foreign countries or regions whose “de facto management bodies” are located in the PRC are considered resident enterprises, and will generally be subject to the EIT Law at the rate of 25% of their global income. The defined “de facto management bodies” are establishments that carry out substantial and overall management and control over production and operations, personnel, accounting, and properties” of the enterprise. If an enterprise is considered a PRC resident enterprise under the above definition, its global income will be subject to enterprise income tax at the rate of 25%. The Notice on Issues about the Determination of Chinese-Controlled Enterprises Registered Abroad as Resident Enterprises on the Basis of Their Body of Actual Management issued by the State Administration of Taxation, or the SAT, on April 22, 2009 and effective on January 1, 2008 and partly amended on December 29, 2017 and became effective on the same date, sets up a more specific definition of “de facto management bodies” standard.
Pursuant to the Administrative Measures for the Recognition of High and New Technology Enterprises promulgated by the Ministry of Science and Technology, the MOF and the SAT on April 14, 2008 and last revised on January 29, 2016 and came into effect on January 1, 2016, the certificate of a high and new technology enterprise is valid for three years. The Administrative Measures for Determination of High and New Tech Enterprises and the EIT Law regulate the sort of enterprises that are eligible for the tax reduction. An enterprise shall satisfy the following requirements in order to be determined as a high and new technology enterprise: (i) the enterprise shall be registered for more than one year when applying for identification; (ii) the enterprise has already owned the intellectual property which plays a critical role in their main products (services) through independent research, assignee, accepting donation, mergers and acquisitions; (iii) its main products (services) which play a key role have fallen within the range prescribed in the High and New Technology Areas Entitled to the Key Support of the State; (iv) it has the total number of scientific and technological personnel in its employment that accounts for at least 10 percent of the total number of its employees during the current year; (v) the percentage of total research and development expenses of the enterprise for the last three fiscal years in total sales income for the same period meets the relevant requirements; (vi) the revenue from high and new technology products (services) accounts for at least 60 percent of the total revenue of the enterprise during the current year; (vii) no major product safety, quality accidents or serious environmental violations have occurred within one year of the application; and (viii) the innovation capability evaluation of the enterprise shall meet the corresponding requirements.
Value Added Tax
According to the Interim Regulation of the PRC on Value Added Tax, or the VAT, issued by the State Council on December 13, 1993 and last revised on November 19, 2017, and the Detailed Rules for the Implementation of the Interim Regulation of the PRC on Value Added Tax issued by the Ministry of Finance, or the MOF, on December 25, 1993 and last revised on October 28, 2011, entities and individuals selling goods in the PRC or providing processing services, repair services and importation services should be subject to VAT, and the payable tax amount shall be calculated by deducting input tax for the current period from output tax for the current period.
95

Table of Contents
According to the Notice of Taxation on Implementing the Pilot Program of Replacing Business Tax with VAT in an
All-round
Manner issued jointly by the MOF and SAT on March 23, 2016 and partly amended by the MOF, SAT and the General Administration of Customs on March 20, 2019 and became effective on April 1, 2019, the countrywide pilot practice of levying VAT in lieu of business tax, or the Pilot Practice, has been carried out since May 1, 2016. According to the specific regulatory documents for the Pilot Practice, including the Implementation Measures for the Pilot Practice of Levying VAT in lieu of Business Tax, the VAT rates vary from 17%, 11%, 6%, 3% to 0% for taxpayers incurring taxable activities. According to the Notice of the MOF and SAT on Adjusting the Value-added Tax Rate effective on May 1, 2018, the VAT tax rates on sales, imported goods that were previously subject to 17% and 11% are now adjusted to 16% and 10%, respectively.
According to the Announcement of the Ministry of Finance, the SAT and the General Administration of Customs on Relevant Policies for Deepening the Value-Added Tax Reform promulgated on March 21, 2019 and came into effect on April 1, 2019, the VAT tax rates on sales, imported goods that were previously subject to 16% and 10% are now adjusted to 13% and 9%, respectively.
Withholding Income Tax
According to the EIT Law and the EIT Regulation, dividends generated after January 1, 2008 and payable by foreign-invested enterprises in the PRC to foreign enterprise investors shall be subject to a 10% withholding tax unless a tax treaty with different withholding tax arrangements has been made between the PRC and the jurisdiction of the relevant foreign enterprises. According to the Arrangement between the Mainland of China and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income issued by SAT on August 21, 2006 and came into effect on December 8, 2006, if the shareholders of a PRC company are Hong Kong residents qualified as the beneficial owner, the applicable withholding tax rate is reduced to 5% if the foreign investor holds at least 25% of the registered capital of the PRC company, or a withholding tax rate of 10% applies to any dividends declared by the PRC company if the foreign investor holds less than 25% of the registered capital of the PRC company. According to Announcement of SAT on Issuing the Measures for the Administration of
Non-Resident
Taxpayers’ Enjoyment of the Treatment under Tax Agreements effective on January 1, 2020,
non-resident
taxpayers claiming treaty benefits shall be handled in accordance with the principles of “self-assessment, claiming benefits, retention of the relevant materials for future inspection”. Where a
non-resident
taxpayer self-assesses and concludes that it satisfies the criteria for claiming treaty benefits, it may enjoy treaty benefits at the time of tax declaration or at the time of withholding through the withholding agent, simultaneously gather and retain the relevant materials for future inspection and accept
follow-up
administration by the tax authorities.
Pursuant to the Announcement on Matters Concerning “Beneficial Owners” in Tax Treaties, issued by the SAT on February 3, 2018 and came into effect on April 1, 2018, when determining an applicant’s “beneficial owner” status regarding tax treatments in connection with dividends, interests or royalties in tax treaties, several factors set forth below will be taken into account, although the actual analysis will be fact-specific: (i) whether the applicant is obligated to pay more than 50% of his or her income in 12 months to residents in a third country or region; (ii) whether the business operated by the applicant constitutes a substantial business operation; and (iii) whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate. The applicant must gather and retain relevant documents proving his or her “beneficial owner” status for the inspection of the tax authorities.
Cultural development fee
According to the Notice on Issues Relating to Cultural Undertaking Development Fee Policies Relating to the Pilot Scheme of Levying VAT in Place of Business Tax and Administration of Levying effective as from May 1, 2016, advertising service providers are generally required to pay a cultural development fee at the rate of 3% on the billed sales amount obtained from the provision of advertising services offset by the
after-tax
payment made to other advertising service providers or publishers.
96

Table of Contents
Regulations Related to Labor
The Labor Law of the PRC, which was promulgated by the SCNPC on July 5, 1994, and last amended on December 29, 2018 and became effective on the same date, provides that employees are entitled to equal opportunities in employment, selection of occupations, receiving labor remuneration, rest days and holidays, protection of occupational safety and healthcare, social insurance and welfare. Employers must establish and improve the system for occupational safety and healthcare, provide training on occupational safety and healthcare to employees, comply with national and local regulations on occupational safety and healthcare, and provide necessary labor protective supplies to employees.
The Labor Contract Law of the PRC issued by the SCNPC on June 29, 2007 and last revised on December 28, 2012 and came into effect on July 1, 2013, requires every employer to enter into a written contract of employment with each of its employees. The employer shall not force the employees to work beyond the time limit and each employer must pay overtime compensation to its employees. The wage of each employee shall be no less than the local standard on minimum wages.
Regulations Related to Social Insurance and Housing Provident Funds
In accordance with the Social Insurance Law of the PRC issued by the SCNPC on October 28, 2010, effective on July 1, 2011 and last amended on December 29, 2018 and became effective on the same date, an employee shall participate in five types of social insurance funds, including pension insurance, medical insurance, unemployment insurance, maternity insurance and occupational injury insurance. The premiums for maternity insurance and occupational injury insurance are paid by the employer, while the premiums for pension insurance, medical insurance and unemployment insurance are paid by both the employer and the employee. If the employer fails to fully contribute to social insurance funds on time, the collection agency for such social insurance may demand the employer to make full payment or to pay the shortfall within a set period and collect a late charge. If the employer fails to pay after the due date, the relevant government administrative body may impose a fine on the employer.
In accordance with the Regulation on the Administration of Housing Provident Funds issued by the State Council on April 3, 1999 and last revised on March 24, 2019 and came into effect on the same date, enterprises must register with the competent managing center for housing funds and shall contribute to the Housing Provident Fund for any employee on its payroll. Where an employer fails to pay up housing provident funds within the prescribed time limit, the employer may be fined and ordered to make payment within a certain period.
Regulations Related to Employee Stock Incentive Plan
Pursuant to the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company, or Circular 7, which was issued by the SAFE on February 15, 2012, employees, directors, supervisors, and other senior management who participate in any stock incentive plan of an publicly-listed overseas company and who are PRC citizens or
non-PRC
citizens residing in China for a continuous period of no less than one year, subject to a few exceptions, are required to register with SAFE or its local branches through a qualified domestic agent, which may be a PRC subsidiary of such overseas listed company, and complete certain other procedures with respect to the stock incentive plan.
In addition, the State Administration for Taxation has issued circulars in relation to employee stock incentive awards, under which our employees based in the PRC shall be subject to PRC individual income tax for exercising their incentive awards. Our PRC subsidiaries shall be responsible to file documents related to employee stock incentive plan with relevant tax authorities and to withhold individual income taxes of those employees who opt to exercise their stock incentive awards.
Regulations Related to M&A and Overseas Listings
In Accordance with the Rules on the Acquisition of Domestic Enterprises by Foreign Investors, or the M&A Rules, promulgated by the MOFCOM on August 8, 2006 and amended on June 22, 2009 and became effective on the same date, a foreign investor was required to obtain necessary approvals when (i) a foreign investor establishes a foreign-invested enterprise either by acquiring equity in a domestic
non-foreign
invested enterprise, or subscribing for new equity in a domestic enterprise via an increase of registered capital; or (ii) a foreign investor establishes a foreign- invested enterprise which purchase and operates the assets of a domestic enterprise, or which purchases the assets of a domestic enterprise and injects those assets to establish a foreign-invested enterprise. Approval from MOFCOM is required if a domestic company or enterprise, or a domestic natural person, through an overseas company established or controlled by it/him, acquires a domestic company which is related to or connected with it/him.
97

Table of Contents
In February 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “Circular 6”), which established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire “de facto control” of domestic enterprises with “national security” concerns. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, effective from September 1, 2011, which provide that the MOFCOM will look into the substance and actual impact of a transaction and prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
On December 24, 2021, the CSRC released the Draft Overseas Listing Administration Provisions and the Draft Overseas Listing Filing Measures, which are open for public comments until January 23, 2022. The Draft Overseas Listing Administration Provisions, if adopted in its current form, will comprehensively improve and reform the existing regulatory regime for and listing of PRC domestic enterprises’ securities, and will regulate both direct and indirect listing of PRC domestic enterprises’ securities by adopting a filing-based regulatory regime. Indirect listing of domestic enterprises refers to the indirect issue of securities overseas by PRC domestic enterprises or the listing of their securities for trading overseas, namely enterprises operating their main business domestically issue securities overseas or listing their securities for trading overseas based on equity, assets, gains or other similar interests of PRC domestic enterprises in the name of overseas enterprises. The Draft Overseas Listing Filing Measures provides that if the issuer meets the following criteria, the and listing conducted by such issuer will be deemed as indirect by PRC domestic enterprises: (i) any of the revenue, net profit, total assets or net assets of the domestic enterprises accounted for more than 50% of the respective audited revenue, profit, total assets or net assets of the issuer within the latest fiscal year; (ii) a majority of the officers responsible for management of the issuer are PRC citizens or have their usual place of residence located in the territory of the PRC, the issuer’s main place of operation is within PRC. It is unclear based on the Draft Overseas Listing Filing Measures whether either or both of the above criteria need to be satisfied. According to the Draft Overseas Listing Administration Provisions, PRC domestic enterprises that and list securities in overseas markets, either in direct or indirect means, are required to fulfill the filing procedure with the CSRC and report relevant information. and listings that (i) are prohibited by specific PRC Laws and/or regulations; (ii) constitute threat to or endanger national security; (iii) involve material ownership disputes; (iv) the PRC domestic enterprises, their controlling shareholder or actual controller involving in certain criminal offense in the past three years; or (v) directors, supervisors and senior management of the issuer involving in certain criminal offense or administrative penalties with serious circumstances in the past three years, among other circumstances, are explicitly forbidden by the Draft Overseas Listing Administration Provisions. As implementation rules, the Draft Overseas Listing Filing Measures specifies the filing requirement and procedures. Where an issuer makes an application for to competent overseas regulators, the issuer must submit to the CSRC filing documents within three business days after such application is submitted. The Draft Overseas Listing Filing Measures also requires, either after the filing by the issuer and before the completion of and listing, or after the overseas listing, subsequent report to the CSRC on material events, such as material change in principal business or change of control. As of the date of this annual report, the Draft Overseas Listing Administration Provisions and the Draft Overseas Listing Filing Measures had been released for public comments only and the final version and effective date of such regulations are subject to change with substantial uncertainty.
98

Table of Contents

4.C. | Organizational Structure

The following is a list of our principal subsidiaries and the VIEs as of the date of this annual report.

Name |  | Place of Formation |  | Relationship
Lizhi Inc. |  | British Virgin Islands |  | Wholly owned subsidiary
Lizhi Holding Limited |  | Hong Kong |  | Wholly owned subsidiary
Beijing Hongyiyichuang Information Technology Co., Ltd. |  | China |  | Wholly owned subsidiary
Tiya Inc. |  | Cayman Islands |  | Wholly owned subsidiary
TIYA INC. |  | British Virgin Islands |  | Wholly owned subsidiary
Tiya Holding Limited |  | Hong Kong |  | Wholly owned subsidiary
TIYA PTE. LTD. |  | Singapore |  | Wholly owned subsidiary
NASHOR PTE. LTD. |  | Singapore |  | Wholly owned subsidiary
Guangzhou Tiya Information Technology Co., Ltd. |  | China |  | Wholly owned subsidiary
Tiya Inc. |  | USA |  | Wholly owned subsidiary
Guangzhou Lizhi Network Technology Co., Ltd. |  | China |  | VIE
Guangzhou Huanliao Network Technology Co., Ltd. |  | China |  | VIE

The following diagram illustrates our corporate structure as of the date of this annual report, including our significant subsidiaries and the VIEs.
Notes:

(1) | The shareholders of Guangzhou Lizhi and their relationship with our company are as follows: (i) Mr. Jinnan (Marco) Lai (84.81%), our founder, Chief Executive Officer and Chairman, and the beneficial owner of the shares held by Voice Future Ltd, one of our shareholders; (ii) Mr. Ning Ding (7.50%), our co-founder, Chief Technology Officer and director, and the beneficial owner of the shares held by Voice Intelligence Ltd, one of our shareholders; and (iii) Zhuhai Dayin Ruoxi Enterprise Management Center (Limited Partnership) (formerly known as Zhuhai Dayin Ruoxi Investment Development Center (Limited Partnership) (珠海市⼤⾳若希企业管理中⼼(有限合伙)) (7.69%), 99.17% of whose interest is owned by Mr. Jinnan (Marco) Lai. Guangzhou Lizhi operates our LIZHI App.

(2) | The sole shareholder of Guangzhou Huanliao is Mr. Ning Ding, our co-founder, Chief Technology Officer and director. Guangzhou Huanliao currently focuses on the operation of Huanliao, an audio-based social app recently launched by us.

(3) | NASHOR PTE. LTD. and TIYA PTE. LTD. currently focus on our overseas business.

99

Table of Contents
Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders
Currently, our business in China are operated primarily through the VIEs, Guangzhou Lizhi and Guangzhou Huanliao, due to PRC legal restrictions on foreign ownership in value-added telecommunication services and other internet related business. The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version) and the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version) provides that foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider other than an
e-commerce
service provider, and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision) require that the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record. In addition, foreign investors are prohibited from investing in companies engaged in certain online and culture related businesses. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Related to Foreign Investment.” We are an exempted company incorporated in the Cayman Islands with limited liability. Hongyi Technology and Guangzhou Tiya, our PRC subsidiaries, are considered as foreign-invested enterprises. To comply with the foregoing PRC laws and regulations, we primarily conduct our business in China through the VIEs in the PRC, based on a series of contractual arrangements. As a result of these contractual arrangements, we exert effective control over the VIEs and consolidate their operating results in our consolidated financial statements under U.S. GAAP. In 2019, 2020 and 2021, the amount of revenues generated by the VIEs accounted for 99.9%, 96.7% and 93.0%, respectively, of our total net revenues. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries which, in turn, depends on the payment of service fees to our PRC subsidiaries by the VIEs in the PRC pursuant to certain contractual arrangements among our PRC subsidiaries, the VIEs and the VIEs’ shareholders. In 2019, 2020 and 2021, the amount of service fees paid to our PRC subsidiaries from the VIEs was nil, RMB8.3 million and RMB46.8 million (US$7.3 million), respectively. We expect that the amounts of such service fees will increase in the foreseeable future as our PRC business continues to grow.
These contractual arrangements may not be as effective as direct ownership in providing us with control over the VIEs. If the VIEs or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For details, please refer to “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure.”
In the opinion of Fangda Partners, our PRC counsel:

| • |  | the ownership structures of the VIEs do not and will not contravene any PRC laws or regulations currently in effect; and

| • |  | the contractual arrangements among Hongyi Technology, Guangzhou Lizhi and their respective shareholders, as well as among Guangzhou Tiya, Guangzhou Huanliao and their respective shareholders governed by PRC laws are valid and binding upon each party to such arrangements and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect.

There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. In particular, in March 2019, the National People’s Congress of the PRC adopted the PRC Foreign Investment Law, which became effective on January 1, 2020. Among other things, the PRC Foreign Investment Law defines the “foreign investment” as investment activities in China by foreign investors in a direct or indirect manner, including those circumstances explicitly listed thereunder as establishing new projects or foreign invested enterprises or acquiring shares of enterprises in China, and other approaches of investment as stipulated by laws, administrative regulations or otherwise regulated by the State Council. The PRC Foreign Investment Law leaves uncertainty as to whether foreign investors’ controlling PRC onshore variable interest entities via contractual arrangements will be recognized as “foreign investment” and thus be subject to the restrictions/prohibitions on foreign investments. 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 operating our podcasts, audio entertainment and other internet related businesses do not comply with PRC government restrictions on foreign investment in certain industries, such as value-added telecommunications services business, we could be subject to severe penalties, including being prohibited from continuing operations. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure.”
100

Table of Contents
The following is a summary of the contractual arrangements by and among Hongyi Technology, Guangzhou Lizhi and the shareholders of Guangzhou Lizhi, and by and among Guangzhou Tiya, Guangzhou Huanliao and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao.
Guangzhou Lizhi
Equity Pledge Agreement
Pursuant to an equity pledge agreement entered into on June 20, 2019 by and between Hongyi Technology and then shareholders of Guangzhou Lizhi, such shareholders of Guangzhou Lizhi pledged all of their equity interests in Guangzhou Lizhi to Hongyi Technology, to guarantee the performance of Guangzhou Lizhi and, to the extent applicable, such shareholders of Guangzhou Lizhi, of their obligations under the contractual arrangements of the VIEs. If Guangzhou Lizhi or such shareholders of Guangzhou Lizhi fail to perform their obligations under the contractual arrangement of the VIEs, Hongyi Technology will be entitled to, among other things, right to sell the pledged shares of Guangzhou Lizhi via an auction. This equity pledge agreement will remain in effect so long as any of the exclusive technical consulting and management service agreement, the operation agreement or the exclusive equity transfer option agreement, as mentioned below, remains in effect or any guaranteed obligation of Guangzhou Lizhi, or, to the extent applicable, its shareholder, remains outstanding under the VIE arrangements. The pledge under the equity pledge agreement has been registered with the relevant PRC legal authority pursuant to PRC laws and regulations. The existing equity pledge agreement was initially entered into in March 2011 and was subsequently amended and restated on substantially similar terms in December 2014, June 2017, August 2017 and June 2019, respectively.
Exclusive Equity Transfer Option Agreement
Pursuant to an exclusive equity transfer option agreements entered into on June 20, 2019 by and between Hongyi Technology and then shareholders of Guangzhou Lizhi, such shareholders of Guangzhou Lizhi exclusively granted Hongyi Technology or any party appointed by Hongyi Technology an irrevocable option to purchase all or part of the shares in Guangzhou Lizhi held by then shareholders of Guangzhou Lizhi at a price no lower than the lowest price permitted by PRC law. Whether to exercise this option and the timing, methods and frequency of exercising such option are at the full discretion of Hongyi Technology. The exclusive equity transfer option agreement shall remain valid until all shares in Guangzhou Lizhi held by the shareholder of Guangzhou Lizhi, or all irrevocable options to purchase such shares, have been transferred to Hongyi Technology or its designated person. Hongyi Technology is entitled to terminate this exclusive equity transfer option agreement if a default occurs due to reasons not related to Hongyi Technology under this agreement. The existing share option agreement was initially entered into in March 2011 and was subsequently amended and restated on substantially similar terms in December 2014, June 2017, August 2017 and June 2019, respectively.
Exclusive Technical Consulting and Service Agreement
Pursuant to an exclusive technical consulting and service agreement entered into on June 9, 2017 by and between Hongyi Technology and Guangzhou Lizhi, Guangzhou Lizhi agreed to appoint Hongyi Technology as its exclusive provider of technology services, including software development, internet maintenance, network security and other services in exchange for a service fee of an amount equal to 90% of the
after-tax
net profit of Guangzhou Lizhi, for a term of ten years starting from the date thereof. Hongyi Technology is entitled to terminate or extend the exclusive technical consulting and service agreement at its discretion. The existing exclusive technology consulting and service agreement was initially entered into in March 2011 and was subsequently superseded by an amended and restated exclusive technology consulting and service agreement on substantially similar terms in June 2017.
101

Table of Contents
Operation Agreement
Pursuant to an operation agreement entered into on June 20, 2019 by and among Hongyi Technology, Guangzhou Lizhi and then shareholders of Guangzhou Lizhi, such shareholders of Guangzhou Lizhi agreed that, without written consent of Hongyi Technology or a party designated by it, Guangzhou Lizhi shall refrain from conducting any action that may materially or adversely affect its assets, business, personnel, obligations, rights or operation, for a term of ten years starting from the date thereof. Such actions include, among other things, incurrence of debt to a third party, change of directors or senior management, acquisition or disposal of assets or shares, amendment to its articles of association or business scope and other matters. Hongyi Technology is also entitled to appoint directors and senior management of Guangzhou Lizhi and instruct Guangzhou Lizhi on matters pertinent to its daily operation, financial management. Guangzhou Lizhi is obligated to fully effectuate the appointment or instructions made by Hongyi Technology in methods consistent with applicable laws and articles of Guangzhou Lizhi. Hongyi Technology is entitled to terminate or extend the operation agreement at its discretion. The existing operating agreement was initially entered into in March 2011 and was subsequently superseded by an amended and restated operating agreement on substantially similar terms in June 2017 and June 2019, respectively.
Power of Attorney
Pursuant to a series of power of attorney issued by shareholders of Guangzhou Lizhi on June 20, 2019, such shareholders of Guangzhou Lizhi irrevocably appointed Hongyi Technology as their
attorney-in-fact
to act on their behalf on all shareholder matters of Guangzhou Lizhi and exercise all rights as shareholders of Guangzhou Lizhi. This power of attorney shall remain valid until the abovementioned operating agreement is terminated or Guangzhou Lizhi is dissolved, whichever is earlier. The existing series of power of attorney was initially entered into in March 2011 and was subsequently superseded by a new series of powers of attorney on substantially similar terms in June 2017 and June 2019, respectively.
Guangzhou Huanliao
Equity Pledge Agreement
Pursuant to an equity pledge agreement entered into on May 20, 2019 by and between Guangzhou Tiya and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao, Mr. Ning Ding pledged all of his equity interests in Guangzhou Huanliao to Guangzhou Tiya to guarantee the performance of Guangzhou Huanliao and, to the extent applicable, Mr. Ning Ding, of their obligations under the contractual arrangement of the VIEs. If Guangzhou Huanliao or Mr. Ning Ding fails to perform their obligations under the contractual arrangement of the VIEs, Guangzhou Tiya will be entitled to, among other things, a right to sell the pledged shares of Guangzhou Huanliao via an auction. This equity pledge agreement will remain in effect so long as any of the exclusive technical consulting and management service agreement, the operation agreement or the exclusive equity transfer option agreement, as mentioned below, remains in effect or any guaranteed obligation of Guangzhou Huanliao, or, to the extent applicable, its shareholders, remains outstanding under the VIE arrangements. The pledge under the equity pledge agreement has been registered with the relevant PRC legal authority pursuant to PRC laws and regulations.
Exclusive Equity Transfer Option Agreement
Pursuant to an exclusive equity transfer option agreements entered into on May 20, 2019 by and between Guangzhou Huanliao, Guangzhou Tiya and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao, Mr. Ning Ding exclusively granted Guangzhou Tiya or any party appointed by Guangzhou Tiya an irrevocable option to purchase all or part of the shares in Guangzhou Huanliao held by Mr. Ning Ding at a price no lower than the lowest price permitted by PRC law. Whether to exercise this option and the timing, methods and frequency of exercising such option are at the full discretion of Guangzhou Tiya. The exclusive equity transfer option agreement shall remain valid until all shares in Guangzhou Huanliao held by then shareholders of Guangzhou Huanliao, or all irrevocable options to purchase such shares, have been transferred to Guangzhou Tiya or its designated person. Guangzhou Tiya is entitled to terminate this exclusive equity transfer option agreement if a default occurs due to reasons not related to Guangzhou Tiya under this agreement.
Exclusive Technical Consulting and Service Agreement
Pursuant to an exclusive technology consulting and service agreement entered into on May 20, 2019 by and between Guangzhou Tiya and Guangzhou Huanliao, Guangzhou Huanliao agreed to appoint Guangzhou Tiya as its exclusive provider of technology services, including software development, internet maintenance, network security and other services in exchange for a service fee of an amount equal to 90% of the
after-tax
net profit of Guangzhou Huanliao, for a term of ten years starting from the date thereof. Guangzhou Tiya is entitled to terminate or extend the exclusive technical consulting and service agreement at its discretion.
102

Table of Contents
Operation Agreement
Pursuant to an operation agreement entered into on May 20, 2019 by and among Guangzhou Tiya, Guangzhou Huanliao and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao, Mr. Ning Ding agreed that, without written consent of Guangzhou Tiya or a party designated by it, Guangzhou Huanliao shall refrain from conducting any action that may materially or adversely affect its assets, business, personnel, obligations, rights or operation, for a term of ten years starting from the date thereof. Such actions include, among other things, incurrence of debt to a third party, change of directors or senior management, acquisition or disposal of assets or shares, amendment to its articles of association or business scope and other matters. Guangzhou Tiya is also entitled to appoint directors and senior management of Guangzhou Huanliao and instruct Guangzhou Huanliao on matters relating to its daily operation, financial management. Guangzhou Huanliao is obligated to fully effectuate the appointment or instructions made by Guangzhou Tiya in methods consistent with applicable laws and articles of Guangzhou Huanliao. Guangzhou Tiya is entitled to terminate or extend the operation agreement at its discretion.
Power of Attorney
Pursuant to a series of power of attorney issued by Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao on May 20, 2019, Mr. Ning Ding irrevocably appointed Guangzhou Tiya as his
attorney-in-fact
to act on his behalf on all shareholder matters of Guangzhou Huanliao and exercise all rights as the sole shareholder of Guangzhou Huanliao. This power of attorney shall remain valid until the abovementioned operating agreement or Guangzhou Tiya is terminated or dissolved.

4.D. | Property, Plant and Equipment

Our corporate headquarters are located in Guangzhou, China. As of December 31, 2021, we have leased office space with an aggregate area of approximately 8,515 square meters, of which approximately 5,944 square meters are in Guangzhou and 1,283 square meters are in other cities in the PRC and 1,288 square meters are overseas.
Our main IT infrastructure includes Internet data centers (IDC) and content delivery networks (CDN). We lease IDC facilities from major domestic IDC providers. We believe that our existing facilities are generally adequate in meeting our current needs, but we expect to seek additional space as needed to accommodate future growth.

ITEM 4A. | UNRESOLVED STAFF COMMENTS

None.

ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion may contain forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Item 3. Key Information—Item 3.D. Risk Factors” and elsewhere in this annual report.
For the impact of foreign currency fluctuations on the company, and the extent to which foreign currency net investments are hedged by currency borrowing and other hedging instruments, please refer to, “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign exchange risk.”
103

Table of Contents
5.A. Operating Results
General Factors Affecting Our Results of Operations
Our business and operating results are affected by general factors affecting China’s and overseas online audio and entertainment industries, which include:

| • |  | overall economic growth of China and overseas region where we operate;

| • |  | the usage and penetration rate of mobile internet and mobile payment;

| • |  | the users’ preferences and changes in market trends in online audio and entertainment industries;

| • |  | the growth and competitive landscape of online audio market; and

| • |  | governmental policies and initiatives affecting online audio and internet industries.

Unfavorable changes in any of these general industry conditions could negatively affect demand for our services and materially and adversely affect our results of operations.
Specific Factors Affecting Our Results of Operations
While our business is influenced by general factors affecting the online audio industry in China and overseas, we believe our results of operations are more directly affected by company specific factors, including the following major factors:
Our ability to expand user base and enhance user engagement
We rely on our engaged and growing user community to drive our net revenue growth. Our user base and level of user engagement in turn help us motivate hosts to produce high-quality content on our platforms, which further stimulates user interactions and spending. Our ability to effectively expand our user base and increase user engagement will affect the growth of our business and our revenue going forward.
The following table sets forth our average total mobile MAUs for each of the quarters indicated.

|  | For the Three Months Ended |
|  | March 31, 2020 |  |  | June 30, 2020 |  |  | September 30, 2020 |  |  | December 31, 2020 |  |  | March 31, 2021 |  |  | June 30, 2021 |  |  | September 30, 2021 |  |  | December 31, 2021 |
|  | (in thousands) |
Average Total Mobile MAUs |  |  | 54,478 |  |  |  | 55,863 |  |  |  | 56,205 |  |  |  | 58,438 |  |  |  | 59,677 |  |  |  | 60,877 |  |  |  | 58,946 |  |  |  | 54,115 |

Our ability to maintain and expand our user base, as well as maintain and enhance user engagement, depends on, among other things, our ability to cultivate and retain high-quality hosts, our ability to continuously produce quality content, our ability to maintain our pivotal position in the growing online audio industry in China, our ability to maintain our growth in the overseas market, and our ability to continually improve our users’ entertainment experience through technological innovation. Also, the growth of our user base could be largely influenced by the restrictive and regulatory measures that the PRC government authority may impose on the industry we operate in. See “Item 3. Key Information—3.D. Risk Factors— Risks Related to Our Business and Industry—The PRC government may further tighten the regulation on online audio and entertainment platforms, which may materially and negatively affect our reputation, business, financial condition and results of operations.”
Our ability to cultivate and retain hosts and to enrich our content
Hosts are critical to expanding our user base and enhancing user engagement. We will continue to attract, nurture and promote our hosts through our comprehensive host development system and increase our hosts’ stickiness to and reliance on our platforms.
The high-quality content generated by our hosts attracts more users to our platforms, increases their level of engagement and in turn drives the growth of our net revenue. Our ability to cultivate and retain hosts and drive content creation depends on, among other things, our brand awareness, the size and engagement of our user base, our audio technologies, and monetization opportunities available on our platforms.
104

Table of Contents
Our ability to maximize monetization potential
At current stage, we strategically offer most of our podcasts for free to create an engaging audio community, which we believe is essential in expanding our user base and provides monetization potential through audio entertainment. We currently generate substantially all of our net revenues through virtual gift sales to users of our audio entertainment products, with a small portion of net revenues generated from podcast, advertising and others.
Our virtual gift sales are primarily driven by the number of paying users. We have experienced significant growth in the number of paying users as a result of our innovative product offering and diversification of virtual gifting scenarios. We intend to attract and train more popular hosts, provide more high-quality content, expand user paying scenarios on our platforms, and enhance interactions between hosts and audience.
The following table sets forth the number of our average audio entertainment mobile MAUs on our apps, average audio entertainment paying users on our apps and average total monthly paying users across our platforms and apps for each of the quarters indicated. Our average audio entertainment mobile MAUs, average audio entertainment paying users and average total monthly paying users have generally increased during most of such periods, primarily due to our ability to offer diverse audio content and interactive audio products that drive user engagement and spending.

|  | For the Three Months Ended |
|  | March 31, 2020 |  |  | June 30, 2020 |  |  | September 30, 2020 |  |  | December 31, 2020 |  |  | March 31, 2021 |  |  | June 30, 2021 |  |  | September 30, 2021 |  |  | December 31, 2021 |
|  | (in thousands) |
Average audio entertainment Mobile MAUs |  |  | 7,198 |  |  |  | 7,394 |  |  |  | 7,591 |  |  |  | 9,056 |  |  |  | 8,269 |  |  |  | 9,116 |  |  |  | 9,168 |  |  |  | 9,401 |
Average audio entertainment paying users |  |  | 450.2 |  |  |  | 463.4 |  |  |  | 448.3 |  |  |  | 422.1 |  |  |  | 472.9 |  |  |  | 493.2 |  |  |  | 484.7 |  |  |  | 496.8 |
Average total monthly paying users |  |  | 450.3 |  |  |  | 463.4 |  |  |  | 448.3 |  |  |  | 422.4 |  |  |  | 474.7 |  |  |  | 494.4 |  |  |  | 485.5 |  |  |  | 497.3 |

We will continue to strengthen and expand our innovative audio entertainment product offerings to drive paying ratio and diversify our monetization channels. Leveraging our steadily growing user base, we are also exploring the possibility of monetizing our podcast services and introducing new models such as revenue sharing podcasts.
Our ability to further improve cost efficiency and economies of scale
We have made substantial investments in our technology, products, content and team. Our costs and expenses consist primarily of revenue sharing fees in relation to arrangements with our hosts. It is critical for us to manage our costs and expenses effectively and improve operational efficiency. We believe our platforms have achieved strong operating leverage and economies of scale as a result of our engaged user base and extensive content library. Our user-generated content library makes our business more cost-effective compared to competitors focused on acquiring costly professional-generated content. Our large podcast user base and their loyalty to hosts serve as an organic funnel to direct traffic from our podcasts to our audio entertainment, thereby lowering our user acquisition costs.
Our ability to achieve cost efficiency and economies of scale also depends on our ability to efficiently manage and control our costs and expenses. We plan to upgrade our technological capabilities and infrastructure to support the growth of our business. We expect the adoption of advanced streaming and AI technologies to improve our operational efficiency, which, together with our strong business growth, will enable us to benefit further from economies of scale.
105

Table of Contents
Key Components of Results of Operations

|  | For the Year Ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |  |  | US$ |
|  | (in thousands, except for share and per share data) |
Net revenues |  |  | 1,180,597 |  |  |  | 1,502,908 |  |  |  | 2,119,514 |  |  |  | 332,598 |
Cost of revenues |  |  | (910,155 | ) |  |  | (1,134,678 | ) |  |  | (1,502,505 | ) |  |  | (235,776 | )
Gross profit: |  |  | 270,442 |  |  |  | 368,230 |  |  |  | 617,009 |  |  |  | 96,822 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling and marketing expenses |  |  | (208,550 | ) |  |  | (142,734 | ) |  |  | (386,204 | ) |  |  | (60,604 | )
General and administrative expenses |  |  | (45,714 | ) |  |  | (88,856 | ) |  |  | (104,617 | ) |  |  | (16,417 | )
Research and development expenses |  |  | (158,015 | ) |  |  | (225,329 | ) |  |  | (264,706 | ) |  |  | (41,538 | )
Total operating expenses |  |  | (412,279 | ) |  |  | (456,919 | ) |  |  | (755,527 | ) |  |  | (118,559 | )
Operating loss |  |  | (141,837 | ) |  |  | (88,689 | ) |  |  | (138,518 | ) |  |  | (21,737 | )
Other income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income/(expenses), net |  |  | 300 |  |  |  | (1,796 | ) |  |  | (1,103 | ) |  |  | (173 | )
Foreign exchange gains/(losses) |  |  | 1,178 |  |  |  | (836 | ) |  |  | (738 | ) |  |  | (116 | )
Investment income |  |  | — |  |  |  | 1,241 |  |  |  | 468 |  |  |  | 73 |
Government grants |  |  | 9,452 |  |  |  | 12,870 |  |  |  | 13,496 |  |  |  | 2,118 |
Others, net |  |  | (2,050 | ) |  |  | (3,975 | ) |  |  | (479 | ) |  |  | (75 | )
Loss before income taxes |  |  | (132,957 | ) |  |  | (81,185 | ) |  |  | (126,874 | ) |  |  | (19,910 | )
Income tax expense |  |  | — |  |  |  | (999 | ) |  |  | (376 | ) |  |  | (59 | )
Net loss |  |  | (132,957 | ) |  |  | (82,184 | ) |  |  | (127,250 | ) |  |  | (19,969 | )
Accretions to preferred shares redemption value |  |  | (940,186 | ) |  |  | (154,066 | ) |  |  | — |  |  |  | — |
Net loss attributable to our Company’s ordinary shareholders |  |  | (1,073,143 | ) |  |  | (236,250 | ) |  |  | (127,250 | ) |  |  | (19,969 | )
Net loss |  |  | (132,957 | ) |  |  | (82,184 | ) |  |  | (127,250 | ) |  |  | (19,969 | )
Other comprehensive income/(loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | 671 |  |  |  | (6,338 | ) |  |  | (7,848 | ) |  |  | (1,232 | )
Total other comprehensive income/(loss) |  |  | 671 |  |  |  | (6,338 | ) |  |  | (7,848 | ) |  |  | (1,232 | )
Total comprehensive loss |  |  | (132,286 | ) |  |  | (88,522 | ) |  |  | (135,098 | ) |  |  | (21,201 | )
Accretions to preferred shares redemption value |  |  | (940,186 | ) |  |  | (154,066 | ) |  |  | — |  |  |  | — |
Comprehensive loss attributable to our Company’s ordinary shareholders |  |  | (1,072,472 | ) |  |  | (242,588 | ) |  |  | (135,098 | ) |  |  | (21,201 | )
Net loss attributable to our Company’s ordinary shareholders per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | (4.13 | ) |  |  | (0.27 | ) |  |  | (0.13 | ) |  |  | (0.02 | )
Diluted |  |  | (4.13 | ) |  |  | (0.27 | ) |  |  | (0.13 | ) |  |  | (0.02 | )
Weighted average number of ordinary shares |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 260,000,000 |  |  |  | 883,202,412 |  |  |  | 991,715,849 |  |  |  | 991,715,849 |
Diluted |  |  | 260,000,000 |  |  |  | 883,202,412 |  |  |  | 991,715,849 |  |  |  | 991,715,849 |

106

Table of Contents

|  | For the Year Ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |  |  | US$ |
|  | (in thousands, except for share and per share data) |
Net loss attributable to our Company’s ordinary shareholders per ADSs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | (82.55 | ) |  |  | (5.35 | ) |  |  | (2.57 | ) |  |  | (0.40 | )
Diluted |  |  | (82.55 | ) |  |  | (5.35 | ) |  |  | (2.57 | ) |  |  | (0.40 | )
Weighted average number of ADSs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 13,000,000 |  |  |  | 44,160,121 |  |  |  | 49,585,792 |  |  |  | 49,585,792 |
Diluted |  |  | 13,000,000 |  |  |  | 44,160,121 |  |  |  | 49,585,792 |  |  |  | 49,585,792 |

107

Table of Contents
Net Revenues
We generate net revenues through (i) sales of virtual gifts to users in relation to audio entertainment, and (ii) podcast, advertising and others. The following table sets forth sources of our net revenues in absolute amounts and as percentages of total net revenues for the periods indicated:

|  | For the Year Ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | % |  |  | RMB |  |  | % |  |  | RMB |  |  | US$ |  |  | % |
|  | (in thousands, except for percentages) |
Net revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Audio entertainment |  |  | 1,167,934 |  |  |  | 98.9 |  |  |  | 1,481,120 |  |  |  | 98.6 |  |  |  | 2,101,475 |  |  |  | 329,767 |  |  |  | 99.1 |
Podcast, advertising and others |  |  | 12,663 |  |  |  | 1.1 |  |  |  | 21,788 |  |  |  | 1.4 |  |  |  | 18,039 |  |  |  | 2,831 |  |  |  | 0.9 |
Total |  |  | 1,180,597 |  |  |  | 100.0 |  |  |  | 1,502,908 |  |  |  | 100.0 |  |  |  | 2,119,514 |  |  |  | 332,598 |  |  |  | 100.0 |

Cost of Revenues
Our cost of revenues consists of (i) revenue sharing fees, (ii) salary and welfare benefits, (iii) payment handling costs, (iv) bandwidth costs, and (v) others. The table below sets forth a breakdown of our cost of revenues in absolute amounts and as percentages of total cost of revenues for the periods indicated:

|  | For the Year Ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | % |  |  | RMB |  |  | % |  |  | RMB |  |  | US$ |  |  | % |
|  | (in thousands, except for percentages) |
Cost of revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenue sharing fees |  |  | 850,167 |  |  |  | 93.4 |  |  |  | 1,031,903 |  |  |  | 90.9 |  |  |  | 1,357,270 |  |  |  | 212,985 |  |  |  | 90.3 |
Salary and welfare benefits |  |  | 29,072 |  |  |  | 3.2 |  |  |  | 55,948 |  |  |  | 4.9 |  |  |  | 63,752 |  |  |  | 10,004 |  |  |  | 4.2 |
Payment handling costs |  |  | 15,573 |  |  |  | 1.7 |  |  |  | 22,692 |  |  |  | 2.0 |  |  |  | 32,506 |  |  |  | 5,101 |  |  |  | 2.2 |
Bandwidth costs |  |  | 5,702 |  |  |  | 0.6 |  |  |  | 11,226 |  |  |  | 1.0 |  |  |  | 30,889 |  |  |  | 4,847 |  |  |  | 2.1 |
Others |  |  | 9,641 |  |  |  | 1.1 |  |  |  | 12,909 |  |  |  | 1.2 |  |  |  | 18,088 |  |  |  | 2,839 |  |  |  | 1.2 |
Total |  |  | 910,155 |  |  |  | 100.0 |  |  |  | 1,134,678 |  |  |  | 100.0 |  |  |  | 1,502,505 |  |  |  | 235,776 |  |  |  | 100.0 |

Revenue sharing fees
. Our revenue sharing fees represent our payment to hosts or guilds based on a percentage of revenue from sales of virtual items and certain performance based incentives. We expect the revenue sharing fees to increase generally in parallel with the expansion of our business. However, the
COVID-19
outbreak has brought uncertainties and interruptions to China’s macroeconomics and the global economy and may adversely affect our business and financial performance in 2022. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry— We face risks related to the outbreak of
COVID-19.”
Salary and welfare benefits
. Salary and welfare benefits represent payroll-related expenses incurred for our employees involved in the operations of our platforms and products. We expect our salary and welfare benefits to continue to increase in absolute amount in parallel with our business growth. For risks related to the
COVID-19,
see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry—We face risks related to the outbreak of
COVID-19.”
108

Table of Contents
Payment handling costs
. Payment handling costs represent fees that we pay to third-party payment processing platforms through which our users purchase our virtual currencies. We expect our payment handling costs to continue to increase in absolute amount in parallel with our business growth. For risks related to the
COVID-19,
see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry— We face risks related to the outbreak of
COVID-19.”
Bandwidth costs
. Bandwidth costs is fees that we pay to telecommunication service providers for bandwidth and content delivery-related services. We expect our bandwidth costs to continue to increase in absolute amount in parallel with our business growth. For risks related to the
COVID-19,
see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry—We face risks related to the outbreak of
COVID-19.”
Others
. Other costs of revenues include other taxes and surcharges, advertising production cost, depreciation and amortization and other costs.
Operating Expenses
Our operating expenses consist of (i) selling and marketing expenses; (ii) research and development expenses; and (iii) general and administrative expenses.
The following table sets forth the components of our operating expenses in absolute amounts and as percentages of total operating expenses for the periods indicated:

|  | For the Year Ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | % |  |  | RMB |  |  | % |  |  | RMB |  |  | US$ |  |  | % |
|  | (in thousands, except for percentages) |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling and marketing expenses |  |  | 208,550 |  |  |  | 50.6 |  |  |  | 142,734 |  |  |  | 31.3 |  |  |  | 386,204 |  |  |  | 60,604 |  |  |  | 51.1 |
Research and development expenses |  |  | 158,015 |  |  |  | 38.3 |  |  |  | 225,329 |  |  |  | 49.3 |  |  |  | 264,706 |  |  |  | 41,538 |  |  |  | 35.0 |
General and administrative expenses |  |  | 45,714 |  |  |  | 11.1 |  |  |  | 88,856 |  |  |  | 19.4 |  |  |  | 104,617 |  |  |  | 16,417 |  |  |  | 13.9 |
Total |  |  | 412,279 |  |  |  | 100.0 |  |  |  | 456,919 |  |  |  | 100.0 |  |  |  | 755,527 |  |  |  | 118,559 |  |  |  | 100.0 |

Selling and Marketing Expenses
Our selling and marketing expenses primarily consist of (i) advertising and promotional expenses, including traffic promotion and brand marketing; and (ii) salaries and welfare benefits to our sales and marketing personnel. We expect our selling and marketing expenses to adjust dynamically with the Company’s operation strategy in the foreseeable future. For risks related to the
COVID-19,
see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry—We face risks related to the outbreak of
COVID-19.”
Research and Development Expenses
Our research and development expenses primarily consist of salaries and welfare benefits of our research and development staff and bandwidth costs relating to research and development activities associated with upgrading our platforms. We expect our research and development expenses to continue to grow in absolute amount in parallel with our business growth as we continue to upgrade our audio and AI technologies. For risks related to the
COVID-19,
see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry— We face risks related to the outbreak of
COVID-19.”
109

Table of Contents
General and Administrative Expenses
Our general and administrative expenses primarily consist of (i) salaries and welfare benefits of our general and administrative staff; (ii) professional service fees and (iii) other expenses such as leases and depreciation and amortization. We expect our general and administrative expenses to grow in absolute amount as we grow our business. For risks related to the
COVID-19,
see “Item 3. Key Information—3.D. Risk Factors— Risks Related to Our Business and Our Industry— We face risks related to the outbreak of
COVID-19.”
Other Expenses/Income
Our other expenses/income consist mainly of (i) foreign exchange losses/gains; (ii) interest expenses of bank loan and investment incomes; (ii) government grants we received; and (iv) others primarily including litigation gains/(losses) and bank fees.
Other Comprehensive Income/Loss
Our other comprehensive income/(loss) mainly consists of foreign currency translation adjustments. Foreign currency translation adjustments are reported as a cumulative translation adjustment. A cumulative translation adjustment is resulted from the translation of the financial statements of the consolidating entities within the group with functional currency other than the group’s reporting currency in Renminbi. We expect that the foreign currency translation adjustments will continue to fluctuate in accordance with the fluctuation between Renminbi and U.S. dollars in future periods.
Results of Operations
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Net revenues
. Our net revenues were RMB2,119.5 million (US$332.6 million) in the fiscal year 2021, representing an increase of 41.0% from RMB1,502.9 million in the prior year. The increase was mainly attributable to an increase in the number of average total monthly paying users and their spending on our audio entertainment products. The extent to which the
COVID-19
impacts on the Company’s operations beyond the fiscal year 2021 will depend on future developments of the pandemic in China and across the globe, which are subject to changes and substantial uncertainty and therefore cannot be predicted. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry— We face risks related to the outbreak of
COVID-19.”
Cost of revenues
was RMB1,502.5 million (US$235.8 million) in the fiscal year 2021, representing an increase of 32.4% from RMB1,134.7 million in the prior year. The increase was primarily due to the increases in the revenue sharing fees to our content creators, the salary and welfare benefits expenses, the payment handling costs and bandwidth costs as the Company’s business scaled up.
Gross profit and gross profit margin
. As a result of the foregoing, our gross profit increased by 67.6% from RMB368.2 million in 2020 to RMB617.0 million (US$96.8 million) in 2021. Our gross profit margin increased from 24.5% to 29.1% during the same periods. The increase was mainly due to the lower revenue sharing percentage to content creators.
Total operating expenses
. Our total operating expenses were RMB755.5 million (US$118.6 million) in the fiscal year 2021, representing an increase of 65.4% from RMB456.9 million in the prior year.
Selling and marketing expenses
. Our selling and marketing expenses were RMB386.2 million (US$60.6 million) in the fiscal year 2021, representing an increase of 170.6% from RMB142.7 million in the prior year, mainly attributable to the increased branding and promotional expenses for promotion of our new Apps and expansion of our international business, the increased marketing expenses associated with our audio entertainment products, as well as salary and welfare benefits expenses.
Research and development expenses
. Our research and development expenses were RMB264.7 million (US$41.5 million) in the fiscal year 2021, representing an increase of 17.5% from RMB225.3 million in the prior year, primarily due to the increased headcount in research and development personnel and the average salary.
110

Table of Contents
General and administrative expenses
. Our general and administrative expenses were RMB104.6 million (US$16.4 million) in the fiscal year 2021, representing an increase of 17.7% from RMB88.9 million in the prior year, mainly due to the increasing salary and welfare benefits expenses, rental expenses and amortization expenses.
Interest income, net
. We recorded interest income of RMB1.8 million in 2020 and RMB1.1 million (US$0.2 million) in 2021, respectively.
Foreign exchange (losses)/gains
. We recorded foreign exchange gains of RMB0.8 million in 2020 and RMB0.7 million (US$0.1 million) in 2021. The change is mainly relating to fluctuation in currency exchange rate in 2021.
Government grants
. Our government grants increased by 4.9% from RMB12.9 million in 2020 to RMB13.5 million (US$2.1 million) in 2021. The increase is mainly relating to the increases in government grants we received.
Loss before income taxes
. As a result of the foregoing, our loss before income taxes increased from RMB81.2 million in 2020 to RMB126.9 million (US$19.9 million) in 2021.
Income tax expense
. We recorded income tax of RMB0.4 million (US$0.1 million) in 2021, while there was an income tax of RMB1.0 million in 2020.
Net loss
. As a result of foregoing, our net loss increased from RMB82.2 million in 2020 to RMB127.3 million (US$20.0 million) in 2021.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net revenues
. Our net revenues were RMB1,502.9 million (US$230.3 million) in the fiscal year 2020, representing an increase of 27.3% from RMB1,180.6 million in the prior year.
Audio entertainment revenues
reached RMB1,481.1 million (US$227.0 million) in the fiscal year 2020, representing an increase of 26.8% from RMB1,167.9 million in the prior year. The increase was mainly attributable to an increase in the number of average total monthly paying users and their spending on the Company’s interactive audio products.
Podcast, advertising and other revenues
were RMB21.8 million (US$3.3 million) in the fiscal year of 2020, representing an increase of 72.1% from RMB12.7 million in the prior year. The increase was primarily attributable to the increase in the number of paying users in our podcast services and advertisers as the Company’s operation continued to expand.
Cost of revenues
was RMB1,134.7 million (US$173.9 million) in the fiscal year 2020, representing an increase of 24.7% from RMB910.2 million in the prior year. The increase was primarily due to the increase of revenue sharing fees and other costs, which were generally in line with the growth of the Company’s business, as well as the recognition of share-based compensation expenses upon and after the IPO.
Gross profit and gross profit margin
. As a result of the foregoing, our gross profit increased by 36.2% from RMB270.4 million in 2019 to RMB368.2 million (US$56.4 million) in 2020. Our gross profit margin increased from 22.9% to 24.5% during the same periods.
Total operating expenses
. Our total operating expenses were RMB456.9 million (US$70.0 million) in the fiscal year 2020, representing an increase of 10.8% from RMB412.3 million in the prior year, primarily due to the growth of the salary and welfare benefits, other costs which increased with the growth of the audio entertainment business and recognition of share-based compensation expenses that became effective upon and after the IPO.
Selling and marketing expenses
. Our selling and marketing expenses were RMB142.7 million (US$21.9 million) in the fiscal year 2020, representing a decrease of 31.6% from RMB208.6 million in the prior year, mainly attributable to reduced expenses related to branding and promotional activities in the year of 2020.
111

Table of Contents
Research and development expenses
. Our research and development expenses were RMB225.3 million (US$34.5 million) in the fiscal year 2020, representing an increase of 42.6% from RMB158.0 million in the prior year, primarily due to the growth of the salary and welfare benefits and other costs related to research and development activities as our business grew and recognition of share-based compensation expenses upon and after our IPO.
General and administrative expenses
. Our general and administrative expenses increased by 94.4% from RMB45.7 million in 2019 to RMB88.9 million (US$13.6 million) in 2020, mainly as a result of the increased expenses in the salary and welfare benefits, other professional service and recognition of share-based compensation expenses upon and after our IPO.
Interest income, net
. We recorded interest income of RMB0.3 million in 2019 and interest expense of RMB1.8 million (US$0.3 million) in 2020, respectively.
Foreign exchange (losses)/gains
. We recorded foreign exchange gains of RMB1.2 million in 2019 and foreign exchange losses of RMB0.8 million (US$0.1 million) in 2020. The change is mainly relating to fluctuation in currency exchange rate in 2020.
Government grants
. Our government grants increased by 36.2% from RMB9.5 million in 2019 to RMB12.9 million (US$2.0 million) in 2020. The increase is mainly relating to the increases in government grants we received.
Loss before income taxes
. As a result of the foregoing, our loss before income taxes decreased from RMB133.0 million in 2019 to RMB81.2 million (US$12.4 million) in 2020.
Income tax expense
. We recorded income tax of RMB1.0 million (US$0.2 million) in 2020, while there was no such income tax in 2019.
Net loss
. As a result of foregoing, our net loss decreased from RMB133.0 million in 2019 to RMB82.2 million (US$12.6 million) in 2020.
Taxation
Cayman Islands
Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gain. Additionally, upon payments of dividends by us to respective shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Under the current laws of the British Virgin Islands, entities incorporated in British Virgin Islands are exempted from income tax on their foreign- derived incomes in the British Virgin Islands. There are no withholding taxes in the British Virgin Islands.
Singapore
Under the Singapore tax laws, subsidiaries in Singapore are subject to a unified 17% tax rate, except for certain entities that are entitled to preferential tax treatments, and there are no withholding taxes in Singapore on remittance of dividends. For the years ended December 31, 2020 and 2021, the Company’s overseas entity recognized income tax expense amounted to RMB1.0 million and RMB0.3 million, respectively, for the assessable profits base on the existing legislation, interpretation and practice of Singapore.
112

Table of Contents
Hong Kong
Our subsidiary incorporated in Hong Kong is subject to Hong Kong profits tax at a rate of 16.5% for taxable income earned in Hong Kong before April 1, 2018. Starting from the financial year commencing on April 1, 2018, the
two-tiered
profits tax regime took effect, under which the tax rate is 8.25% for assessable profits on the first HK$2 million and 16.5% for any assessable profits in excess of HK$2 million. As an anti-avoidance measure, a group of “connected entities” can only nominate one entity within the Group to enjoy the reduced tax rate for a given year of assessment.
PRC
Generally, our subsidiaries and consolidated VIEs in China are subject to enterprise income tax on their taxable income in China at a rate of 25%, except where a special preferential rate applies. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.
Guangzhou Lizhi obtained High and New Technology Enterprise, or HNTE, status from December 1, 2020 to December 1, 2023, and it enjoyed a preferential tax rate of 15% in enterprise income tax to the extent it has taxable income under the PRC Enterprise Income Tax Law. In addition, Guangzhou Huanliao qualified as a HNTE which allows it to enjoy a three-year preferential EIT rate of 15% from December 21, 2021 to December 21, 2024. They will enjoy the 15% preferential tax rate as long as it
re-applies
for HNTE status every three years and meet the HNTE criteria during this three-year period. If they fail to meet the criteria for qualification as an HNTE in any year, (i) the enterprises cannot enjoy the 15% preferential tax rate in that year and must instead use the uniform 25% enterprise income tax rate and (ii) they will need to
re-apply
for HNTE status.
Dividends paid by our wholly foreign-owned subsidiaries in China to our intermediary holding companies in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entities satisfy all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority, in which case the dividends paid to the Hong Kong subsidiaries would be subject to withholding tax at the preferential rate of 5%. Effective from November 1, 2015, the above mentioned approval requirement has been abolished, but a Hong Kong entity is still required to file application package with the relevant tax authority, and settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority.
If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China—Under the PRC enterprise income tax law, we may be classified as a PRC ‘resident enterprise,’ which could result in unfavorable tax consequences to us and our shareholders and ADS holders and have a material adverse effect on our results of operations and the value of your investment.”
We are subject to value-added tax, or VAT, at a rate of 6% on the services we provide, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law.
Critical Accounting Policies and Judgments
Principles of consolidation
The consolidated financial statements include the financial statements of us, our subsidiaries, the VIEs and subsidiaries of the VIEs for which we are the primary beneficiary.
Subsidiaries are those entities in which we, directly or indirectly, control more than one half of the voting power, have the power to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of the board of directors, or have the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
113

Table of Contents
A consolidated VIE is an entity in which we, or our subsidiary, through contractual arrangements, have the power to direct the activities that most significantly impact the entity’s economic performance, bear the risks of and enjoy the rewards normally associated with ownership of the entity, and therefore we or our subsidiary is the primary beneficiary of the entity. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Corporate Structure.”
All transactions and balances among us, our subsidiaries, the VIEs and subsidiaries of the VIEs have been eliminated upon consolidation.
Revenue recognition
Our net revenues comprise of audio entertainment revenue and podcast, advertising and other revenue.
We adopted ASC Topic 606, “Revenue from Contracts with Customers” for all periods presented.
Consistent with the criteria of Topic 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services using the five steps defined under ASC Topic 606.
Audio entertainment revenue
We are principally engaged in operating our own interactive audio entertainment platforms, which enable hosts and users to interact with each other in audio live streaming and other interactive audio products. Audio entertainment revenue is generated from sales of virtual items to our users. We have a recharge system for users to purchase our virtual currency which can be used to purchase virtual items. Users can recharge via bank transfer and various online third-party payment platforms, including AliPay, WeChat Pay and other payment platforms. Virtual currency is
non-refundable
and without expiry. The virtual currency is often consumed soon after it is purchased based on history of turnover of the virtual currency. Unconsumed virtual currency is recorded as deferred revenue. Virtual currencies used to purchase virtual items are recognized as revenue according to the prescribed revenue recognition policies of virtual items addressed below unless otherwise stated.
Hosts engage in audio live streaming performance on platforms. We share a portion of the sales proceeds of virtual items (“revenue sharing fee”) with hosts and their respective guilds in accordance with their audio entertainment live streaming service agreements.
We evaluate and determine that we are the principal and view users to be our customers. We report audio entertainment revenues on a gross basis. Accordingly, the amounts billed to users are recorded as revenues and revenue sharing fee paid to hosts and their respective guilds are recorded as cost of revenues. Where we are the principal, we control the virtual items before they are transferred to users. Its control is evidenced by our sole ability to monetize the virtual items before they are transferred to users, and is further supported by us being primarily responsible to users and having a level of discretion in establishing pricing. We design, create and offer various virtual items for sale to users with
pre-determined
stand-alone selling prices. Virtual items are categorized as consumable and time-based items. Consumable items are consumed upon purchase and use while time-based items could be used for a fixed period of time such as a virtual special symbol that can be purchased and displayed on the users’ profile over a fixed period of time; users can purchase consumable or time-based items and present these virtual items to hosts to show support for their favorite hosts or purchase time-based virtual items that enhance the users’ personal profile.
114

Table of Contents
Revenue related to each consumable item is a single performance obligation provided on a consumption basis, and is recognized at the point in time when the virtual item is transferred directly to the users and consumed by them. Revenue related to time-based virtual items is recognized ratably over the contract period. During the years ended December 31, 2019, 2020 and 2021, the weighted average contract period for the time-based virtual items purchased were 97 days, 124 days and 117 days, respectively. We do not have further performance obligations to the user after the virtual items are consumed immediately or after the stated contract period of time for time-based items.
Podcast revenue
We provide users with certain subscription services which entitle paying subscribers to listen to specific podcast content on our platforms. The subscription fee is time-based and is collected upfront from subscribers.
The receipt of subscription fee is initially recorded as deferred revenue. We satisfy our performance obligation by providing services throughout the estimated user relationship period as the subscription period is generally perpetual. Revenue is recognized ratably over the estimated average user relationship period. The estimated average user relationship period is based on data collected from those paying subscribers who have subscribed to a specific podcast content. We estimate the user relationship period for a podcast content to be from the date a paying subscriber subscribes to it through the date which we estimate to be for the last time the paying subscriber listens to the content. The determination of the estimated average user relationship period is based on our best estimate that takes into account all known and relevant information at the time of assessment. We assess the estimated average user relationship period on a regular basis. Any adjustments arising from changes in the estimated average user relationship period as a result of new information will be accounted as a change in accounting estimate in accordance with ASC 250 Accounting Changes and Error Corrections.
The podcast content are licensed by hosts to us. We record revenue on a gross basis as (i) we are the primary obligor in the arrangement; and (ii) we have latitude in establishing the selling price.
Contract liabilities
Contract liabilities primarily consist of deferred revenue which comprises unconsumed virtual currency, unamortized revenue from time-based virtual items and unamortized subscription fees for podcast services:

|  | As of January 1, 2019 |  |  | As of December 31, |
| 2019 |  |  | 2020 |  |  | 2021 |
|  | (RMB in thousands) |
Deferred revenue |  |  | 10,668 |  |  |  | 14,530 |  |  |  | 17,001 |  |  |  | 20,657 |

During the years ended December 31, 2019, 2020 and 2021, we recognized revenue amounted to RMB8.9 million, RMB9.9 million and RMB11.0 million (US$1.7 million), respectively that was included in the corresponding opening deferred revenue balance at January 1, 2019, December 31, 2019 and 2020.
During the years ended December 31, 2019, 2020 and 2021, we did not have any arrangement where the performance obligations had already been satisfied in the past period but recognized the corresponding revenue in the current period.
Advertising revenue
We generate advertisement revenues from rendering of various forms of advertisement services by way of advertisement display on the audio entertainment live streaming platforms. Advertisements on our platforms are generally charged on the basis of duration whereby revenue is recognized ratably over the contract period of display. We provide sales incentives in the forms of discounts and rebates to advertisement agencies based on purchase volume. Revenue is recognized based on the price charged to the advertisers or agencies, net of sales incentives provided to the agencies. Sales incentives are recorded at the time of revenue recognition based on the contracted rebate rates and contract amount.
115

Table of Contents
The accounts receivable arises primarily from our advertising customers.

|  | As of December 31, |
|  | 2020 |  |  | 2021 |
|  | (RMB in thousands) |
Accounts receivable |  |  | 8,361 |  |  |  | 6,458 |

Please see Note 3 of consolidated financial statements for additional information.
There were no material contract assets as of December 31, 2020 and 2021.
Practical Expedients
We have used the following practical expedients as allowed under ASC Topic 606:

| (i) | The transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied has not been disclosed, as substantially all of our contracts have an original expected duration of one year or less.

| (ii) | Payment terms and conditions vary by contract type, although terms generally include a requirement of prepayment or payment within one year or less. We have determined that our contracts generally do not include a significant financing component.

| (iii) | Costs to obtain a contract with a customer were expensed as incurred when the amortization period would have been one year or less.

Share-based compensation
Amended and Restated 2019 Share Incentive Plan
In September 2018, Lizhi BVI adopted the 2018 Share Incentive Plan, or the 2018 BVI Plan. Under the 2018 BVI Plan, Lizhi BVI granted 27,765,900 options and restricted shares to its certain management members, employees and a consultant corresponding to 27,765,900 ordinary shares.
We adopted a share incentive plan on May 31, 2019, or the 2019 Share Incentive Plan. The 2019 Share Incentive Plan replaced the 2018 BVI Plan in its entirety and granted 38,194,330 options and restricted shares to certain management members, employees and consultant. We further amended and restated our 2019 Share Incentive Plan on March 18, 2020, or the Amended and Restated 2019 Share Incentive Plan, to increase the maximum aggregate number of Class A ordinary shares we are authorized to issue under the Amended and Restated 2019 Share Incentive Plan to 100,000,000 Class A ordinary shares. On September 17, 2021, we adopted the Second Amended and Restated 2019 Share Incentive Plan to replace the Amended and Restated 2019 Share Incentive Plan in its entirety, increasing the maximum aggregate number of Class A ordinary shares we are authorized to issue under the Second Amended and Restated 2019 Share Incentive Plan to 170,000,000 Class A ordinary shares. As of February 28, 2022, 65,533,900 options, restricted shares and restricted share units corresponding to 65,533,900 of our ordinary shares are outstanding, which has been redesignated as Class A ordinary shares on a
one-on-one
basis immediately prior to the completion of our initial public offering (the “2019 Replacement”). There is no change of fair value, vesting schedule and other key terms of such award agreements entered into with each grantee and the classification of share based awards immediately before and after the 2019 Replacement except as stated herein. Thus the 2019 Replacement was not considered a modification of share based awards. Among those, a total of 9,020,630 Class A ordinary shares corresponding to restricted shares granted to certain of our management members and director, which has been redesignated as Class A ordinary shares on a
one-on-one
basis immediately prior to the completion of IPO, were held by Kastle Limited, a company incorporated with limited liability under the laws of Hong Kong as of February 28, 2022. Kastle Limited holds such ordinary shares in trust for the benefit of these senior management and directors. The granted and outstanding awards under the 2018 BVI Plan have since been terminated.] For key terms of the Second Amended and the Restated 2019 Share Incentive Plan, see “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Share Incentive Plan.”
116

Table of Contents
Share based compensation expenses arise from share based awards, including share options for the purchase of ordinary shares, restricted shares and restricted share units.
We account for share-based awards granted to employee and
non-employee
in accordance with ASC 718 Stock Compensation. Share-based compensation expenses are recognized in the consolidated financial statements based on their grant date fair values. The fair value of share option is affected by the fair value of ordinary shares as well as assumptions regarding a number of complex and subjective variables, including the expected volatility of the fair value of ordinary shares, actual and projected employee share option exercise behavior, risk-free interest rates and expected dividends. The fair value of restricted share, restricted share units and share options with little to no exercise price, are generally measured as the grant date price of the Company’s ordinary shares. Prior to the IPO in January 2020, the fair value of our ordinary shares was assessed using the income approach/discounted cash flow method, with a discount for lack of marketability, given that the shares underlying the awards were not publicly traded at the time of grant. With the completion of IPO, it is no longer necessary to estimate the fair value of ordinary shares as the market price of its publicly traded ADSs is used as an indicator of fair value of the ordinary shares.
We have never declared or paid any cash dividends on its capital stock, and we do not anticipate any dividend payments in the foreseeable future. The contractual term is the contract life of the options. We estimated the risk free interest rate based on the market yield of US Government Bonds with maturities of ten years as of the valuation date, plus a country default risk spread between China and US. For options granted in the year ended December 31, 2018, the expected and weighted average volatility was 56.38%, risk-free rate was 3.05%, maximum contractual term was 10 years, and enterprise value per ordinary share was US$0.21. No share option was granted for the year ended December 31, 2019, and all share options granted in 2020 and 2021 were with little to no exercise price for which fair value was measured as the grant date price of our ordinary shares.
Share-based compensation expenses are recorded net of actual forfeitures. For a cliff-vesting award or award with graded-vesting features and service conditions only, we use straight-line method to recognize compensation cost over the total requisite service period for the entire award. For an award with performance and/or service condition that affects vesting, the performance and/or service condition is not considered in determining the award’s fair value on the grant date. We recognize compensation expenses for awards with performance conditions if and when we conclude that it is probable that the performance condition will be achieved, net of actual
pre-vesting
forfeitures over the requisite service period, using graded vesting method. We reassess the probability of vesting at each reporting period for awards with performance conditions and adjusts compensation expenses based on its probability assessment, unless on certain situations, we may not be able to determine that it is probable that a performance condition will be satisfied until the event occurs.
An aggregate of 45,469,640 options, restricted shares and restricted share units was granted for the years ended December 31, 2021. The expected volatility at the grant date and each option valuation date was estimated based on the annualized standard deviation of the daily return embedded in historical share prices of comparable peer companies with a time horizon close to the expected expiry of the term of the options. The weighted average volatility is the expected volatility at the grant date weighted by number of options. We have never declared or paid any cash dividends on its capital stock, and we do not anticipate any dividend payments in the foreseeable future. The contractual term is the contract life of the options. We estimated the risk free interest rate based on the market yield of U.S. government bonds with maturities of ten years as of the valuation date, plus a country default risk spread between China and U.S.
For the purpose of determining the estimated fair value of our share options, we believe the expected volatility and the estimated fair value of our ordinary shares are the most critical assumptions. Changes in these assumptions could significantly affect the fair value of share options and hence the amount of stock-based compensation we recognize in our consolidated financial statements. Since we did not have a trading history for our shares sufficient to calculate our own historical volatility, the expected volatility of our future ordinary share price was estimated based on the price volatility of the shares of comparable public companies that operate in the same or similar business.
117

Table of Contents
Subsequent to our initial public offering in January 2020, the market price of our publicly traded ADSs is used as an indicator of fair value of our ordinary shares for purposes of recording share-based compensation in connection with the equity awards granted.
Fair value of ordinary shares
Prior to our initial public offering, we were a private company with no quoted market prices for our ordinary shares. We therefore needed to make estimates of financial forecast at various dates for the purpose of determining the fair value of our ordinary shares at the date of the grant of share-based compensation awards to our employees as one of the inputs into determining the grant date fair value of the award.
The option-pricing method was used to allocate equity value of our company to preferred and ordinary shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid. This method requires making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board and management. The other major assumptions used in calculating the fair value of ordinary shares include:

| • |  | Weighted average cost of capital, or WACC: The WACCs were determined in consideration of factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systematic risk factors.

| • |  | Comparable companies: In deriving the WACCs, which are used as the discount rates under the income approach, certain publicly traded companies in the live broadcasting and audio entertainment business were selected for reference as our guideline companies.

| • |  | Discount for lack of marketability, or DLOM: DLOM was quantified by the Finnerty put options model. Under this option-pricing method, which assumed that the put option is struck at the average price of the stock before the privately held shares can be sold, the cost of the put option was considered as a basis to determine the DLOM. This option pricing method is one of the methods commonly used in estimating DLOM as it can take into consideration factors such as timing of a liquidity event, for instance an initial public offering, and estimated volatility of our shares. The farther the valuation date is from an expected liquidity event, the higher the put option value is and thus the higher the implied DLOM is.

The lower DLOM is used for the valuation, the higher the determined fair value of the ordinary shares becomes. DLOM remained in the range of 22% to 0% in the period from December 31, 2016 to the completion of our initial public offering in January 2020.
The determination of the equity value requires complex and subjective judgments to be made regarding prospects of the industry and the products at the valuation date, our projected financial and operating results, our unique business risks and the liquidity of our shares.
With the completion of our initial public offering in January 2020, it is no longer necessary for us to estimate the fair value of our ordinary shares in connection with our accounting for granted options, restricted shares and restricted share units and the market price of our publicly traded ADSs is used as an indicator of fair value of our ordinary shares.
Recently issued accounting pronouncements
For detailed discussion on recent accounting pronouncements, see Note 2(dd) to our consolidated financial statements included elsewhere in this annual report.
118

Table of Contents

5.B | Liquidity and Capital Resources

Cash flows and working capital
Our principal sources of liquidity have been cash generated from our operations, contributions from our shareholders, and bank loans taken out by the VIEs. As of December 31, 2021, we had RMB533.3 million (US$83.7 million) in cash and cash equivalents. Our cash and cash equivalents mainly represent demand deposits which are placed in bank and large reputable financial institutions, that are readily convertible to fixed amounts of cash and with original maturities from the date of purchase with terms of three months or less.
We had a positive working capital (defined as total current assets deducted by total current liabilities) of RMB211.0 million (US$33.1 million) as of December 31, 2021 primarily due to the net proceeds received from our
follow-on
public offering completed in April 2021. Although we have received net proceeds from our
follow-on
public offering completed in April 2021 to meet our ongoing working capital needs and fund our continuous growth and achieved a positive working capital as of December 31, 2021, there is no assurance that we will generate sufficient net income or operating cash flows to meet our working capital requirements and repay our liabilities as they become due in the future due to a variety of factors, some of which are beyond our control.
We will endeavor to prudently manage our working capital to support our business and operations. In terms of financing activities, we have raised capital through private placements to investors and will use cash generated from our future operating activities and the net proceeds raised in our initial public offering to meet our ongoing working capital needs and fund our continuous growth. In terms of business initiatives, we will continue to (i) strengthen our monetization effort through providing more innovative products to users in China and overseas, (ii) develop a wider and more diversified content creator base to gain more pricing power as part of our content sourcing efforts, and (iii) prudently manage our costs and operating expenses, including revenue sharing fees and advertising and promotional expenses, while achieving sustainable growth.
We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from financing activities, including the net proceeds we received from our
follow-on
offering in April 2021, our initial public offering in January 2020, and third-party loans taken out by the VIEs. We believe that our current cash and cash equivalents, together with our cash generated from operating activities, financing activities,
follow-on
offering in April 2021 and our initial public offering, will be sufficient to meet our present anticipated working capital requirements and capital expenditures at least for next coming 12 months.
We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to issue debt or equity securities or obtain additional credit facilities. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. Issuance of additional equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business and prospects may suffer.
As we will continue to invest in product innovation and AI technology to support our growth, we may not be able to further improve our working capital position or to achieve a surplus. In the future, should we require additional liquidity and capital resources to fund our business and operations, we may need to obtain additional financing, including financing from new and/or existing shareholders, and financing generated through capital market and commercial banks. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry— We have significant working capital requirements and had working capital deficits in the past. If we experience working capital deficits in the future, our business, liquidity, financial condition and results of operations may be materially and adversely affected.” In addition, the
COVID-19
outbreaks may materially and adversely affect our ability to raise additional capital in future and our liquidity. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry— We face risks related to the outbreak of
COVID-19”
and “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Our Industry—We may be unable to obtain additional capital in a timely manner or on acceptable terms. Furthermore, our future capital needs may cause us to be bound by covenants that restrict our operations, such as our ability to incur additional indebtedness or pay dividends.”
119

Table of Contents
The following table presents the summary of our consolidated cash flows data for the years ended December 31, 2019, 2020 and 2021.

|  | For the Year Ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |  |  | US$ |
|  | (in thousands) |
Net cash (used in)/generated from operating activities |  |  | (95,753 | ) |  |  | 39,996 |  |  |  | (40,426 | ) |  |  | (6,343 | )
Net cash (used in)/generated from investing activities |  |  | (29,370 | ) |  |  | (94,559 | ) |  |  | 52,101 |  |  |  | 8,176 |
Net cash generated from financing activities |  |  | — |  |  |  | 298,046 |  |  |  | 212,682 |  |  |  | 33,374 |
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash |  |  | 2,228 |  |  |  | (7,038 | ) |  |  | (6,063 | ) |  |  | (952 | )
Net (decrease)/ increase in cash, cash equivalents, and restricted cash |  |  | (122,895 | ) |  |  | 236,445 |  |  |  | 218,294 |  |  |  | 34,255 |
Cash, cash equivalents, and restricted cash at the beginning of the year |  |  | 205,604 |  |  |  | 82,709 |  |  |  | 319,154 |  |  |  | 50,082 |
Cash, cash equivalents, and restricted cash at the end of the year |  |  | 82,709 |  |  |  | 319,154 |  |  |  | 537,448 |  |  |  | 84,337 |

Operating activities
Net cash used in operating activities was RMB40.4 million (US$6.3 million) in 2021. The difference between our net cash used in operating activities and our net loss of RMB127.3 million (US$20.0 million) was due to (i) an increase in salary and welfare payable of RMB30.0 million (US$4.7 million), (ii) depreciation of property, equipment and leasehold improvement of RMB19.2 million (US$3.0 million), (iii) an increase in accrued expenses and other current liabilities of RMB2.9 million (US$0.5 million), and (iv) an increase in deferred revenue of RMB3.7 million (US$0.6 million), partially offset by an increase in prepayments and other current assets of RMB15.9 million (US$2.5 million), an increase in accounts payable of RMB2.5 million (US$0.4 million) and an increase in taxes payable of RMB1.7 million (US$0.3 million). The increase in salary and welfare payable was attributable to our business growth which requires and is likely to continue to require higher labor cost. The increase in the depreciation of property, equipment and leasehold improvement is likely to continue as a result of our continued growth. The increase in accrued expenses and other current liabilities was primarily attributable to an increase in professional and miscellaneous expenses in line with our business growth. The increase in prepayments and other current assets was primarily attributable to an increase in deposits for operating lease, prepaid service fees and receivables from third-party online payment platform, which in line with our business growth. The increase in deferred revenue was primarily attributable to the growth in unconsumed virtual currency in parallel with the growth of our business.
Net cash generated from operating activities was RMB40.0 million in 2020. The difference between our net cash generated in operating activities and our net loss of RMB82.2 million was due to (i) an increase in salary and welfare payable of RMB26.4 million, (ii) depreciation of property, equipment and leasehold improvement of RMB17.7 million, (iii) an increase in accrued expenses and other current liabilities of RMB14.3 million, and (iv) an increase in deferred revenue of RMB2.5 million, partially offset by an increase in prepayments and other current assets of RMB5.0 million, an increase in accounts payable of RMB6.0 million and an increase in taxes payable of RMB6.0 million. The increase in salary and welfare payable was attributable to our business growth which requires and is likely to continue to require higher labor cost. The increase in the depreciation of property, equipment and leasehold improvement is likely to continue as a result of our continued growth. The increase in accrued expenses and other current liabilities was primarily attributable to an increase in our advertising and promotional expenses, other professional and miscellaneous expenses in line with our business growth. The increase in deferred revenue was primarily attributable to the growth in unconsumed virtual currency in parallel with the growth of our business.
120

Table of Contents
Net cash used in operating activities was RMB95.8 million in 2019. The difference between our net cash used in operating activities and our net loss of RMB133.0 million was due to (i) an increase in salary and welfare payable of RMB29.4 million, (ii) depreciation of property, equipment and leasehold improvement of RMB10.8 million, (iii) an increase in accrued expenses and other current liabilities of RMB8.6 million, and (iv) an increase in deferred revenue of RMB3.9 million, partially offset by an increase in prepayments and other current assets of RMB12.9 million, a decrease in accounts payable of RMB4.4 million and a decrease in other tax payable of RMB2.3 million. The increase in salary and welfare payable was attributable to our business growth which requires and is likely to continue to require higher labor cost. The depreciation of property, equipment and leasehold improvement was
non-cash
in nature and was adjusted in the presentation of our net cash flow from operating activities based on indirect method. The increase in the depreciation of property, equipment and leasehold improvement is likely to continue as a result of our continued growth. The increase in accrued expenses and other current liabilities was primarily attributable to an increase in our advertising and promotional expenses in line with our business growth. The increase in deferred revenue was primarily attributable to the growth in unconsumed virtual currency in parallel with the growth of our business.
Investing activities
Net cash generated from investing activities was RMB52.1 million (US$8.2 million) in 2021 primarily due to maturities of short-term investments of RMB73.0 million (US$11.5 million), which offset by purchasing of intangible assets, property, equipment and leasehold improvement of RMB20.9 million (US$3.3 million).
Net cash used in investing activities was RMB94.6 million in 2020 primarily due to purchase of short-term investments of RMB86.3 million and property, equipment and leasehold improvement of RMB21.2 million.
Net cash used in investing activities was RMB29.4 million in 2019 primarily due to purchase of property, equipment and leasehold improvement of RMB27.9 million.
Financing activities
Net cash generated from financing activities was RMB212.7 million (US$33.4 million) in 2021 primarily due to the completion of our
follow-on
public offering in April 2021 and third-party loans taken out by the VIEs.
Net cash generated from financing activities was RMB298.0 million in 2020 primarily due to the completion of our initial public offering in January 2020.
Net cash generated from financing activities was zero in 2019 as we did not have any financing activities in 2019.
Material Cash Requirements
Other than the ordinary cash requirements for our operations, our material cash requirements as of December 31, 2021 and any subsequent interim period primarily include our capital expenditures and operating lease obligations.
Capital Expenditures
We made capital expenditures of RMB29.4 million, RMB23.0 million and RMB20.9 million (US$3.3 million) in 2019, 2020 and 2021, respectively. In these periods, our capital expenditures were mainly used for purchases of property, equipment, leasehold improvement and intangible assets. In next coming 12 months, we expect the majority of our capital expenditures will use for purchasing long-term assets above.
Contractual obligation
The following table sets forth our contractual obligations as of December 31, 2021:

|  | Payment Due by Years Ending |
|  | Less than 1 year |  |  | 1-3 years |  |  | 3-5 years |  |  | More than 5 years |  |  | Total |
|  | (in RMB thousands) |
Lease obligations (1) |  |  | 10,718 |  |  |  | 9,321 |  |  |  | 3,297 |  |  |  | 72 |  |  |  | 23,408 |

Note:

(1) | Lease obligation represents the minimum commitments under non-cancelable operating lease agreements for our office premises and staff quarters.

121

Table of Contents
We intend to fund our existing and future material cash requirements with our existing cash balance and other financing alternatives. We will continue to make cash commitments, including capital expenditures to support the short-term and/or long-term growth of our business.
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We do not have retained or contingent interests in assets transferred. We have not entered into contractual arrangements that support the credit, liquidity or market risk for transferred assets. We do not have obligations that arise or could arise from variable interests held in an unconsolidated entity, or obligations related to derivative instruments that are both indexed to and classified in our own equity, or not reflected in the statement of financial position.
Other than as discussed above, we did not have any significant capital and other commitments, long-term obligations or guarantees as of December 31, 2021.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.
Holding Company Structure
LIZHI INC. is a holding company with no material operations of its own. We conduct our operations primarily through the VIEs and their subsidiaries in China. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries, the VIEs and their subsidiaries. If our subsidiaries and the VIEs or any newly formed subsidiaries incur debts on their own behalf in the future, the instruments governing their debts may restrict their ability to pay dividends to us.
In addition, our subsidiaries, the VIEs and their subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance of the PRC, or the PRC GAAP. In accordance with PRC company laws, our subsidiaries, the VIEs and their subsidiaries in China must make appropriations from their
after-tax
profits to
non-distributable
surplus or reserve funds including (i) statutory surplus fund or general reserve fund, as applicable and (ii) discretionary surplus fund or enterprise expansion fund and staff bonus and welfare fund, as applicable. The appropriation to the statutory surplus fund or general reserve fund must be at least 10% of the
after-tax
profits calculated in accordance with the PRC GAAP. Appropriation is not required if the statutory surplus fund or general reserve fund has reached 50% of the registered capital of our consolidated VIEs. Appropriation to discretionary surplus fund or enterprise expansion fund and staff bonus and welfare fund is made at the discretion of our PRC subsidiaries, consolidated VIEs and their subsidiaries in China.
As a holding company with no material operations of our own, we conduct our operations primarily through our PRC subsidiaries, the VIEs and their subsidiaries. We held cash and cash equivalents of RMB533.3 million (US$83.7 million) as of December 31, 2021, among which RMB224.8 million (US$35.3 million) was held by LIZHI INC.. Apart from such cash and cash equivalents held in the Cayman Islands, substantially all of our assets were held and substantially all of our net revenues were generated by our PRC subsidiaries, the VIEs and their subsidiaries.
As an offshore holding company, we are permitted under PRC laws and regulations to provide funding from the proceeds of our offshore fund raising activities to our PRC subsidiaries only through loans or capital contributions, and to the VIEs only through loans, in each case subject to the satisfaction of the applicable government registration and approval requirements. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of our initial public offering to make additional capital contributions or loans to our PRC subsidiaries” and “Use of Proceeds.” The ability of our subsidiaries in China to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations. See “Item 3. Key Information—3.D. Risk Factors—Risks Related 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 subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares” and “Item 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China— Under the PRC enterprise income tax law, we may be classified as a PRC ‘resident enterprise,’ which could result in unfavorable tax consequences to us and our shareholders and ADS holders and have a material adverse effect on our results of operations and the value of your investment.” As a result, there is uncertainty with respect to our ability to provide prompt financial support to our PRC subsidiaries when needed. Notwithstanding the foregoing, our PRC subsidiaries may use their own retained earnings (rather than Renminbi converted from foreign currency denominated capital) to provide financial support to the VIEs either through entrustment loans from our PRC subsidiaries or direct loans to such VIE’s nominee shareholders, which would be contributed to the VIEs as capital injections. Such direct loans to the nominee shareholders would be eliminated in our consolidated financial statements against the VIE’s share capital.
122

Table of Contents

5.C. | Research and Development, Patents and Licenses, Etc.

Our strong technological capabilities support the stable operation of our platforms. Flexibility and scalability are combined when delivering superior services, which increase operational efficiency and enable innovations. our platforms incorporate the following features: (i) audio making,
(ii) AI-enabled
discovery and distribution, (iii) user-experience enhancements, and (iv) data storage and backup technologies. We will continue to strengthen our technologies and big data analytic capabilities to enhance user experience and achieve operational efficiencies.

5.D. | Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2021 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition.

5.E. | Critical Accounting Estimates

Critical accounting estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical, as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. For a detailed discussion of our significant accounting policies and related judgments, see “Note 2 Significant Accounting Policies” in the Notes to Consolidated Financial Statements included elsewhere in this annual report.
The following is a brief description of our critical accounting estimate:
Critical accounting estimate in provision for income taxes and valuation allowance for deferred tax assets
We are subject to the income tax laws of the various jurisdictions in which we operate. These laws are often complex and may be subject to different interpretations. To determine the financial statement impact of accounting for income taxes, including the provision for income tax expense and valuation allowance for deferred tax assets, we must make assumptions and judgments about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as make judgments regarding the timing of when certain items may affect taxable income in various tax jurisdictions.
Our interpretations of tax laws are subject to review and examination by the various taxing authorities in the jurisdictions where we operate, and disputes may occur regarding our view on a tax position. These disputes over interpretations with the various taxing authorities may be settled by audit, administrative appeals or adjudication in the court systems of the tax jurisdictions in which we operate. We regularly review whether it may be assessed additional income taxes as a result of the resolution of these matters, and records additional unrecognized tax benefits as necessary. In addition, we may revise our estimate of income taxes due to changes in income tax laws, legal interpretations, and business strategies. It is possible that revisions in our estimate of income taxes may materially affect the Group’s results of operations.
We apply a more likely than not (defined as a likelihood of more than 50%) threshold and a two-step approach for the tax position measurement and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the possible amount being realized upon settlement. We adjust the unrecognized tax benefits as necessary when new information becomes available, including changes in tax law and regulations, and interactions with taxing authorities. Uncertain tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the possible amount of benefit that management believes is more likely than not to be realized upon settlement. Although we believe that our estimates are reasonable, the final tax amount could be different from the amounts reflected in our income tax provisions and accruals. To the extent that the final provision for income taxes in the period in which such a determination is made. For the years ended December 31, 2019, 2020 and 2021, we had recorded income tax expenses of RMB nil, RMB1.0 million and RMB0.4 million, respectively.
123

Table of Contents
Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. Deferred taxes are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized within the provision for income taxes in the period enacted.
We recognize deferred tax assets in connection with certain tax attributes, including mainly the net operating loss (“NOL”) carryforwards, and performs regular reviews to ascertain whether our deferred tax assets are realizable. These reviews include management’s estimates and assumptions regarding future taxable income and may incorporate various tax planning strategies, including strategies that may be available to utilize NOLs before they expire. In connection with these reviews, if it is determined that a deferred tax asset is not realizable, a valuation allowance is established. The valuation allowance may be reversed in a subsequent reporting period if management determines that, based on revised estimates of future taxable income or changes in tax planning strategies, it is more likely than not that all or part of the deferred tax asset will become realizable. As of December 31, 2020 and 2021, management does not believe that sufficient positive evidence exists to conclude that the recoverability of our deferred tax assets is more likely than not to be realized. Consequently, we have provided full valuation allowances on the related deferred tax assets.
Our provision for income taxes is composed of current and deferred taxes. The current and deferred tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the global tax implications are known, which could impact our effective tax rate.

ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A. | Directors and Senior Management

The following table sets forth information regarding our executive officers and directors as of the date of this annual report.

Directors and Executive Officers |  | Age |  | Position/Title
Mr. Jinnan (Marco) Lai |  | 47 |  | Founder, Chief Executive Officer and Chairman of the Board of Directors
Mr. Ning Ding |  | 43 |  | Co-founder and Chief Technology Officer
Mr. Zelong Li |  | 37 |  | Chief Operating Officer
Ms. Chengfang Lu |  | 35 |  | Acting Chief Financial Officer
Ms. Juan Ren |  | 37 |  | Vice President and Director
Mr. Yipeng Li |  | 45 |  | Independent Director
Mr. Ming Zhang |  | 45 |  | Independent Director
Mr. Xiang Wang |  | 61 |  | Independent Director
Professor Yike Guo |  | 60 |  | Independent Director

Mr.
Jinnan (Marco) Lai,
is our founder, Chief Executive Officer and Chairman. Mr. Lai has served as a director and the Chief Executive Officer of Lizhi BVI since December 2010 and our director and Chief Executive Officer since January 2019. Before founding Lizhi
,
Mr. Lai was a successful serial entrepreneur in China’s internet industry. He worked as the chief executive officer for Shanghai Labox Information Technology Limited from 2007 to 2010, and also founded Guangzhou Mowang Information Technology Co., Ltd. and served as its president from 2003 to 2007. Before starting his business career, Mr. Lai was a radio host.
Mr.
Ning Ding
is our
co-founder
and Chief Technology Officer. Mr. Ding had served as our director from January 2019 to April 2022. Mr. Ding has served as a director of Lizhi BVI since March 2012. Mr. Ding has been the chief technology officer of Guangzhou Lizhi since 2010. Previously, Mr. Ding served as the deputy general manager of technology for Shanghai Labox Information Technology Limited from 2007 to 2010. He worked for Guangzhou Mowang Information Technology Co., Ltd. as its development manager from 2006 to 2007. Mr. Ding graduated from Southwest University with a bachelor’s degree in computer science and technology.
Mr.
Zelong Li
is our Chief Operating Officer. Mr. Zelong Li has served as our Chief Operating Officer since March 2021. Mr. Li had served as our director from March 2019 to April 2022. Mr. Li has been a vice president of Guangzhou LIZHI since 2010 and a director of LIZHI BVI since June 2017. Before joining us, Mr. Li served as a product manager for Shanghai Labox Information Technology Limited from 2008 to 2010. Mr. Li graduated from Guangdong Mechanical & Electrical College of Technology with a bachelor’s degree in computer application.
124

Table of Contents
Ms.
Chengfang Lu
is our Acting Chief Financial Officer. Ms. Lu has served as our Acting Chief Financial Officer since June 2020. Ms. Lu also served as the Company’s Director of Finance from 2019. Previously, Ms. Lu worked at PricewaterhouseCoopers from 2013. Ms. Lu received her bachelor’s degree and master’s degree in accounting from Jinan University. Ms. Lu is a member of Chinese Institution of Certified Public Accountants.
Ms.
Juan Ren
is our Vice President and director. Ms. Ren has served as our Vice President since May 2015 and our director since January 2020. Ms. Ren has been the vice president of Guangzhou Lizhi since 2011. Previously, Ms. Ren served as a financial manager for a branch of Shenzhen B&K New Energy Co., Ltd. from 2007 to 2011. Ms. Ren graduated from Hubei Polytechnic University.
Mr.
Yipeng Li
has served as our independent director since January 2020. Mr. Li has served as the chief financial officer and a director of Cloopen Group Holding Limited (NYSE: RAAS) since May 2020 and February 2021, respectively. Prior to that, Mr. Li served as the chief financial officer of Sunlands Technology Group (NYSE: STG) from September 2017 to April 2020. Mr. Li served as the chief financial officer of Alibaba Health Information Technology Limited (HKEx: 241), a subsidiary of Alibaba Group, from September 2015 to September 2017. Prior to that, he was the chief financial officer at Jiuxian.com, a leading online platform for alcohol offerings from March 2015 to August 2015. From June 2010 to February 2015, Mr. Li served as the vice president of iQIYI, Inc. (Nasdaq: IQ), in charge of its financial and legal department. Mr. Li received his bachelor’s degree in accounting from Simon Fraser University in 2002. Mr. Li is a member of Chinese Institution of Certified Public Accountants.
Mr.
Ming Zhang
has served as our independent director since July 2020. Mr. Zhang has nearly 20 years of experiences in Internet technology industry. He founded Great Wall Club Inc. in 2008 and has been serving as the Chairman of its Board of Directors. He is also a prominent cross-border angel investor and the founder of GASA University.
Mr.
Xiang Wang
has served as our independent director since July 2020. Mr. Wang has joined Xiaomi Corporation since 2015, serving as its President since 2019 and the Senior Vice President from 2015 to 2019. He has over 20 years of experiences in semiconductor and communication industry. Previously, he served as the Senior Vice President and President of Qualcomm Greater China. Mr. Wang received his bachelor’s degree in electronic engineering from Beijing University of Technology.
Professor Yike Guo
has served as our independent director since September 2020. Professor Guo has over 30 years of experience in data science and machine learning and has been developing innovative technology in the industry since the
mid-1990s.
Professor Guo is currently serving as the Vice-President (Research and Development) of Hong Kong Baptist University (the“HKBU”), leading the development of the university’s overall research strategy, research infrastructure and postgraduate education since January 2020. Professor Guo has also been serving as a Professor of Computing Science in the Department of Computing at Imperial College London since 2002, adjunct professor at Imperial College Business School since 2016 and the founding director of the Data Science Institute at Imperial College since 2014. He was elected as a Fellow of the Royal Academy of Engineering (FREng) and a Member of Academia Europaea (MAE) in 2018. Professor Guo founded InforSense Limited in 1999, an Imperial College
spin-off
software company specializing in big data analysis for life science and medicine, and served as its CEO until 2009. After InforSense Limited was merged with IDBS, a global advanced R&D software provider, in 2009, Professor Guo served as the Chief Innovation Officer of the IDBS until 2018. Professor Guo received a first-class honours degree in Computing Science from Tsinghua University and a Ph.D. in Computational Logic from Imperial College.

6.B. | Compensation

Compensation
For the fiscal year ended December 31, 2021, we paid an aggregate of RMB7.5 million (US$1.2 million) in cash to our executive officers, and an aggregate of RMB1.4 million (US$0.2 million) in cash to our
non-executive
directors. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries and the VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund. For share incentive grants to our directors and executive officers, see “—Share Incentive Plan.”
Employment Agreements and Indemnification Agreements
We have entered into an employment agreement with each of our executive officers. Each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer. We may also terminate an executive officer’s employment without cause upon advance written notice. In such case of termination by us other than for cause, we will pay an additional amount to the executive officer as provided by applicable law. The executive officer may resign at any time with an advance written notice.
125

Table of Contents
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use all
non-public
information relating to the business, financial condition and other aspects of us and our customers, users and suppliers, and may not disclose such
non-public
information for any purpose other than to fulfill his or her responsibilities in the best interest of the Company except otherwise authorized by us. In addition, each executive officer has agreed to be bound by
non-competition
and
non-solicitation
restrictions during the term of his or her employment and typically for one year following the last date of employment.
We have also entered into an indemnification agreement with each of our directors and executive officers. Under these agreements, we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
Share Incentive Plan
In September 2018, Lizhi BVI adopted the 2018 Share Incentive Plan, or the 2018 BVI Plan. Under the 2018 BVI Plan, Lizhi BVI granted 27,765,900 options and restricted shares to its certain management members, employees and a consultant corresponding to 27,765,900 ordinary shares.
We adopted a share incentive plan on May 31, 2019, or the 2019 Share Incentive Plan, for the purpose of granting share based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. The 2019 Share Incentive Plan has replaced the 2018 BVI Plan in its entirety. All granted and outstanding awards under the 2018 BVI Plan have since been terminated.
We amended and restated the 2019 Share Incentive Plan on March 18, 2020, or the Amended and Restated 2019 Share Incentive Plan, to increase the maximum aggregate number of Class A ordinary shares we are authorized to issue under the Amended and Restated 2019 Share Incentive Plan to 100,000,000 Class A ordinary shares. On September 17, 2021, we adopted the Second Amended and Restated 2019 Share Incentive Plan to replace the Amended and Restated 2019 Share Incentive Plan in its entirety, increasing the maximum aggregate number of Class A ordinary shares we are authorized to issue under the Second Amended and Restated 2019 Share Incentive Plan to 170,000,000 Class A ordinary shares.
As of February 28, 2022, there are 66,533,900 options, restricted shares and restricted share units outstanding that were granted to certain management members, employees and consultant corresponding to 66,533,900 of our Class A ordinary shares pursuant to the Second Amended and Restated 2019 Share Incentive Plan. Among those, a total of 9,020,630 Class A ordinary shares corresponding to restricted shares granted to certain of our management members and director, were held by Kastle Limited, a company incorporated with limited liability under the laws of Hong Kong, as of February 28, 2022. Kastle Limited holds such ordinary shares in trust for the benefit of these management members and directors.
The maximum aggregate number of shares which may be issued pursuant to all awards under the Second Amended and Restated 2019 Share Incentive Plan is 170,000,000 Class A ordinary shares. As of February 28, 2022, awards representing 66,533,900 Class A ordinary shares have been granted and outstanding under the Second Amended and Restated 2019 Share Incentive Plan. The awards issued under the Second Amended and Restated 2019 Share Incentive Plan are vested by equal instalment from nil to four years upon our initial public offering in January 2020.
The following paragraphs summarize the terms of the Second Amended and Restated 2019 Share Incentive Plan.
Types of Awards
. The Second Amended and Restated 2019 Share Incentive Plan permits the awards of options, restricted shares and restricted share units, or other right or benefit authorized to be granted under the Plan.
Plan Administration
. The Second Amended and Restated 2019 Share Incentive Plan is administered by our board of directors or committee or individuals authorized by our board. The plan administrator is entitled to determine the participants who are to receive awards, the number of awards to be granted, and the terms and conditions of each award grant.
Eligibility
. Employees, directors and officers and the consultants of our company are eligible to participate pursuant to the terms of the Second Amended and Restated 2019 Share Incentive Plan.
Conditions of Award
. The plan administrator shall determine the participants, types of awards, numbers of shares to be covered by awards, terms and conditions of each award, and provisions with respect to the vesting schedule, settlement, exercise, repurchase, cancellation, forfeiture, restrictions, limitations or suspension of awards.
Term of Award
. The term of each award shall be fixed by the administrator and is stated in the award agreement between recipient of an award and us. No award shall be granted under the Second Amended and Restated 2019 Share Incentive Plan after ten years from the date the Second Amended and Restated 2019 Share Incentive Plan was approved by the board.
126

Table of Contents
Vesting Schedule
. In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement.
Transfer Restrictions
. Unless otherwise determined by the administrator of the Second Amended and Restated 2019 Share Incentive Plan, no award and no right under any such award shall be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order, and shall not be subject to execution, attachment, or similar process.
Termination and Amendment
. Unless terminated earlier, the Second Amended and Restated 2019 Share Incentive Plan has a term of 10 years. The plan administrator has the authority to amend or terminate the Second Amended and Restated 2019 Share Incentive Plan, provided that, such termination or amendment shall not adversely affect in any material way any awards previously granted unless agreed by the relevant grantee.
The following table summarizes, as of February 28, 2022, the number of the outstanding awards granted under the Second Amended and Restated 2019 Share Incentive Plan to our directors and executive officers.

Name |  | Exercise Price |  | Ordinary Shares Underlying Outstanding Options, Restricted Shares and Restricted Share Units Awards Granted |  | Date of Grant |  | Date of Expiration
|  | (US$/share) |  |  |  |  |  |
Mr. Jinnan (Marco) Lai |  | — |  | — |  | — |  | —
Mr. Ning Ding |  | Nominal |  | * |  | April 1, 2020 |  | —
Mr. Zelong Li |  | Nominal |  | * |  | Various dates from May 31, 2019 to March 29, 2021 |  | —
Mr. Yipeng Li |  | — |  | — |  | — |  | —
Ms. Juan Ren |  | Nominal |  | * |  | Various dates from May 31, 2019 to June 10, 2020 |  | —
Ms. Chengfang Lu |  | Nominal |  | * |  | Various dates from April 1, 2020 to June 10, 2020 |  | —
Mr. Ming Zhang |  | — |  | * |  | July 13, 2020 |  | —
Mr. Xiang Wang |  | — |  | * |  | July 13, 2020 |  | —
Professor Yike Guo |  | — |  | * |  | September 9, 2020 |  | —

Note
: * Less than 1% of our total outstanding shares.
As of February 28, 2022, other grantees under the Second Amended and Restated 2019 Share Incentive Plan as a group held awards representing 59,874,400 Class A ordinary shares.
For discussions of our accounting policies and estimates for awards granted pursuant to the Second Amended and Restated 2019 Share Incentive Plan, see “Item 5. Operating and Financial Review and Prospects—5.A. Operating Results—Critical Accounting Policies, Judgments and Estimates—Share-based compensation.”

6.C. | Board Practices

Board of directors
Our board of directors consists of six directors, including four independent directors. A director is not required to hold any shares in our company to qualify to serve as a director. The Corporate Governance Rules of the Nasdaq generally require that a majority of an issuer’s board of directors must consist of independent directors. However, the Corporate Governance Rules of the Nasdaq permit foreign private issuers like us to follow “home country practice” in certain corporate governance matters. We rely on this “home country practice” exception and do not have a majority of independent directors serving on our board of directors.
127

Table of Contents
A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare the nature of his or her interest at a meeting of our directors. In addition, the interested director shall not vote (nor be counted in the quorum) on any resolution of our board of directors approving any contract or arrangement or any other proposal in which he or any of his close associates is materially interested in except for certain circumstances as set out in our Second Amended and Restated Memorandum and Articles of Association. Our board of directors may exercise all of the powers of our company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock or other securities whenever money is borrowed or as security for any debt, liability or obligation of our company or of any third party. None of our directors has a service contract with us that provides for benefits upon termination of service as a director.
Committees of the board of directors
We have established the following committees in our board of directors upon our initial public offering: an audit committee, a compensation committee and a nominating and corporate governance committee. The committees operate in accordance with terms of reference established by our board of directors.
Audit Committee. Our audit committee consists of Mr. Yipeng Li, Mr. Ming Zhang and Mr. Xiang Wang. Mr. Yipeng Li is the chairman of our audit committee. We have determined that each of Mr. Yipeng Li, Mr. Ming Zhang satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market and Rule
10A-3
under the Securities Exchange Act of 1934. We have determined that Mr. Yipeng Li qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

| • |  | selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm;

| • |  | reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response;

| • |  | reviewing and approving all proposed related party transactions;

| • |  | discussing the annual audited financial statements with management and the independent registered public accounting firm;

| • |  | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant or material control deficiencies, if any;

| • |  | annually reviewing and reassessing the adequacy of our audit committee charter;

| • |  | meeting separately and periodically with management and the independent registered public accounting firm; and

| • |  | reporting regularly to the board of directors.

Compensation Committee
. Our compensation committee consists of Mr. Jinnan (Marco) Lai, Ms. Juan Ren and Mr. Ming Zhang, and is chaired by Mr. Jinnan (Marco) Lai. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our executive officers. Our executive officer may not be present at any committee meeting during which such executive officer’s performance or compensation is deliberated upon. The compensation committee is responsible for, among other things:

| • |  | reviewing and approving the compensation for our executive officers;

| • |  | reviewing and evaluating periodically the management succession plan in consultation with the chief executive officer;

| • |  | reviewing any incentive compensation or equity plans, programs or similar arrangements;

| • |  | selecting compensation consultant, legal counsel or other adviser only after taking into consideration of all factors relevant to that person’s independence from management; and

| • |  | reporting periodically to the board of directors.

Nominating and Corporate Governance Committee
. Our nominating and corporate governance committee consists of Mr. Jinnan (Marco) Lai, Ms. Juan Ren and Mr. Ming Zhang, and is chaired by Mr. Jinnan (Marco) Lai. The nominating and corporate governance committee assists the board in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
128

Table of Contents

| • |  | recommending nominees to the board for membership on the board and its committees pursuant to the terms of the Second Amended and Restated Memorandum and Articles of Association;

| • |  | leading and overseeing self-evaluation of the board at least annually to determine whether it and its committees are functioning effectively;

| • |  | recommending criteria for the selection of candidates to the board of directors and its committees;

| • |  | selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as of the nominating and corporate governance committee itself;

| • |  | developing and recommending to the board of directors the code of business conduct and ethics; and

| • |  | overseeing and setting compensation for our directors.

Duties and Functions of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe to our company a duty to exercise the skill they actually possess and such care and diligence that a reasonable prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. Our company has the right to seek damages if a duty owed by our directors is breached. In limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached. The functions and powers of our board of directors include, among others, (i) convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings, (ii) declaring dividends and distributions, (iii) appointing officers and determining their terms of offices and responsibilities, and (iv) approving the transfer of shares of our company, including the registering of such shares in our share register.
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the board. Each director is not subject to a term of office and holds office until such time as his successor takes office or until the earlier of his death, resignation or removal from office by ordinary resolution or the affirmative vote of a simple majority of the other directors present and voting at a board meeting. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company to be of unsound mind; (iii) resigns by notice in writing to our company; (iv) without special leave of absence from our board of directors, is absent from three consecutive meetings of the board and the board resolves that his office be vacated; (v) is prohibited by law from being a director; or (vi) is removed from office pursuant to any other provisions of the Second Amended and Restated Memorandum and Articles of Association.
Board
Diversity

Board Diversity Matrix (As of February 28, 2022)
Country of Principal Executive Offices: |  | People’s Republic of China
Foreign Private Issuer |  | Yes
Disclosure Prohibited Under Home Country Law |  | No
Total Number of Directors |  | 9
|  | Female |  | Male |  | Non-Binary |  | Did Not Disclose Gender
Part I: Gender Identity
Directors |  | 1 |  | 8 |  | 0 |  | 0
Part II: Demographic Background
Underrepresented Individual in Home Country Jurisdiction |  | —
LGBTQ+ |  | —

129

Table of Contents

6.D. | Employees

We had 754 employees as of December 31, 2021. As of December 31, 2021, 17 of our full-time employees were located outside of China.
The following table sets forth a breakdown of our employees by function as of December 31, 2021:

|  | Number of employees |  |  | % of total |
Research and development |  |  | 501 |  |  |  | 66.4 | %
Operations and products |  |  | 102 |  |  |  | 13.5 | %
Sales and marketing |  |  | 48 |  |  |  | 6.4 | %
General and administration |  |  | 103 |  |  |  | 13.7 | %
Total |  |  | 754 |  |  |  | 100.0 | %

Our success depends on our ability to attract, retain and motivate qualified personnel. We offer competitive salaries and encourage a corporate culture of passion and innovation.
We enter into standard contracts and agreements regarding confidentiality, intellectual property, employment, commercial ethics policies and
non-competition
with most of our executive officers, managers and core employees. These contracts typically include a
non-competition
provision effective during and up to one year after their employment with us and a confidentiality provision effective during and after their employment with us.
Under PRC law, we participate in various employee social security plans that are organized by municipal and provincial governments for our
PRC-based
full-time employees, including pension, unemployment insurance, work-related injury insurance, medical insurance and housing insurance. We are required under PRC law to make contributions from time to time to employee benefit plans for our
PRC-based
full-time employees at specified percentages of the salaries, bonuses and certain allowances of such employees, up to a maximum amount specified by the local governments in China.
None of our employees are represented by labor unions. We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes.

6.E. | Share Ownership

The following table sets forth information concerning the beneficial ownership of our ordinary shares as of February 28, 2022 by:
130

Table of Contents

| • |  | each of our directors and executive officers;

| • |  | all of our directors and executive officers as a group; and

| • |  | each of our principal shareholders who beneficially own more than 5% of our total outstanding ordinary shares.

The calculations in the table below are based on 1,014,356,010 ordinary shares issued and outstanding.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person. The table below excludes 9,020,630 ordinary shares issued to Kastle Limited, which holds such ordinary shares in trust for the benefit of certain of our senior management and directors before the corresponding share awards granted to such senior management and directors are vested pursuant to the Second Amended and Restated 2019 Share Incentive Plan, except when calculating the number of shares underlying share options held by such person or group that are exercisable or options, restricted shares and restricted share units that will become vested within 60 days after February 28, 2022.

|  | Ordinary Shares |
|  | Class A ordinary shares |  |  | Class B ordinary shares |  |  | Total ordinary shares on an as-converted basis |  |  | Percentage of total ordinary shares on an as-converted basis |  |  | Percentage of aggregate voting power*** |
Directors and Executive Officers**†: |
Jinnan (Marco) Lai (1) |  |  | 14,925,000 |  |  |  | 192,215,000 |  |  |  | 207,140,000 |  |  |  | 20.4 | % |  |  | 62.6 | %
Ning Ding (2) |  |  | 1,000 |  |  |  | 39,000,000 |  |  |  | 39,001,000 |  |  |  | 3.8 | % |  |  | 12.6 | %
Zelong Li |  |  | * |  |  |  | — |  |  |  | * |  |  |  | * |  |  |  | * |
Mr. Yipeng Li |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Ms. Juan Ren |  |  | * |  |  |  | — |  |  |  | * |  |  |  | * |  |  |  | * |
Ms. Chengfang Lu |  |  | * |  |  |  | — |  |  |  | * |  |  |  | * |  |  |  | * |
Mr. Ming Zhang |  |  | — |  |  |  | — |  |  |  | * |  |  |  | * |  |  |  | * |
Mr. Xiang Wang |  |  | — |  |  |  | — |  |  |  | * |  |  |  | * |  |  |  | * |
Professor Yike Guo |  |  | * |  |  |  | — |  |  |  | * |  |  |  | * |  |  |  | * |
All Directors and Executive Officers as a Group |  |  | 25,072,070 |  |  |  | 231,215,000 |  |  |  | 256,287,070 |  |  |  | 25.2 | % |  |  | 75.5 | %
Principal Shareholders: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Matrix Partners China I Hong Kong Limited (3) |  |  | 153,169,710 |  |  |  | — |  |  |  | 153,169,710 |  |  |  | 15.1 | % |  |  | 4.9 | %
Morningside China TMT Fund II, L.P. (4) |  |  | 112,662,460 |  |  |  | — |  |  |  | 112,662,460 |  |  |  | 11.1 | % |  |  | 3.6 | %
Morningside China TMT Top Up Fund, L.P. (5) |  |  | 65,337,530 |  |  |  | — |  |  |  | 65,337,530 |  |  |  | 6.4 | % |  |  | 2.1 | %

Notes
:

* | Less than 1% of our total outstanding shares.

131

Table of Contents

** | For each person and group included in this column, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of (i) 1,014,356,010, being the number of ordinary shares outstanding as of February 28, 2022, excluding 9,020,630 ordinary shares held by Kastle Limited, which holds such ordinary shares in trust for the benefit of certain of our senior management and directors before the corresponding share awards granted to such senior management and directors are vested pursuant to the Second Amended and Restated 2019 Share Incentive Plan, and (ii) the number of ordinary shares underlying options, restricted shares and restricted share units held by such person or group that are exercisable or issuable within 60 days after February 28, 2022.

*** | For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our ordinary shares as a single class.

† | The address of our directors and executive officers is Yangcheng Creative Industry Zone, No. 309 Middle Huangpu Avenue, Tianhe District, Guangzhou 510655, The People’s Republic of China.

(1) | The number of ordinary shares beneficially owned represents 207,140,000 ordinary shares held by Mr. Lai through Voice Future Ltd, or Voice Future, including 192,215,000 Class B ordinary shares and 14,925,000 Class A ordinary shares. The 14,925,000 Class A ordinary shares (including 1,660,000 Class A ordinary shares held in the form of 83,000 ADSs, each representing 20 Class A ordinary shares) are held by Mr. Lai in trust for the benefits of certain independent third parties. Voice Future is 5% owned by VOICE WORLD Ltd, an entity controlled by Mr. Lai, and 95% owned by Voice Home Ltd. The entire interest of Voice Home Ltd is held by The Core Trust Company Limited as trustee for a trust established by Mr. Lai as settlor for the benefit of beneficiaries designated by Mr. Lai. All of the voting and dispositive power of Voice Future is vested in VOICE WORLD Ltd. VOICE WORLD Ltd is wholly owned by Mr. Jinnan (Marco) Lai. Voice Future is a company organized under the laws of the British Virgin Islands. The registered address of Voice Future is Vistra Corporate Service Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands. VOICE WORLD Ltd. is a company organized under the laws of the British Virgin Islands. The registered address of VOICE WORLD Ltd. is Start Chambers, Wickhams Cay II, P.O. Box 2221, Road Town, Tortola, VG1110, British Virgin Islands.

(2) | The number of ordinary shares beneficially owned represents 39,000,000 Class B ordinary shares held by Mr. Ning Ding through Voice Intelligence Ltd, or Voice Intelligence. Voice Intelligence is 5% owned by AI VOICE Ltd., an entity controlled by Mr. Ding, and 95% owned by Voice Tech Ltd. The entire interest of Voice Tech Ltd is held by The Core Trust Company as trustee for a trust established by Mr. Ding as settlor for the benefit of beneficiaries designated by Mr. Ding. All of the voting and dispositive power of Voice Intelligence is vested in AI VOICE Ltd. AI VOICE Ltd is wholly owned by Mr. Ding. Voice Intelligence is a company organized under the laws of the British Virgin Islands. The registered address of Voice Intelligence is Vistra Corporate Service Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.

(3) | Represents 153,169,710 Class A ordinary shares held by Matrix Partners China I Hong Kong Limited. Matrix Partners China I Hong Kong Limited is a company organized under the laws of Hong Kong. The registered address of Matrix Partners China I Hong Kong Limited is UNIT 1003, 10/F., TOWER 2, SILVERCORD 30 CANTON ROAD, TSIM SHA TSUI KOWLOON, HONG KONG. Matrix Partners China I Hong Kong Limited is controlled by Matrix Partners China I, L.P., which holds 90.2% of the equity interest of Matrix Partners China I Hong Kong Limited. The remaining 9.8% of its equity interest is held by Matrix Partners China I-A, L.P. Both Matrix Partners China I, L.P. and Matrix Partners China I-A, L.P. are managed by Matrix China I GP, Ltd. Timothy A. Barrows, David Ying Zhang, David Su and Yibo Shao are directors of Matrix China I GP, Ltd. and are deemed to have shared voting and investment power over the shares held by Matrix Partners China I, L.P. and Matrix Partners China I-A, L.P. The registered office address of Matrix Partners China I, L.P. and Matrix Partners China I-A, L.P. is Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

(4) | Represents 112,662,460 Class A ordinary shares held by Morningside China TMT Fund II, L.P. Morningside China TMT Fund II, L.P. is an exempted limited partnership registered under the laws of the Cayman Islands. The registered address of Morningside China TMT Fund II, L.P. is Windward 3, Regatta Office Park, PO Box 1350, Grand Cayman KY1-1108, Cayman Islands. The general partner of Morningside China TMT Fund II, L.P. is Morningside China TMT GP II, L.P., whose general partner is TMT General Partner Ltd. TMT General Partner Ltd. is controlled by its board consisting of five individuals, Jianming Shi, Qin Liu, Gerald Lokchung Chan, Maria K. Lam and Makim Wai On Andrew Ma.

132

Table of Contents

(5) | Represents 65,337,530 Class A ordinary shares held by Morningside China TMT Top Up Fund, L.P. Morningside China TMT Top Up Fund, L.P. is an exempted limited partnership under the laws of the Cayman Islands. The registered address of Morningside China TMT Top Up Fund, L.P. is Windward 3, Regatta Office Park, PO Box 1350, Grand Cayman KY1-1108, Cayman Islands. The general partner of Morningside China TMT Top Up Fund, L.P. is Morningside China TMT GP II, L.P., whose general partner is TMT General Partner Ltd. TMT General Partner Ltd. is controlled by its board consisting of five individuals, Jianming Shi, Qin Liu, Gerald Lokchung Chan, Maria K. Lam and Makim Wai On Andrew Ma.

To our knowledge, as of February 28, 2022, a total of 609,193,320 Class A ordinary shares are held by one record holder in the United States, which was Deutsche Bank Trust Company Americas, the depositary of our ADR program, representing approximately 60.1% of our total outstanding shares. In addition, none of our outstanding Class A ordinary shares was held by any record holder in the United States as of February 28, 2022.
None of our shareholders has informed us that it is affiliated with a member of Financial Industry Regulatory Authority, or FINRA.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A. | Major Shareholders

Please refer to “Item 6. Directors, Senior Management and Employees — 6.E. Share Ownership.” The company’s major shareholders do have different voting rights than the other shareholders.

7.B. | Related Party Transactions

Terms of Directors and Officers
See “Item 6. Directors, Senior Management and Employees—6.C. Board Practices—Terms of Directors and Officers.”
Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders
See “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders.”
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Employment Agreements and Indemnification Agreements.”
Share Incentives
See “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Share Incentive Plan.”
Other Related Party Transactions
During the year ended December 31, 2021, other than disclosed elsewhere, we did not have any other related party transactions.

7.C. | Interests of Experts and Counsel

Not applicable.
133

Table of Contents

ITEM 8. | FINANCIAL INFORMATION

8.A. | Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.
Litigation
In January 2021, the Company, certain of its current and former directors and officers, underwriters and certain other parties were named as defendants in two putative securities class actions filed in the Supreme Court of the State of New York, County of New York (the “State Court”) and the U.S. District Court for the Eastern District of New York (the “Federal Court”), respectively. The actions are both purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of their trading in the ADSs. Both actions allege that our Registration Statement dated January 16, 2020 contained material misstatements and/or omissions regarding the impact of
COVID-19
on the Company in violation of the U.S. Securities Act of 1933. The Company, and the other defendants, have moved to dismiss both actions. The defendants’ motion to dismiss was granted by the State Court on March 3, 2022. The motion to dismiss filed in the Federal Court is still pending. These actions remain in their preliminary stages. We are currently unable to estimate the potential loss, if any, associated with the resolution of such lawsuits, if they proceed. We intend to defend the actions vigorously. For risks and uncertainties relating to the pending cases against us, please see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We and certain of our directors and officers have been named as defendants in several shareholder class action lawsuits, which could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.”
Except the above, we are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business involving our users, hosts and competitors in matters relating to copyrights, unfair competition, contract disputes and other matters. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial costs and diversion of our resources, including our management’s time and attention. See “Item 3. Key Information— Item 3.D. Risk Factors—Risks Related to Our Business and Our Industry—We may be liable for intellectual property infringement relating to intellectual properties of third parties, which may materially and adversely affect our business, financial condition and prospects,” “Item 3. Key Information—Item 3.D. Risk Factors—Risks Related to Our Business and Our Industry—We may be held liable for information or content displayed on, retrieved from or linked to our platforms, if such content is deemed to violate any PRC laws or regulations, or for improper or fraudulent activities conducted on our platforms, and PRC authorities may impose legal sanctions on us and our reputation may be damaged,” “Item 3. Key Information— Item 3.D. Risk Factors—Risks Related to Our Business and Our Industry—Implementation of the labor laws and regulations in China may adversely affect our business and results of operations,” and “Item 3. Key Information—Item 3.D. Risk Factors—We are subject to risks relating to litigation and disputes, which could adversely affect our business, prospects, results of operations and financial condition.”
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 ordinary shares or the ADSs representing our Class A ordinary shares. 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 an exempted company incorporated in the Cayman Islands with limited liability. 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. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Related to Dividend Distribution.”
134

Table of Contents
Our board of directors has 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 board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our 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 Class A ordinary shares underlying the 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 Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Item 12. Description of Securities Other Than Equity Securities—12.D. American Depositary Shares.”

8.B. | Significant Changes

Except as otherwise disclosed in this report, we have not experienced any significant changes since the date of our audited consolidated financial statements included herein.

ITEM 9. | THE OFFER AND LISTING

9.A. | Offering and Listing Details

Our ADSs have been listed on the Nasdaq Global Market since January 17, 2020 under the symbol “LIZI.” Each ADS represents 20 of our Class A ordinary shares.

9.B. | Plan of Distribution

Not applicable.

9.C. | Markets

Each ADS represents 20 of our Class A ordinary shares. Our ADSs have been listed on the Nasdaq Global Market since January 17, 2020. Our ADSs trade under the symbol “LIZI.”

9.D. | Selling Shareholders

Not applicable.

9.E. | Dilution

Not applicable.

9.F. | Expenses of the Issue

Not applicable.

ITEM 10. | ADDITIONAL INFORMATION

10.A. | Share Capital

Not applicable.

10.B. | Memorandum and Articles of Association

We are an exempted company incorporated under the laws of the Cayman Islands and our affairs are governed by our Second Amended and Restated Memorandum and Articles of Association, as amended and restated from time to time, and Companies Act (as amended) of the Cayman Islands, and the common law of the Cayman Islands.
We incorporate by reference into this annual report our Second Amended and Restated Memorandum and Articles of Association, the form of which was filed as Exhibit 3.2 to our registration statement on Form
F-1
(File Number
333-
234351) filed with the Securities and Exchange Commission on October 28, 2019, as amended. Our shareholders adopted our Second Amended and Restated Memorandum and Articles of Association by a special resolution in October 2019, which became effective immediately prior to completion of our initial public offering of ADSs representing our ordinary shares.
135

Table of Contents
The following are summaries of material provisions of our Second Amended and Restated Memorandum and Articles of Association and the Companies Act (as amended) insofar as they relate to the material terms of our ordinary shares.
Registered Office and Objects
Our registered office in the Cayman Islands is at the offices of Osiris International Cayman Limited, Suite
#4-210,
Governors Square, 23 Lime Tree Bay Avenue, PO Box 32311, Grand Cayman
KY1-1209,
Cayman Islands.
According to Clause 3 of our Second Amended and Restated Memorandum and Articles of Association, the objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by any law as provided by the Companies Act (as amended) or as the same may be revised from time to time, or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management and Employees.”
Ordinary Shares
General
. Holders of our ordinary shares will have the same rights except for voting and conversion rights. All of our issued and outstanding ordinary shares are fully paid and
non-assessable.
Certificates representing the ordinary shares are issued in registered form. We may not issue share to bearer. Our shareholders who are
non-residents
of the Cayman Islands may freely hold and transfer their ordinary shares.
Dividends
. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to our Second Amended and Restated Memorandum and Articles of Association and the Companies Act. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Our Second Amended and Restated Memorandum and Articles of Association provides that dividends may be declared and paid out of our profits, realized or unrealized, or out of the share premium account or as otherwise permitted by the Companies Act. No dividend may be declared and paid unless our directors determine that, immediately after the payment, we will be able to pay our debts as they become due in the ordinary course of business and we have funds lawfully available for such purpose.
Conversion
. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person who is not a Founder or an affiliate of a Founder, or upon a change of beneficial ownership of any Class B ordinary shares as a result of which any person who is not a Founder or an affiliate of a Founder becomes a beneficial owner of such Class B ordinary shares, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. For the purpose of the foregoing sentence, an “affiliate” of a Founder also includes the estates and trusts of such Founder. In addition, in the event that a beneficial owner of Class B ordinary shares is one of our directors or executive officers, where such person ceases to be a director or an executive officer of our company, the Class B ordinary shares such person holds do not automatically convert to Class A ordinary shares as a result of termination of such person’s directorship or employment of an executive officer of our company.
Voting Rights
. Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together as one single class on all matters submitted to a vote by the members. Each Class A ordinary share shall be entitled to one vote on all matters subject to vote at general and special meetings of our company and each Class B ordinary share shall be entitled to 10 votes on all matters subject to vote at general and special meetings of our company.
136

Table of Contents
A quorum required for a meeting of shareholders consists of one or more shareholders holding the majority of the votes attaching to the issued and outstanding shares entitled to vote at general meetings, which shall include the Founders present in person or by proxy or, if a corporation or other
non-natural
person, by its duly authorized representative. As a Cayman Islands exempted company with limited liability, we are not obliged by the Companies Act to call shareholders’ annual general meetings. Our Second Amended and Restated Memorandum and Articles of Association provides that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we will specify the meeting as such in the notices calling it, and the annual general meeting will be held at such time and place as may be determined by our board of directors. Each general meeting, other than an annual general meeting, shall be an extraordinary general meeting. Shareholders’ annual general meetings and any other general meetings of our shareholders may be called by a majority of our board of directors or our chairman or upon a requisition of shareholders holding at the date of deposit of the requisition not less than
one-third
of the votes attaching to the issued and outstanding shares entitled to vote at general meetings, in which case the directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our Second Amended and Restated Memorandum and Articles of Association does not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders. Advance notice of at least seven (7) days is required for the convening of our annual general meeting and other general meetings unless such notice is waived in accordance with our articles of association.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting, while a special resolution also requires the affirmative vote of no less than
two-thirds
of the votes attaching to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting. A special resolution will be required for important matters such as a change of name or making changes to our Second Amended and Restated Memorandum and Articles of Association.
Transfer of Ordinary Shares
. Subject to the restrictions in our Second Amended and Restated Memorandum and Articles of Association as set out below, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:

| • |  | the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;

| • |  | the instrument of transfer is in respect of only one class of shares;

| • |  | the instrument of transfer is properly stamped, if required;

| • |  | in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and

| • |  | a fee of such maximum sum as the Nasdaq may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof.

If our directors refuse to register a transfer they shall, within two calendar months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the Nasdaq, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 calendar days in any year as our board may determine.
137

Table of Contents
Liquidation
. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), if the assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the
paid-up
capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares held by them. Any distribution of assets or capital to a holder of ordinary share will be the same in any liquidation event.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 calendar days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Ordinary Shares
. We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders thereof, on such terms and in such manner as may be determined, before the issue of such shares, by our board of directors or by an ordinary resolution of our shareholders. Our company may also repurchase any of our shares provided that the manner and terms of such purchase have been approved by our board of directors or by ordinary resolution of our shareholders, or are otherwise authorized by our Second Amended and Restated Memorandum and Articles of Association. Under the Companies Act, the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds of a fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if the company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Act no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding other than shares held as treasury shares, or (c) if we have commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
Variations of Rights of Shares
. If at any time our share capital is divided into different classes or series of shares, the rights attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series), whether or not our company is being
wound-up,
may be varied with the consent in writing of holders of not less than
two-thirds
of the issued shares of that class or series or with the sanction of a resolution passed at a separate meeting of the holders of the shares of the class or series by
two-thirds
of the votes cast at such a meeting. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
Inspection of Books and Records
. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements.
Issuance of Additional Shares
. Our Second Amended and Restated Memorandum and Articles of Association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent authorized but unissued.
Our Second Amended and Restated Memorandum and Articles of Association also authorizes our board of directors to establish from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including:

| • |  | the designation of the series;

| • |  | the number of shares of the series;

| • |  | the dividend rights, dividend rates, conversion rights, voting rights; and

| • |  | the rights and terms of redemption and liquidation preferences.

Our board of directors may issue preferred shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting power of holders of ordinary shares.
138

Table of Contents
Anti-Takeover Provisions
. Some provisions of our Second Amended and Restated Memorandum and Articles of Association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
Exempted Company
. We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company:

| • |  | does not have to file an annual return of its shareholders with the Registrar of Companies;

| • |  | is not required to open its register of members for inspection;

| • |  | does not have to hold an annual general meeting;

| • |  | may obtain an undertaking against the imposition of any future taxation (such undertakings can be given for up to 30 years);

| • |  | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;

| • |  | may register as a limited duration company; and

| • |  | may register as a segregated portfolio company.

“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the company.

10.C. | Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual report.

10.D. | Exchange Controls

The Cayman Islands currently has no exchange control regulations or currency restrictions. See “Item 4. Information of the Company—4.B. Business Overview—Regulation—Regulations Related to Foreign Exchange.”

10.E. | Taxation

Cayman Islands Taxation
According to Walkers (Hong Kong), our Cayman counsel, the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation, and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us or holders of our ADSs or Class A ordinary shares levied by the government of the Cayman Islands, except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of the ADSs or Class A ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the ADSs or Class A ordinary shares, nor will gains derived from the disposal of the ADSs or Class A ordinary shares be subject to Cayman Islands income or corporation tax.
139

Table of Contents
People’s Republic of China Taxation
Under the PRC EIT Law, which became effective on January 1, 2008 and last amended on December 29, 2018, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the PRC EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise.
SAT Circular 82 issued by the SAT in April 2009 specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) not less than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. Although SAT Circular 82 and SAT Bulletin 45 apply only to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise group and not those controlled by PRC individuals or foreigners, Fangda Partners, our legal counsel as to PRC law, has advised us that the determination criteria set forth therein may reflect SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners. Further to SAT Circular 82, the SAT issued the SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and administration details of regarding the determination on residence status and administration on post-determination matters. Our company is incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and there solutions of its shareholders) are maintained, outside the PRC. As such, we do not believe that our company meets all of the conditions above or is a PRC resident enterprise for PRC tax purposes even if the standards for “de facto management body” prescribed in SAT Circular 82 are applicable to us. For the same reasons, we believe our other entities outside China are not PRC resident enterprises either. 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.” There can be no assurance that the PRC government will ultimately take a view that is consistent with us. If the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. For example, a 10% withholding tax would be imposed on dividends we pay to our
non-PRC
enterprise shareholders (including our ADS holders). In addition, nonresident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ADSs or Class A ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our
non-PRC
individual shareholders (including our 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). 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 obtain the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. See “Risk Factors—Risks Related to Doing Business in China—Under the PRC enterprise income tax law, we may be classified as a PRC ‘resident enterprise,’ which could result in unfavorable tax consequences to us and our shareholders and ADS holders and have a material adverse effect on our results of operations and the value of your investment.”
Material U.S. Federal Income Tax Considerations
The following are material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of the ADSs or Class A ordinary shares, but this discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold the ADSs or Class A ordinary shares.
This discussion applies to a U.S. Holder that holds the ADSs or Class A ordinary shares as capital assets for U.S. federal income tax purposes (generally, property held for investment). It does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including the alternative minimum tax, the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to special rules, such as:
140

Table of Contents

| • |  | certain financial institutions;

| • |  | dealers or traders in securities that use a mark-to-market method of tax accounting;

| • |  | persons holding ADSs or ordinary shares as part of a straddle, integrated or similar transaction;

| • |  | persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

| • |  | entities classified as partnerships for U.S. federal income tax purposes and their partners;

| • |  | tax-exempt entities, “individual retirement accounts” or “Roth IRAs”;

| • |  | insurance companies;

| • |  | certain U.S. expatriates;

| • |  | persons that own or are deemed to own ADSs or ordinary shares representing 10% or more of our voting power or value;

| • |  | persons holding ADSs or ordinary shares in connection with a trade or business outside the United States; or

| • |  | persons who acquired our ADSs or ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation.

If a partnership (or other entity that is classified as a partnership for U.S. federal income tax purposes) owns ADSs or ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning ADSs or ordinary shares and their partners should consult their tax advisers as to their particular U.S. federal income tax consequences of owning and disposing of ADSs or ordinary shares.
This discussion is based on the Internal Revenue Code of 1986, as amended, (the “Code”), administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, and the income tax treaty between the United States and the PRC, or the Treaty, all as of the date hereof, any of which is subject to change, possibly with retroactive effect.
As used herein, a “U.S. Holder” is a person that is eligible for the benefits of the Treaty, and that for U.S. federal income tax purposes is beneficial owner of our ADSs or Class A ordinary shares and:

| • |  | a citizen or individual resident of the United States;

| • |  | a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or

| • |  | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

Treasury regulations that apply to taxable years beginning on or after December 28, 2021, or the Foreign Tax Credit Regulations, may in some circumstances prohibit a U.S. person from claiming a foreign tax credit with respect to certain
non-U.S.
taxes that are not creditable under applicable income tax treaties. Accordingly, U.S. investors that are not eligible for Treaty benefits should consult their tax advisers regarding the creditability or deductibility of any PRC taxes imposed on dividends on, or dispositions of, the ADSs or Class A ordinary shares. This discussion, in so far as it addresses the creditability of PRC taxes, does not apply to investors in this special situation.
141

Table of Contents
In general, a U.S. Holder that owns ADSs will be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying ordinary shares represented by those ADSs.
This discussion does not address any U.S. federal taxes (such as estate or gift taxes) other than income taxes, nor does it address any state, local or
non-U.S.
considerations. U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and
non-U.S.
tax consequences of owning and disposing of ADSs or ordinary shares in their particular circumstances.
Passive Foreign Investment Company Rules
In general, a
non-U.S.
corporation is a passive foreign investment company for U.S. federal income tax purposes, or PFIC, for any taxable year in which (i) 75% or more of its gross income consists of passive income; or (ii) 50% or more of the value of its assets (generally determined on an average quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a
non-U.S.
corporation that owns (or is treated as owning for U.S. federal income tax purposes), directly or indirectly, at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive asset for these purposes. Goodwill (the value of which may be determined by reference to the excess of the sum of the corporation’s market capitalization and liabilities over the value of its assets) is generally characterized as a
non-passive
or passive asset based on the nature of the income produced in the activity to which the goodwill is attributable.
Based on the composition of our income and assets and the estimated value of our assets, including goodwill, which is based on the average price of our ADSs, we believe that we were not a PFIC for our taxable year ended on December 31, 2021. However, our PFIC status for any taxable year is an annual factual determination that can be made only after the end of that year and depends on the composition of our income and assets and the value of our assets from time to time. We hold a substantial amount of cash and while that continues to be the case our PFIC status for any taxable year will depend primarily on the average value of our goodwill. The value of our goodwill may be determined, in large part, by reference to our market capitalization. Because our market capitalization has declined substantially since our initial public offering (including in 2021 and recent months), if the value of our goodwill is determined by reference to our market capitalization, there is a significant risk that we will be a PFIC for our taxable year 2022, and possibly future taxable years. Moreover, it is not entirely clear how the contractual arrangements between our WFOEs, the VIEs and the shareholders of the VIEs will be treated for purposes of the PFIC rules, and we may be or become a PFIC if the VIE is not treated as owned by us for these purposes. In addition, the extent to which our goodwill should be characterized as an active asset is not entirely clear. For these reasons, there can be no assurance that we will not be a PFIC for our current or any future taxable year.
If we are a PFIC for any taxable year and any of our subsidiaries, the VIEs or other companies in which we own or are treated as owning equity interests is also a PFIC (any such entity, a “Lower-tier PFIC”), U.S. Holders will be deemed to own a proportionate amount (by value) of the shares of each Lower-tier PFIC and will be subject to U.S. federal income tax according to the rules described in the subsequent paragraph on (i) certain distributions by a Lower-tier PFIC and (ii) dispositions of shares of Lower-tier PFICs, in each case as if the U.S. Holders held such shares directly, even though the U.S. Holders will not receive the proceeds of those distributions or dispositions.
In general, if we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of its ADSs or ordinary shares will be allocated ratably over that U.S. Holder’s holding period. The amounts allocated to the taxable year of the sale or disposition and to any year before we became a PFIC will be taxed as ordinary income. The amount allocated to each other taxable year will be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge will be imposed on the resulting tax liability for each such year. Furthermore, to the extent that distributions received by a U.S. Holder in any taxable year on its ADSs or ordinary shares exceed 125% of the average of the annual distributions on the ADSs or ordinary shares received during the preceding three taxable years or the U.S. Holder’s holding period, whichever is shorter, the excess distributions will be subject to taxation in the same manner. If we are a PFIC for any taxable year during which a U.S. Holder owns ADSs or ordinary shares, we will generally continue to be treated as a PFIC with respect to the U.S. Holder for all succeeding taxable years during which the U.S. Holder owns the ADSs or ordinary shares, even if we cease to meet the threshold requirements for PFIC status. If we are a PFIC for any taxable year but cease to be PFIC for subsequent years, U.S. Holders should consult their tax advisers regarding the advisability of making a “deemed sale” election that will allow them to eliminate the continuing PFIC status under certain circumstances.
142

Table of Contents
Alternatively, if we are a PFIC and if the ADSs are “regularly traded” on a “qualified exchange,” a U.S. Holder of ADSs may make a
mark-to-market
election that will result in tax treatment different from the general tax treatment for PFICs described above. The ADSs will be treated as “regularly traded” for any calendar year in which more than a de minimis quantity of the ADSs are traded on a qualified exchange on at least 15 days during each calendar quarter. The Nasdaq, where the ADSs are listed, is a qualified exchange for this purpose, but there is no assurance that our ADSs will be treated as regularly traded for any relevant period. If a U.S. Holder makes the
mark-to-market
election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ADSs at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the
mark-to-market
election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ADSs will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ADSs in a taxable year in which we are a PFIC will be treated as ordinary income, and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the
mark-to-market
election, with any excess treated as capital loss). If a U.S. Holder makes the
mark-to-market
election, distributions paid on ADSs will be treated as discussed under “—
Taxation of Distributions
” above (but subject to the discussion in the immediately subsequent paragraph). U.S. Holders will not be able to make a
mark-to-market
election with respect to our ordinary shares or Lower-tier PFICs, if any. U.S. Holders should consult their tax advisers regarding the availability and advisability of a
mark-to-market
election if we are a PFIC for any taxable year.
If we are a PFIC (or with respect to a particular U.S. Holder are treated as a PFIC) for a taxable year in which we pay a dividend or for the prior taxable year, the favorable tax rate described above with respect to dividends paid to certain
non-corporate
U.S. Holders will not apply.
If we are a PFIC for any taxable year during which a U.S. Holder owns any ADSs or ordinary shares, the U.S. Holder will generally be required to file annual reports with the Internal Revenue Service. U.S. Holders should consult their tax advisers regarding the determination of whether we are a PFIC for any taxable year and the potential application of the PFIC rules to their ownership of ADSs or ordinary shares.
Taxation of Distributions
This discussion is subject to the discussion above under “—
Passive Foreign Investment Company Rules
.”
Distributions paid on the ADSs or ordinary shares, other than certain pro rata distributions of ADSs or ordinary shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Subject to applicable limitations, dividends paid to certain
non-corporate
U.S. Holders of ADSs may be taxable at a favorable rate.
Non-corporate
U.S. Holders should consult their tax advisers regarding the availability of this favorable rate in their particular circumstances.
Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s, or in the case of ADSs, the depositary’s, receipt. The amount of any dividend income paid in foreign currency will be the U.S. dollar amount calculated by reference to the spot rate in effect on the date of actual or constructive receipt, regardless of whether the payment is in fact converted into U.S. dollars on such date. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the amount received. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
143

Table of Contents
Dividends will be treated as foreign-source income and will constitute passive category income or in certain cases, general category income, for foreign tax credit purposes. As described in “—People’s Republic of China Taxation,” dividends paid by us may be subject to PRC withholding tax. For U.S. federal income tax purposes, the amount of the dividend income will include any amounts withheld in respect of PRC withholding tax. Subject to applicable limitations, which vary depending upon the U.S. Holder’s circumstances, PRC taxes withheld from dividend payments (at a rate not exceeding the applicable rate provided in the Treaty) generally will be creditable against a U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances. In lieu of claiming a credit, a U.S. Holder may elect to deduct such PRC taxes in computing its taxable income, subject to applicable limitations. An election to deduct creditable foreign taxes instead of claiming foreign tax credits must apply to all creditable foreign taxes paid or accrued in the relevant taxable year.
Sale or Other Taxable Disposition of ADSs or Ordinary Shares
This discussion is subject to the discussion above under “—
Passive Foreign Investment Company Rules
.”
A U.S. Holder will generally recognize capital gain or loss on a sale or other taxable disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized on the sale or disposition and the U.S. Holder’s tax basis in the ADSs or ordinary shares disposed of, in each case as determined in U.S. dollars. The gain or loss will be long-term capital gain or loss if at the time of the sale or disposition the U.S. Holder has owned the ADSs or ordinary shares for more than one year. Long-term capital gains recognized by
non-corporate
U.S. Holders are subject to tax rates that are lower than those applicable to ordinary income. The deductibility of capital losses is subject to limitations.
As described in “—People’s Republic of China Taxation,” gains on the sale of ADSs or ordinary shares may be subject to PRC taxes. Under the Code, capital gains of U.S. persons are generally treated as U.S.-source income. However, a U.S. Holder may be able to elect to treat the gain as foreign-source income under the Treaty and claim foreign tax credit in respect to any PRC tax on dispositions. The Foreign Tax Credit Regulations generally preclude a U.S. Holder from claiming a foreign tax credit with respect to PRC income taxes on gains from dispositions of ADSs or ordinary shares if the U.S. Holder does not elect to apply the benefits of the Treaty. However, in that case it is possible that any PRC taxes on disposition gains may either be deductible or reduce the amount realized on the disposition. The rules governing foreign tax credits and deductibility of foreign taxes are complex. U.S. Holders should consult their tax advisers regarding the consequences of the imposition of any PRC tax on disposition gains, including the Treaty’s resourcing rule, any reporting requirements with respect to a Treaty-based return position and the creditability or deductibility of the PRC tax in their particular circumstances (including any applicable limitations).
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related intermediaries may be subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other “exempt recipient” or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
Certain U.S. Holders who are individuals (or certain specified entities) may be required to report information relating to their ownership of ADSs or ordinary shares, unless the ADSs or ordinary shares are held in accounts at financial institutions (in which case the accounts may be reportable if maintained by
non-U.S.
financial institutions). U.S. Holders should consult their tax advisers regarding their reporting obligations with respect to the ADSs or ordinary shares.

10.F. | Dividends and Paying Agents

Not applicable.
144

Table of Contents

10.G. | Statement by Experts

Not applicable.

10.H. | Documents on Display

We previously filed with the SEC registration statement on Form
F-1
(File Number
333-
234351), as amended, including annual report contained therein, to register additional securities that become effective immediately upon filing, to register our ordinary shares in relation to our initial public offering. We also filed with the SEC related registration statement on Form
F-6
(File Number
333-
235857) to register our ADSs.
We are subject to the periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form
20-F
within four months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at
1-800-SEC-0330.
The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

10.I | Subsidiary information

Not applicable.

ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.
We may invest the net proceeds we receive from the offering in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.
Foreign exchange risk
Substantially all of our revenues are denominated in Renminbi. The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its
decade-old
policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
145

Table of Contents
To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. To the extent that we need to convert U.S. dollars we received from our initial public offering in January 2020 into Renminbi for our operations or capital expenditures, 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.
As of December 31, 2021, we had U.S. dollar-denominated cash and cash equivalents of US$45.8 million. A 10% depreciation of U.S. dollar against the Renminbi based on the foreign exchange rate on December 31, 2021 would result in a decrease of RMB29.2 million in cash and cash equivalents. A 10% appreciation of U.S. dollar against the Renminbi based on the foreign exchange rate on December 31, 2021 would result in an increase of RMB29.2 million in cash and cash equivalents.
Inflation risk
Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2019, 2020 and 2021 were increases of 4.5%, 0.2% and 1.5%, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.

ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

12.A. | Debt Securities

Not applicable.

12.B. | Warrants and Rights

Not applicable.

12.C. | Other Securities

Not applicable.

12.D. | American Depositary Shares

Fees and Expenses
Pursuant to the terms of the deposit agreement, as an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs):
146

Table of Contents

Service |  | Fees
•  To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash) |  | Up to US$0.05 per ADS issued
•  Cancellation of ADSs, including the case of termination of the deposit agreement |  | Up to US$0.05 per ADS cancelled
•  Distribution of cash dividends |  | Up to US$0.05 per ADS held
•  Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale of rights, securities and other entitlements |  | Up to US$0.05 per ADS held
•  Distribution of ADSs pursuant to exercise of rights. |  | Up to US$0.05 per ADS held
•  Distribution of securities other than ADSs or rights to purchase additional ADSs |  | Up to US$0.05 per ADS held
•  Depositary services |  | Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank

As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs) such as:
Fees for the transfer and registration of Class A ordinary shares charged by the registrar and transfer agent for the Class A ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares).
Expenses incurred for converting foreign currency into U.S. dollars.
Expenses for cable, telex and fax transmissions and for delivery of securities.
Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e., when Class A ordinary shares are deposited or withdrawn from deposit).
Fees and expenses incurred in connection with the delivery or servicing of Class A ordinary shares on deposit.
Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to Class A ordinary shares, deposited securities, ADSs and ADRs.
Any applicable fees and penalties thereon.
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
147

Table of Contents
The depositary may make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS fees collected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time.
Payments by Depositary
As of the date of this annual report, we have received US$1.0 million cash payment from Deutsche Bank Trust Company Americas, the depositary bank for our ADR program.
PART II

ITEM 13. | ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

14.A. – 14.D. Material Modifications to the Rights of Security Holders
See “Item 10. Additional Information” for a description of the rights of shareholders, which remain unchanged.
14.E. Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form
F-1
(File
No. 333-
234351), as amended, including the annual report contained therein, which registered 82,000,000 Class A ordinary shares representing by ADSs and was declared effective by the SEC on January 16, 2020, for our initial public offering, which closed on January 22, 2020, at an initial offering price of US$11.00 per ADS. Citigroup Global Markets Inc. was the representative of the underwriters.
In connection with the issuance and distribution of the ADSs in our initial public offering, our expenses incurred and paid to others totaled approximately US$6.2 million, which included US$3.6 million for underwriting discounts and commissions. None of the transaction expenses included direct or indirect payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates or others. We received an aggregate net proceeds of approximately US$38.1 million from our initial public offering.
As of the date of this annual report, we used US$29.2 million of the net proceeds received from our initial public offering for innovative products development, sales and marketing and general corporate purposes. We still intend to use the remainder of the proceeds from our initial public offering as disclosed in our registration statements on Form
F-1.
None of these net proceeds from our initial public offering and the optional offering was paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates or others.
The following “Use of Proceeds” information relates to the registration statement on Form
F-3,
as amended (File
No. 333-254782)
that became effective immediately upon filing on April 2, 2021, and the applicable prospectus supplements in relation to our offering of 3,685,504 ADSs, representing 73,710,080 Class A ordinary shares and Warrants to purchase up to 2,764,128 ADSs representing 55,282,560 Class A ordinary shares in consideration for $30,000,002 for our
follow-on
offering, which closed in April 2021. Kingswood Capital Markets, division of Benchmark Investments, Inc was the placement agent.
The total expenses incurred for our company’s account in connection with our
follow-on
offering was approximately US$2.0 million, which included US$1.5 million in underwriting discounts and commissions for the
follow-on
offering and approximately US$0.5 million in other costs and expenses for our
follow-on
offering. We received net proceeds of approximately US$28.5 million from our
follow-on
offering. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds from the
follow-on
offering were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.
148

Table of Contents
For the period from April 2, 2021, the date that the registration statement on Form
F-3
and the applicable prospectus supplement was declared effective by the SEC, to the date of this annual report, we used approximately US$1.8 million of the net proceeds received from
follow-on
offering for general corporate purposes.

ITEM 15. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e)
under the Exchange Act) as of the end of the period covered by this report, as required by Rule
13a-15(b)
under the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2021, our disclosure controls and procedures were ineffective as our management has identified a material weakness which is detailed under the section entitled “—Internal Control Over Financial Reporting.”
Internal Control Over Financial Reporting
In the course of auditing our consolidated financial statements for the year ended December 31, 2021, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2021, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States. As defined in the standards established by 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 that has been identified relates to our lack of sufficient and competent accounting and financial reporting personnel, including personnel with appropriate knowledge of U.S. GAAP and SEC financing reporting requirements. The lack of such personnel impacts our ability to timely and completely address complex U.S. GAAP accounting matters, carry out
period-end
financial reporting control and procedures, and prepare our consolidated financial statements and related disclosures to fulfill U.S. GAAP and SEC financial reporting requirements.
We have implemented a number of measures to address the material weakness that has been identified in connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2021, and plan to continue to implement these measures to improve our internal control on a continuing basis.
These measures include the following:

| (1) | we have hired new accounting staff with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements to strengthen period-end financial reporting controls and procedures;

| (2) | we have established, and plan to continue to develop, an ongoing program to provide sufficient and appropriate training for financial reporting and accounting personnel, especially training related to U.S. GAAP and SEC financial reporting requirements;

| (3) | we have assigned, and plan to continue to improve, clear roles and responsibilities for accounting and financial reporting staff to address accounting and financial reporting issues;

| (4) | we have hired qualified consultant to assess Sarbanes-Oxley Act compliance readiness to assess generally where overall controls over financial reporting can be improved and assist us to implement improvements where necessary.

149

Table of Contents
We intend to remediate this material weakness in multiple phases and expect that we will incur certain costs for implementing our remediation measures. We cannot assure you, however, that all these measures will be sufficient to remediate our material weakness in time, or at all. See “Item 3. Key Information—D. Risk factors—Risks Related to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of our shares may be materially and adversely affected.” As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule
13a-15(f)
and
15d-15(f)
under the Exchange Act. Our management evaluated the effectiveness of our internal control over financial reporting, as required by Rule
13a-15(c)
of the Exchange Act, based on criteria established in the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2021 due to a material weakness identified in our internal control over financial reporting as described above.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm
This annual report on Form
20-F
does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act) during the period covered by this annual report on Form
20-F
that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16.A. | AUDIT COMMITTEE FINANCIAL EXPERT

Our audit committee consists of Mr. Yipeng Li, Mr. Ming Zhang and Mr. Xiang Wang. Mr. Yipeng Li is the chairman of our audit committee. We have determined that each of Mr. Yipeng Li and Mr. Ming Zhang satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market and Rule
10A-3
under the Securities Exchange Act of 1934. We have determined that Mr. Yipeng Li qualifies as an “audit committee financial expert.”

ITEM 16.B. | CODE OF ETHICS

Our board of directors has adopted a code of business conduct and ethics that applies to all of our directors, officers, employees, including certain provisions that specifically apply to our principal executive officer, principal financial officer, principal accounting officer or controller and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form
F-1
(file
No. 333-234351)
filed with the SEC on October 28, 2019, as amended, and posted a copy of our code of business conduct and ethics on our website at www.lizhi.fm. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.
150

Table of Contents

ITEM 16.C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

Auditor Fees
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by PricewaterhouseCoopers Zhong Tian LLP, our independent registered public accounting firm, for the periods indicated.

|  | Year Ended December 31, |
Services |  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |
|  | (in thousands) |
Audit Fees (1) |  |  | 5,358 |  |  |  | 6,500 |  |  |  | 7,000 |
Total |  |  | 5,358 |  |  |  | 6,500 |  |  |  | 7,000 |

Note : |

(1) | Audit Fees . Audit fees mean the aggregate fees billed in each of the fiscal periods listed for professional services rendered by our principal auditors for the audit of our annual consolidated financial statements and assistance with and review of documents filed with the SEC.

The policy of our audit committee is to
pre-approve
all audit and
non-audit
services provided by PricewaterhouseCoopers Zhong Tian LLP, our independent registered public accounting firm, including audit services and audit-related services as described above, other than those for de minimus services which are approved by the audit committee prior to the completion of the audit.

ITEM 16.D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16.E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not applicable.

ITEM 16.F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16.G. | CORPORATE GOVERNANCE

As a Cayman Islands exempted company listed on Nasdaq Stock Market, we are subject to the corporate governance requirements under Nasdaq Rules. However, Rule 5615 of the Nasdaq Rules permits a foreign private issuer like our company to follow home country practice in lieu of certain corporate governance matters as required under Rule 5600 Series, Rule 5250(b)(3) and Rule 5250(d) of the Nasdaq Rules.
Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the corporate governance requirements under the Nasdaq Rules. We elect to rely on home country practice exemption in lieu of the requirements of the Rule 5600 Series of the Nasdaq Rules, except the following: compliance with the Notification of Noncompliance requirement (Rule 5625), the Voting Rights requirement (Rule 5640), the Diverse Board Representation Rule (Rule 5605(f)), the Board Diversity Disclosure Rule (Rule 5606), having an audit committee that satisfies Rule 5605(c)(3), and ensuring that such audit committee’s members meet the independence requirement in Rule 5605(c)(2)(A)(ii).
In particular, we relied on home country practice exemption with respect to Rule 5620(a) of the Nasdaq Rules, which requires a Nasdaq-listed company to hold an annual meeting of Shareholders no later than one year after the end of the company’s fiscal
year-end
and we did not hold an annual shareholders meeting in 2021. We may, however, hold annual shareholder meetings in the future if there are significant issues that require shareholders’ approvals.
151

Table of Contents
We elected to follow home country practice exemption and be exempt from the requirements to obtain shareholder approval for (1) certain acquisitions of the stock or assets of another company under Rule 5635(a) of the Nasdaq Rules, (2) the issuance of securities when the issuance or potential issuance will result in a change of control of the Company under Rule 5635(b) of the Nasdaq Rules, (3) the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended under Rule 5635(c) of the Nasdaq Rules, and (4) the issuance of 20% or more of its outstanding ordinary shares under Rule 5635(d) of the Nasdaq Rules. We relied on our home country practice exemption to be exempt from Rule 5605(d)(2) of the Nasdaq Rules, which requires a Nasdaq-listed company to establish a compensation committee comprised entirely of independent directors and two out of three members of our compensation committee are independent directors. We relied on our home country practice exemption to be exempt from Rule 5605(e)(1) of the Nasdaq Rules, which requires a Nasdaq-listed company to nominate director nominees either by a majority independent board or by a nominations committee comprised solely of independent directors and we do not have a majority independent board or a nominations committee comprised solely of independent directors. We relied on our home country practice exemption to be exempt from Rule 5250(b)(3) of the Nasdaq Rules, which requires a Nasdaq-listed company to disclose third party director and nominee compensation no later than when the companies files its next Form 20-F. Subject to Nasdaq Rules, we may also opt to rely on additional home country practice exemptions in the future.
Our shareholders may be afforded less protection than they otherwise would under the Nasdaq Global Market corporate governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our American Depositary Shares—As an exempted company incorporated in the Cayman Islands with limited liability, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards.”

ITEM 16.H. | MINE SAFETY DISCLOSURE

Not applicable.
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III

ITEM 17. | FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18.

ITEM 18. | FINANCIAL STATEMENTS

The consolidated financial statements of LIZHI INC. are included at the end of this annual report.

ITEM 19. | EXHIBITS

Exhibit Number |  | Description of Document
1.1 |  | Second Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to Exhibit 3.2 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
2.1 |  | Form of Registrant’s Specimen American Depositary Receipt (incorporated by reference to Exhibit 4.3 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
2.2 |  | Registrant’s Specimen Certificate for Ordinary shares (incorporated by reference to Exhibit 4.2 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
2.3 |  | Form of Deposit Agreement (incorporated by reference to Exhibit 4.3 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
2.4* |  | Description of Securities registered under Section 12 of the Exchange Act

152

Table of Contents

Exhibit Number |  | Description of Document
4.1 |  | LIZHI INC Amended and Restated 2019 Share Incentive Plan (incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F (File no. 001-39177) filed with the SEC on April 20, 2020)
4.2 |  | LIZHI INC Second Amended And Restated 2019 Share Incentive Plan (incorporated by reference to Exhibit 10.1 to our registration statement on Form S-8 (File no. 333-259595) filed with the SEC on September 17, 2021)
4.3 |  | Form of Indemnification Agreement with the Registrant’s directors and executive officers (incorporated by reference to Exhibit 10.2 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.4 |  | Form of Employment Agreement between the Registrant and a director or executive officer of the Registrant (incorporated by reference to Exhibit 10.3 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.5 |  | Shareholders Agreement dated March 6, 2019 by and among the Registrant, its ordinary shareholders, preferred shareholders and other parties named therein (incorporated by reference to Exhibit 4.4 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.6 |  | English translation of the third amended and restated agreement of equity pledge agreement entered into on June 20, 2019 by and between Hongyi Technology and the shareholders of Guangzhou Lizhi (incorporated by reference to Exhibit 10.4 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.7 |  | English translation of the fourth amended and restated agreement of exclusive equity transfer option agreement entered into on June 20,2019 by and among Hongyi Technology, Guangzhou Lizhi and the shareholders of Guangzhou Lizhi (incorporated by reference to Exhibit 10.5 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.8 |  | English translation of the amended and restated agreement of exclusive technical consulting and management service agreement entered into on June 9, 2017 by and between Hongyi Technology and Guangzhou Lizhi (incorporated by reference to Exhibit 10.6 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.9 |  | English translation of the second amended and restated agreement of business operation agreement entered into on June 20, 2019 by and among Hongyi Technology, Guangzhou Lizhi and the shareholders of Guangzhou Lizhi (incorporated by reference to Exhibit 10.7 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.10 |  | English translation of the power of attorney dated June 20, 2019 issued by Mr. Jinnan (Marco) Lai, one of the shareholders of Guangzhou Lizhi (incorporated by reference to Exhibit 10.8 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.11 |  | English translation of the power of attorney dated June 20, 2019 issued by Mr. Ning Ding, one of the shareholders of Guangzhou Lizhi (incorporated by reference to Exhibit 10.9 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.12 |  | English translation of the equity pledge agreement entered into on May 20, 2019 by and between Guangzhou Tiya and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao (incorporated by reference to Exhibit 10.10 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)

153

Table of Contents

Exhibit Number |  | Description of Document
4.13 |  | English translation of the exclusive equity transfer option agreement entered into on May 20, 2019 by and among Guangzhou Tiya, Guangzhou Huanliao and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao (incorporated by reference to Exhibit 10.11 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.14 |  | English translation of the exclusive technical consulting and management service agreement entered into on May 20, 2019 by and between Guangzhou Tiya and Guangzhou Huanliao (incorporated by reference to Exhibit 10.12 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.15 |  | English translation of the business operation agreement entered into on May 20, 2019 by and among Guangzhou Tiya, Guangzhou Huanliao and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao (incorporated by reference to Exhibit 10.13 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
4.16 |  | English translation of the power of attorney dated May 20, 2019 issued by Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao (incorporated by reference to Exhibit 10.14 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
8.1* |  | Significant subsidiaries of the registrant
11.1 |  | Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 to our registration statement on Form F-1 (File No. 333-234351), as amended, initially filed with the SEC on October 28, 2019)
12.1* |  | Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2* |  | Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1** |  | Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2** |  | Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1* |  | Consent of Walkers (Hong Kong)
15.2* |  | Consent of Fangda Partners
15.3* |  | Consent of PricewaterhouseCoopers Zhong Tian LLP
101.INS* |  | Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH* |  | Inline XBRL Taxonomy Extension Schema Document
101.CAL* |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* |  | Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* |  | Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document
104* |  | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* | Filed herewith

** | Furnished herewith

154

Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form
20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

LIZHI INC.
By: |  | /s/ Jinnan (Marco) Lai
|  | Name: Jinnan (Marco) Lai
|  | Title: Chief Executive Officer, Director

Date: April 27, 2022

Table of Contents
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

|  | Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 1427) |  | F-2
Consolidated Balance Sheets as of December 31, 2020 and 2021 |  | F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2019, 2020 and 2021 |  | F- 5
Consolidated Statements of Changes in Shareholders’ (Deficit)/Equity for the years ended December 31, 2019, 2020 and 2021 |  | F- 6
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2020 and 2021 |  | F- 8
Notes to the Consolidated Financial Statements |  | F- 9

F - 1

Table of Contents
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Shareholders of Lizhi Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lizhi Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020,
and
the related consolidated statements of operations and comprehensive loss, of changes in shareholders’ deficit/equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers Zhong Tian LLP
Beijing, the People’s Republic of China
April 27, 2022
We have served as the Company’s auditor since 2019
F - 2

Table of Contents
LIZHI INC.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except for share, ADS, per share and per ADS data)

|  | As of December 31, 2020 |  |  | As of December 31, 2021 |
|  | RMB |  |  | RMB |  |  | US$ Note 2(e) |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 315,459 |  |  |  | 533,293 |  |  |  | 83,685 |
Short-term investments |  |  | 73,022 |  |  |  | — |  |  |  | — |
Restricted cash |  |  | 3,695 |  |  |  | 4,155 |  |  |  | 652 |
Accounts receivable, net |  |  | 8,361 |  |  |  | 6,458 |  |  |  | 1,013 |
Prepayments and other current assets |  |  | 19,371 |  |  |  | 33,604 |  |  |  | 5,273 |
Total current assets |  |  | 419,908 |  |  |  | 577,510 |  |  |  | 90,623 |
Non-current assets: |  |  |  |  |  |  |  |  |  |  |  |
Property, equipment and leasehold improvement, net |  |  | 34,518 |  |  |  | 33,391 |  |  |  | 5,240 |
Intangible assets, net |  |  | 2,929 |  |  |  | 2,245 |  |  |  | 352 |
Right-of-use assets, net |  |  | 4,282 |  |  |  | 28,941 |  |  |  | 4,541 |
Other non-current assets |  |  | 2,181 |  |  |  | 799 |  |  |  | 125 |
Total non-current assets |  |  | 43,910 |  |  |  | 65,376 |  |  |  | 10,258 |
TOTAL ASSETS |  |  | 463,818 |  |  |  | 642,886 |  |  |  | 100,881 |
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable (including accounts payable of the consolidated variable interest entities (“VIEs”) without recourse to the primary beneficiary of RMB74.0 million and RMB70.6 million as of December 31, 2020 and 2021, respectively) |  |  | 78,267 |  |  |  | 80,793 |  |  |  | 12,678 |
Deferred revenue (including deferred revenue of the consolidated VIEs without recourse to the primary beneficiary of RMB16.2 million and RMB19.1 million as of December 31, 2020 and 2021, respectively) |  |  | 17,001 |  |  |  | 20,657 |  |  |  | 3,242 |
Salary and welfare payable (including salary and welfare payable of the consolidated VIEs without recourse to the primary beneficiary of RMB88.5 million and RMB116.2 million as of December 31, 2020 and 2021, respectively) |  |  | 93,288 |  |  |  | 123,075 |  |  |  | 19,312 |
Taxes payable (including taxes payable of the consolidated VIEs without recourse to the primary beneficiary of RMB4.6 million and RMB4.9 million as of December 31, 2020 and 2021, respectively) |  |  | 5,809 |  |  |  | 5,564 |  |  |  | 872 |
Short-term loans (including short-term loans of the consolidated VIEs without recourse to the primary beneficiary of RMB39.5 million and RMB69.0 million as of December 31, 2020 and 2021, respectively) |  |  | 39,508 |  |  |  | 68,999 |  |  |  | 10,827 |
Lease liabilities due within one year (including lease liabilities due within one year of the consolidated VIEs without recourse to the primary beneficiary of RMB3.5 million and RMB5.8 million as of December 31, 2020 and 2021, respectively) |  |  | 3,709 |  |  |  | 13,929 |  |  |  | 2,186 |
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the primary beneficiary of RMB41.6 million and RMB42.8 million as of December 31, 2020 and 2021, respectively) |  |  | 51,047 |  |  |  | 53,486 |  |  |  | 8,392 |
Total current liabilities |  |  | 288,629 |  |  |  | 366,503 |  |  |  | 57,509 |

F - 3

Table of Contents
LIZHI INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

|  | As of December 31, 2020 |  |  | As of December 31, 2021 |
|  | RMB |  |  | RMB |  |  | US$ Note 2(e) |
Non-current liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Lease liabilities (including lease liabilities of the consolidated VIEs without recourse to the primary beneficiary of RMB0.6 million and RMB4.1 million as of December 31, 2020 and 2021, respectively) |  |  | 587 |  |  |  | 17,076 |  |  |  | 2,680 |
Other non-current liabilities (including other non-current liabilities of the consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2020 and 2021, respectively) |  |  | 5,411 |  |  |  | 4,452 |  |  |  | 699 |
Total non-current liabilities |  |  | 5,998 |  |  |  | 21,528 |  |  |  | 3,379 |
TOTAL LIABILITIES |  |  | 294,627 |  |  |  | 388,031 |  |  |  | 60,888 |
COMMITMENTS AND CONTINGENCIES (NOTE 17) |  |  | — |  |  |  | — |  |  |  | — |

SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |
Class A Ordinary shares (US$0.0001 par value, 1,268,785,000 shares authorized, 710,249,520 shares issued and 693,103,450 shares outstanding as of December 31, 2020; 1,268,785,000 shares authorized, 798,962,260 shares issued and 782,801,250 shares outstanding as of December 31, 2021). |  |  | 472 |  |  |  | 530 |  |  |  | 84 |
Class B Ordinary shares (US$0.0001 par value, 231,215,000 shares authorized, issued and outstanding as of December 31, 2020 and 2021, respectively). |  |  | 168 |  |  |  | 168 |  |  |  | 26 |
Treasury stock |  |  | (12 | ) |  |  | (11 | ) |  |  | (2 | )
Additional paid in capital |  |  | 2,409,753 |  |  |  | 2,630,456 |  |  |  | 412,776 |
Accumulated deficit |  |  | (2,239,281 | ) |  |  | (2,366,531 | ) |  |  | (371,360 | )
Accumulated other comprehensive loss |  |  | (1,909 | ) |  |  | (9,757 | ) |  |  | (1,531 | )
TOTAL SHAREHOLDERS’ EQUITY |  |  | 169,191 |  |  |  | 254,855 |  |  |  | 39,993 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  | 463,818 |  |  |  | 642,886 |  |  |  | 100,881 |

The accompanying notes are an integral part of these consolidated financial statements.
F -
4

Table of Contents
LIZHI INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(All amounts in thousands, except for share, ADS, per share and per ADS data)

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |  |  | US$ |
|  |  |  |  |  |  |  |  |  |  | Note 2(e) |
Net revenues |  |  | 1,180,597 |  |  |  | 1,502,908 |  |  |  | 2,119,514 |  |  |  | 332,598 |
Cost of revenues |  |  | (910,155 | ) |  |  | (1,134,678 | ) |  |  | (1,502,505 | ) |  |  | (235,776 | )
Gross profit |  |  | 270,442 |  |  |  | 368,230 |  |  |  | 617,009 |  |  |  | 96,822 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling and marketing expenses |  |  | (208,550 | ) |  |  | (142,734 | ) |  |  | (386,204 | ) |  |  | (60,604 | )
General and administrative expenses |  |  | (45,714 | ) |  |  | (88,856 | ) |  |  | (104,617 | ) |  |  | (16,417 | )
Research and development expenses |  |  | (158,015 | ) |  |  | (225,329 | ) |  |  | (264,706 | ) |  |  | (41,538 | )
Total operating expenses |  |  | (412,279 | ) |  |  | (456,919 | ) |  |  | (755,527 | ) |  |  | (118,559 | )
Operating loss |  |  | (141,837 | ) |  |  | (88,689 | ) |  |  | (138,518 | ) |  |  | (21,737 | )
Other income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income/(expenses), net |  |  | 300 |  |  |  | (1,796 | ) |  |  | (1,103 | ) |  |  | (173 | )
Foreign exchange gains/(losses) |  |  | 1,178 |  |  |  | (836 | ) |  |  | (738 | ) |  |  | (116 | )
Investment income |  |  | — |  |  |  | 1,241 |  |  |  | 468 |  |  |  | 73 |
Government grants |  |  | 9,452 |  |  |  | 12,870 |  |  |  | 13,496 |  |  |  | 2,118 |
Others, net |  |  | (2,050 | ) |  |  | (3,975 | ) |  |  | (479 | ) |  |  | (75 | )
Loss before income taxes |  |  | (132,957 | ) |  |  | (81,185 | ) |  |  | (126,874 | ) |  |  | (19,910 | )
Income tax expense |  |  | — |  |  |  | (999 | ) |  |  | (376 | ) |  |  | (59 | )
Net loss |  |  | (132,957 | ) |  |  | (82,184 | ) |  |  | (127,250 | ) |  |  | (19,969 | )
Accretions to preferred shares redemption value |  |  | (940,186 | ) |  |  | (154,066 | ) |  |  | — |  |  |  | — |
Net loss attributable to the Lizhi Inc.’s ordinary shareholders |  |  | (1,073,143 | ) |  |  | (236,250 | ) |  |  | (127,250 | ) |  |  | (19,969 | )
Net loss |  |  | (132,957 | ) |  |  | (82,184 | ) |  |  | (127,250 | ) |  |  | (19,969 | )
Other comprehensive income/(loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | 671 |  |  |  | (6,338 | ) |  |  | (7,848 | ) |  |  | (1,232 | )
Total other comprehensive income/(loss) |  |  | 671 |  |  |  | (6,338 | ) |  |  | (7,848 | ) |  |  | (1,232 | )
Total comprehensive loss |  |  | (132,286 | ) |  |  | (88,522 | ) |  |  | (135,098 | ) |  |  | (21,201 | )
Accretions to preferred shares redemption value |  |  | (940,186 | ) |  |  | (154,066 | ) |  |  | — |  |  |  | — |
Comprehensive loss attributable to the Lizhi Inc.’s ordinary shareholders |  |  | (1,072,472 | ) |  |  | (242,588 | ) |  |  | (135,098 | ) |  |  | (21,201 | )
Net loss attributable to the Lizhi Inc.’s ordinary shareholders per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | (4.13 | ) |  |  | (0.27 | ) |  |  | (0.13 | ) |  |  | (0.02 | )
Diluted |  |  | (4.13 | ) |  |  | (0.27 | ) |  |  | (0.13 | ) |  |  | (0.02 | )
Weighted average number of ordinary shares |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 260,000,000 |  |  |  | 883,202,412 |  |  |  | 991,715,849 |  |  |  | 991,715,849 |
Diluted |  |  | 260,000,000 |  |  |  | 883,202,412 |  |  |  | 991,715,849 |  |  |  | 991,715,849 |
Net loss attributable to the Lizhi Inc.’s ordinary shareholders per ADSs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | (82.55 | ) |  |  | (5.35 | ) |  |  | (2.57 | ) |  |  | (0.40 | )
Diluted |  |  | (82.55 | ) |  |  | (5.35 | ) |  |  | (2.57 | ) |  |  | (0.40 | )
Weighted average number of ADSs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 13,000,000 |  |  |  | 44,160,121 |  |  |  | 49,585,792 |  |  |  | 49,585,792 |
Diluted |  |  | 13,000,000 |  |  |  | 44,160,121 |  |  |  | 49,585,792 |  |  |  | 49,585,792 |

The accompanying notes are an integral part of these consolidated financial statements.
F -
5

Table of Contents
LIZHI INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY
(All amounts in thousands, except for share, ADS, per share and per ADS data)

|  | Ordinary shares |  |  | Treasury stock |  |  | Additional paid-in capital |  |  | Accumulated other comprehensive income/(loss) |  |  | Accumulated deficit |  |  | Total shareholders’ (deficit)/equity |
| Shares |  |  | Amounts |  |  | Shares |  |  | Amounts |
|  |  |  |  | RMB |  |  |  |  |  | RMB |  |  | RMB |  |  | RMB |  |  | RMB |  |  | RMB |
Balance at January 1, 2019 |  |  | 260,000,000 |  |  |  | 171 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,758 |  |  |  | (929,888 | ) |  |  | (925,959 | )
Net loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (132,957 | ) |  |  | (132,957 | )
Preferred shares redemption value accretion |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (940,186 | ) |  |  | (940,186 | )
Issuance of treasury stock for grants of restricted shares |  |  | 25,428,430 |  |  |  | 18 |  |  |  | (25,428,430 | ) |  |  | (18 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Foreign currency translation adjustment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 671 |  |  |  | — |  |  |  | 671 |
Balance at December 31, 2019 |  |  | 285,428,430 |  |  |  | 189 |  |  |  | (25,428,430 | ) |  |  | (18 | ) |  |  | — |  |  |  | 4,429 |  |  |  | (2,003,031 | ) |  |  | (1,998,431 | )
Balance at January 1, 2020 |  |  | 285,428,430 |  |  |  | 189 |  |  |  | (25,428,430 | ) |  |  | (18 | ) |  |  | — |  |  |  | 4,429 |  |  |  | (2,003,031 | ) |  |  | (1,998,431 | )
Net loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (82,184 | ) |  |  | (82,184 | )
Issuance of ordinary shares at the initial public offering (“IPO”) |  |  | 82,000,000 |  |  |  | 56 |  |  |  | — |  |  |  | — |  |  |  | 256,352 |  |  |  | — |  |  |  | — |  |  |  | 256,408 |
Conversion of preferred shares to ordinary shares upon the completion of the IPO |  |  | 569,036,090 |  |  |  | 391 |  |  |  | — |  |  |  | — |  |  |  | 2,100,665 |  |  |  | — |  |  |  | — |  |  |  | 2,101,056 |
Preferred shares redemption value accretion before the IPO |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (154,066 | ) |  |  | (154,066 | )
Share-based compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 49,170 |  |  |  | — |  |  |  | — |  |  |  | 49,170 |
Grant of vested options to settle annual bonus |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,378 |  |  |  | — |  |  |  | — |  |  |  | 3,378 |
Issuance of treasury stock for share incentive plan |  |  | 5,000,000 |  |  |  | 4 |  |  |  | (5,000,000 | ) |  |  | (4 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Vesting of restricted shares |  |  | — |  |  |  | — |  |  |  | 9,857,100 |  |  |  | 8 |  |  |  | (8 | ) |  |  | — |  |  |  | — |  |  |  | — |
Vesting of restricted share units |  |  | — |  |  |  | — |  |  |  | 190,160 |  |  |  | — |  |  |  | 196 |  |  |  | — |  |  |  | — |  |  |  | 196 |
Exercise of share options |  |  | — |  |  |  | — |  |  |  | 3,235,100 |  |  |  | 2 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2 |
Foreign currency translation adjustment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (6,338 | ) |  |  | — |  |  |  | (6,338 | )
Balance at December 31, 2020 |  |  | 941,464,520 |  |  |  | 640 |  |  |  | (17,146,070 | ) |  |  | (12 | ) |  |  | 2,409,753 |  |  |  | (1,909 | ) |  |  | (2,239,281 | ) |  |  | 169,191 |

The accompanying notes are an integral part of these consolidated financial statements.
F -
6

Table of Contents
LIZHI INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

|  | Ordinary shares |  |  | Treasury stock |  |  | Additional paid-in capital |  |  | Accumulated other comprehensive income/(loss) |  |  | Accumulated deficit |  |  | Total shareholders’ (deficit)/equity |
| Shares |  |  | Amounts |  |  | Shares |  |  | Amounts |
|  |  |  |  | RMB |  |  |  |  |  | RMB |  |  | RMB |  |  | RMB |  |  | RMB |  |  | RMB |
Balance at January 1, 2021 |  |  | 941,464,520 |  |  |  | 640 |  |  |  | (17,146,070 | ) |  |  | (12 | ) |  |  | 2,409,753 |  |  |  | (1,909 | ) |  |  | (2,239,281 | ) |  |  | 169,191 |
Net loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (127,250 | ) |  |  | (127,250 | )
Issuance of ordinary shares at the follow-on public offering |  |  | 73,710,080 |  |  |  | 48 |  |  |  | — |  |  |  | — |  |  |  | 183,140 |  |  |  | — |  |  |  | — |  |  |  | 183,188 |
Share-based compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 34,715 |  |  |  | — |  |  |  | — |  |  |  | 34,715 |
Issuance of treasury stock for share incentive plan |  |  | 15,002,660 |  |  |  | 10 |  |  |  | (15,002,660 | ) |  |  | (10 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Vesting of restricted shares |  |  | — |  |  |  | — |  |  |  | 6,232,100 |  |  |  | 5 |  |  |  | (5 | ) |  |  | — |  |  |  | — |  |  |  | — |
Vesting of restricted share units |  |  | — |  |  |  | — |  |  |  | 4,830,900 |  |  |  | 3 |  |  |  | 2,853 |  |  |  | — |  |  |  | — |  |  |  | 2,856 |
Exercise of share options |  |  | — |  |  |  | — |  |  |  | 4,924,720 |  |  |  | 3 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3 |
Foreign currency translation adjustment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (7,848 | ) |  |  | — |  |  |  | (7,848 | )
Balance at December 31, 2021 |  |  | 1,030,177,260 |  |  |  | 698 |  |  |  | (16,161,010 | ) |  |  | (11 | ) |  |  | 2,630,456 |  |  |  | (9,757 | ) |  |  | (2,366,531 | ) |  |  | 254,855 |

The accompanying notes are an integral part of these consolidated financial statements.
F -
7

Table of Contents
LIZHI INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands, except for share, ADS, per share and per ADS data)

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |  |  | US$ |
|  |  |  |  |  |  |  |  |  |  | Note 2(e) |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net Loss |  |  | (132,957 | ) |  |  | (82,184 | ) |  |  | (127,250 | ) |  |  | (19,969 | )
Adjustment to reconcile net loss to net cash generated from/(used in) operating activities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Depreciation of property, equipment and leasehold improvement |  |  | 10,772 |  |  |  | 17,677 |  |  |  | 19,225 |  |  |  | 3,017 |
Amortization of intangible assets |  |  | 1,763 |  |  |  | 1,593 |  |  |  | 1,686 |  |  |  | 265 |
Amortization of right-of-use assets |  |  | — |  |  |  | 8,569 |  |  |  | 10,329 |  |  |  | 1,621 |
Foreign exchange (gains)/losses |  |  | (1,178 | ) |  |  | 836 |  |  |  | 738 |  |  |  | 116 |
Investment (gains)/losses |  |  | — |  |  |  | (1,241 | ) |  |  | — |  |  |  | — |
Interest expense/(income) |  |  | — |  |  |  | 2,395 |  |  |  | — |  |  |  | — |
Share-based compensation |  |  | — |  |  |  | 50,741 |  |  |  | 37,359 |  |  |  | 5,862 |
Gains on disposal of property equipment and software |  |  | — |  |  |  | (28 | ) |  |  | — |  |  |  | — |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts receivable |  |  | 3,506 |  |  |  | (5,382 | ) |  |  | 1,903 |  |  |  | 299 |
Prepayments and other current assets |  |  | (12,850 | ) |  |  | (4,989 | ) |  |  | (15,935 | ) |  |  | (2,501 | )
Accounts payable |  |  | (4,416 | ) |  |  | 5,968 |  |  |  | 2,526 |  |  |  | 396 |
Deferred revenue |  |  | 3,862 |  |  |  | 2,471 |  |  |  | 3,656 |  |  |  | 574 |
Salary and welfare payable |  |  | 29,414 |  |  |  | 26,393 |  |  |  | 29,998 |  |  |  | 4,707 |
Taxes payable |  |  | (2,253 | ) |  |  | 6,044 |  |  |  | 1,691 |  |  |  | 266 |
Lease liabilities |  |  | — |  |  |  | (8,555 | ) |  |  | (8,279 | ) |  |  | (1,299 | )
Accrued expenses and other current liabilities |  |  | 8,584 |  |  |  | 14,277 |  |  |  | 2,886 |  |  |  | 453 |
Other non-current liabilities |  |  | — |  |  |  | 5,411 |  |  |  | (959 | ) |  |  | (150 | )
Net cash (used in)/generated from operating activities |  |  | (95,753 | ) |  |  | 39,996 |  |  |  | (40,426 | ) |  |  | (6,343 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchase of property, equipment and leasehold improvement |  |  | (27,865 | ) |  |  | (21,246 | ) |  |  | (20,075 | ) |  |  | (3,150 | )
Purchase of intangible assets |  |  | (1,505 | ) |  |  | (1,759 | ) |  |  | (855 | ) |  |  | (134 | )
Purchase of short-term investments |  |  | — |  |  |  | (86,305 | ) |  |  | — |  |  |  | — |
Maturities of short-term investments |  |  | — |  |  |  | 14,505 |  |  |  | 73,022 |  |  |  | 11,459 |
Net cash received from disposal of property, equipment and leasehold improvement |  |  | — |  |  |  | 246 |  |  |  | 9 |  |  |  | 1 |
Net cash (used in)/generated from investing activities |  |  | (29,370 | ) |  |  | (94,559 | ) |  |  | 52,101 |  |  |  | 8,176 |
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Proceeds from issuance of ordinary shares, net |  |  | — |  |  |  | 259,043 |  |  |  | 183,188 |  |  |  | 28,746 |
Proceeds from exercise of vested share options |  |  |  |  |  |  | 2 |  |  |  | 3 |  |  |  | — |
Proceeds from short-term loans |  |  | — |  |  |  | 69,942 |  |  |  | 49,248 |  |  |  | 7,728 |
Repayments of short-term loans |  |  | — |  |  |  | (30,941 | ) |  |  | (19,757 | ) |  |  | (3,100 | )
Net cash generated from financing activities |  |  | — |  |  |  | 298,046 |  |  |  | 212,682 |  |  |  | 33,374 |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash |  |  | 2,228 |  |  |  | (7,038 | ) |  |  | (6,063 | ) |  |  | (952 | )
Net (decrease)/increase in cash, cash equivalents and restricted cash |  |  | (122,895 | ) |  |  | 236,445 |  |  |  | 218,294 |  |  |  | 34,255 |
Cash, cash equivalents and restricted cash at beginning of the year |  |  | 205,604 |  |  |  | 82,709 |  |  |  | 319,154 |  |  |  | 50,082 |
Cash, cash equivalents and restricted cash at end of the year |  |  | 82,709 |  |  |  | 319,154 |  |  |  | 537,448 |  |  |  | 84,337 |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash paid for interest expense |  |  | — |  |  |  | (1,888 | ) |  |  | (3,141 | ) |  |  | (493 | )
Income taxes paid |  |  | — |  |  |  | — |  |  |  | (924 | ) |  |  | (145 | )
Accretions to preferred shares redemption value |  |  | 940,186 |  |  |  | 154,066 |  |  |  | — |  |  |  | — |

The accompanying notes are an integral part of these consolidated financial statements.
F -
8

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization

Lizhi Inc. (the “Company”) was incorporated in the Cayman Islands in January 2019 in connection with a Reorganization of
pre-existing
entities under common control (see “History of the Group”, below). The Company is a holding company and conducts its business mainly through its subsidiaries, and through variable interest entities (“VIEs”) and subsidiaries of VIEs (collectively referred to as the “Group”). The Group is primarily engaged in the operation of providing audio entertainment, and podcast, advertising and others in the People’s Republic of China (the “PRC” or “China”). The Group commenced its audio entertainment business from the fourth quarter of 2016.
As of December 31, 2021, the Company’s consolidated subsidiaries, the VIEs and subsidiaries of VIEs are as follows:

Major Subsidiaries |  | Place and year of incorporation |  | Percentage of direct or indirect economic ownership |  | Principal activities
Lizhi Inc. (“Lizhi BVI”) |  | British Virgin Islands, Y2010 |  | 100 |  | Investment holding
Lizhi Holding Limited (“Lizhi HK”) |  | Hong Kong, China Y2010 |  | 100 |  | Investment holding
Beijing Hongyiyichuang Information Technology Co., Ltd. (“Hongyi Technology”) |  | Beijing, China Y2011 |  | 100 |  | Technical support and consulting services, advertising service
Tiya Inc. (“Tiya Cayman”) |  | Cayman Islands, Y2019 |  | 100 |  | Investment holding
TIYA INC. (“Tiya BVI”) |  | British Virgin Islands, Y2019 |  | 100 |  | Investment holding
Tiya Holding Limited (“Tiya HK”) |  | Hong Kong, China Y2019 |  | 100 |  | Investment holding
TIYA PTE. LTD. |  | Singapore Y2019 |  | 100 |  | Audio entertainment business and others
NASHOR PTE. LTD. |  | Singapore Y2019 |  | 100 |  | Audio entertainment business and others
Guangzhou Tiya Information Technology Co., Ltd. (“Guangzhou Tiya”) |  | Guangzhou, China Y2019 |  | 100 |  | Technical support and consulting services
Tiya Inc. (“Tiya USA”) |  | USA Y2020 |  | 100 |  | Audio entertainment business and others
Major VIEs |  | Place and year of incorporation/ acquisition |  | Percentage of direct or indirect economic ownership |  | Principal activities
Guangzhou Lizhi Network Technology Co., Ltd. (“Guangzhou Lizhi”) |  | Guangzhou, China Y2007 |  | 100 |  | Audio entertainment and podcast business
Guangzhou Huanliao Network Technology Co., Ltd. (“Guangzhou Huanliao”) * |  | Guangzhou, China Y2016 |  | 100 |  | Audio entertainment business and others
Major subsidiaries of VIEs |  | Place and year of incorporation |  | Percentage of direct or indirect economic ownership |  | Principal activities
Changsha Limang Interaction Entertainment Co., Ltd. |  | Changsha, China Y2015 |  | 100 |  | Audio entertainment business and others
Huai’an Lizhi Network Technology Co., Ltd. |  | Huai’an, China Y2015 |  | 100 |  | Audio entertainment business and others
Wuhan Lizhi Network Technology Co., Ltd. |  | Wuhan, China Y2017 |  | 100 |  | Audio entertainment business and others
Chongqing Piwan Network Technology Co., Ltd. |  | Chongqing, China Y2019 |  | 100 |  | Audio entertainment business and others

* | In May 2019, Guangzhou Huanliao was restructured from being a subsidiary of Guangzhou Lizhi to a VIE of Guangzhou Tiya.

F - 9

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization (Continued)

History of the Group
Reorganization
The Group commenced operations through Guangzhou Lizhi in the PRC, formerly known as Guangzhou Taochao Internet Technology Co., Ltd. Guangzhou Lizhi holds an Internet Content Provider (“ICP”) license to operate Lizhi.fm that provides internet information services to its consumers.
In October 2010, Lizhi BVI was incorporated in the British Virgin Islands. In March 2011, Lizhi BVI established Hongyi Technology in the PRC to control Guangzhou Lizhi through contractual arrangements and Guangzhou Lizhi became a VIE of the Group.
In December 2018, Lizhi BVI repurchased all ordinary shares and preferred shares of Lizhi BVI then held by each of Mr. Jinnan (Marco) Lai and Mr. Ning Ding and issued the same amount of ordinary and preferred shares to VOICE WORLD Ltd and AI VOICE Ltd, each a company incorporated in the British Virgin Islands wholly owned by each of Mr. Jinnan (Marco) Lai and Mr. Ning Ding, respectively.
In March 2019, in connection with its incorporation, the Company issued ordinary shares and preferred shares to all of the then existing shareholders of Lizhi BVI based on their equity interests held in Lizhi BVI. After this transaction, Lizhi BVI became a wholly-owned subsidiary of the Company.
The Company’s shareholding structure immediately after the Reorganization was the same as the capital structure of Guangzhou Lizhi immediately prior to the Reorganization. Concurrently, Guangzhou Lizhi became the consolidated VIE of the Group. The Company determined that the Reorganization should be treated as a
non-substantive
merger with no change in the basis of assets and liabilities of Guangzhou Lizhi. These arrangements were accounted for as a reorganization and the historical financial statements were presented on a carryover basis.
Initial Public Offering
In January 2020, the Company completed an IPO in which an aggregate of 82,000,000 Class A ordinary shares was offered and sold in the form of ADSs. On January 17, 2020, the ADSs have been listed on the Nasdaq Global Market under the symbol “LIZI”.
Follow-on Public Offering
In April 2021, the Company completed a registered direct offering of 3,685,504 ADSs and warrants to purchase up to 2,764,128 ADSs, at an offering price of US$8.14 per ADS and
the
corresponding warrant. The gross proceeds of this registered direct offering were US$30,000,002 before deducting placement agent fees and other offering expenses.
Contractual arrangements with VIEs
PRC laws and regulations place certain restrictions on foreign investment in value-added telecommunication service businesses. The Company conducts a significant portion of their operations in the PRC through Guangzhou Lizhi, Guangzhou Huanliao, and their subsidiaries. The Company has effective control over the VIEs and subsidiaries of VIEs through a series of contractual arrangements among its wholly-owned PRC subsidiaries Hongyi Technology and Guangzhou Tiya, VIEs and their shareholders. The contractual arrangements, as described in more detail below, collectively allow the Company to:

| • |  | exercise effective control over each of the VIEs and subsidiaries of VIEs;

| • |  | receive substantially all of the economic benefits of VIEs and subsidiaries of VIEs; and

| • |  | have an exclusive call option to purchase all or part of the equity interests in and/or assets of each of VIEs and subsidiaries of VIEs when and to the extent permitted by PRC laws.

As a result of these contractual arrangements, the Company is the ultimate primary beneficiary of VIEs and subsidiaries of VIEs, and therefore, has consolidated the financial results of VIEs and subsidiaries of VIEs in its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Below is a summary of the currently effective contractual arrangements by and among the Company’s wholly-owned subsidiaries Hongyi Technology, Guangzhou Tiya, the Company’s VIEs Guangzhou Lizhi, Guangzhou Huanliao and their shareholders (also nominee shareholders).
F - 1
0

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization (Continued)

Contractual arrangements with VIEs (Continued)
Guangzhou Lizhi
Equity Pledge Agreement
Pursuant to an equity pledge agreement entered into on June 20, 2019 by and between Hongyi Technology and then shareholders of Guangzhou Lizhi, such shareholders of Guangzhou Lizhi pledged all of their equity interests in Guangzhou Lizhi to Hongyi Technology, to guarantee the performance of Guangzhou Lizhi and, to the extent applicable, such shareholders of Guangzhou Lizhi, of their obligations under the contractual arrangements of the Group’s VIE. If Guangzhou Lizhi or such shareholders of Guangzhou Lizhi fail to perform their obligations under the contractual arrangement of the Group’s VIE, Hongyi Technology will be entitled to, among other things, right to sell the pledged shares of Guangzhou Lizhi via an auction. This equity pledge agreement remains in effect so long as any of the exclusive technical consulting and management service agreement, the operation agreement or the exclusive equity transfer option agreement, as mentioned below, remains in effect or any guaranteed obligation of Guangzhou Lizhi, or, to the extent applicable, its shareholders, remains outstanding under the VIE arrangements. The existing equity pledge agreement was initially entered into in March 2011 and was subsequently amended and restated on substantially similar terms in December 2014, June 2017, August 2017 and June 2019, respectively.
Exclusive Equity Transfer Option Agreement
Pursuant to an exclusive equity transfer option agreements entered into on June 20, 2019 by and between Hongyi Technology and then shareholders of Guangzhou Lizhi, such shareholders of Guangzhou Lizhi exclusively granted Hongyi Technology or any party appointed by Hongyi Technology an irrevocable option to purchase all or part of the shares in Guangzhou Lizhi held by then shareholders of Guangzhou Lizhi at a price no lower than the lowest price permitted by PRC law. Whether to exercise this option and the timing, methods and frequency of exercising such option are at the full discretion of Hongyi Technology. The exclusive equity transfer option agreement shall remain valid until all shares in Guangzhou Lizhi held by the shareholders of Guangzhou Lizhi, or all irrevocable options to purchase such shares, have been transferred to Hongyi Technology or its designated person. Hongyi Technology is entitled to terminate this exclusive equity transfer option agreement if a default occurs due to reasons not related to Hongyi Technology under this agreement. The existing equity transfer option agreement was initially entered into in March 2011 and was subsequently amended and restated on substantially similar terms in December 2014, June 2017, August 2017 and June 2019, respectively.
Exclusive Technology Consulting and Service Agreement
Pursuant to an exclusive technology consulting and service agreement entered into
o
n June 9, 2017 by and between Hongyi Technology and Guangzhou Lizhi, Guangzhou Lizhi agreed to appoint Hongyi Technology as its exclusive provider of technology services, including software development, internet maintenance, network security and other services in exchange for a service fee of an amount equal to 90% of the
after-tax
net profit of Guangzhou Lizhi, for a term of ten years starting from the date thereof. Hongyi Technology is entitled to terminate or extend the exclusive technical consulting and service agreement at its discretion. The existing exclusive technology consulting and service agreement was initially entered into in March 2011 and was subsequently superseded by an amended and restated exclusive technical consulting and service agreement on substantially similar terms in June 2017.
Operating Agreement
Pursuant to an operating agreement entered into
o
n June 20, 2019 by and among Hongyi Technology, Guangzhou Lizhi and then shareholders of Guangzhou Lizhi, such shareholders of Guangzhou Lizhi agreed that, without written consent of Hongyi Technology or a party designated by it, Guangzhou Lizhi shall refrain from conducting any action that may materially or adversely affect its assets, business, personnel, obligations, rights or operation, for a term of ten years starting from the date thereof. Such actions include, among other things, incurrence of debt to a third party, change of directors or senior management, acquisition or disposal of assets or shares, amendment to its articles of association or business scope and other matters. Hongyi Technology is also entitled to appoint directors and senior management of Guangzhou Lizhi and instruct Guangzhou Lizhi on matters pertinent to its daily operation, financial management. Guangzhou Lizhi is obligated to fully effectuate the appointment or instructions made by Hongyi Technology in methods consistent with applicable laws and articles of Guangzhou Lizhi. Hongyi Technology is entitled to terminate or extend the operation agreement at its discretion. The existing operating agreement was initially entered into in March 2011 and was subsequently superseded by an amended and restated operating agreement on substantially similar terms in June 2017 and June 2019.
F - 1
1

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization (Continued)

Contractual arrangements with VIEs (Continued)
Guangzhou Lizhi (Continued)
Power of Attorney
Pursuant to a series of power of attorney issued by shareholders of Guangzhou Lizhi
o
n June 20, 2019, such shareholders of Guangzhou Lizhi irrevocably appointed Hongyi Technology as their
attorney-in-fact
to act on their behalf on all shareholder matters of Guangzhou Lizhi and exercise all rights as shareholders of Guangzhou Lizhi. This power of attorney shall remain valid until the abovementioned operating agreement is terminated or Guangzhou Lizhi is dissolved, whichever is earlier. The existing series of power of attorney was initially entered into in March 2011 and was subsequently superseded by a new series of powers of attorney on substantially similar terms in June 2017 and June 2019.
The Equity Pledge Agreement, Exclusive Equity Transfer Option Agreement, Exclusive Technology Consulting and Service Agreement, Operating Agreement and Power of Attorney to Guangzhou Lizhi were amended to reflect the changes of shareholders’ holding in the VIE in their respective dates. No other material terms or conditions of these agreements were changed or altered. There was no impact to the Group’s effective control over Guangzhou Lizhi and the Group continues to consolidate Guangzhou Lizhi.
Guangzhou Huanliao
Equity Pledge Agreement
Pursuant to an equity pledge agreement entered into
on
May 20, 2019 by and between Guangzhou Tiya and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao, Mr. Ning Ding pledged all of his equity interests in Guangzhou Huanliao to Guangzhou Tiya to guarantee the performance of Guangzhou Huanliao and, to the extent applicable, Mr. Ning Ding, of their obligations under the contractual arrangement of the Group’s VIEs. If Guangzhou Huanliao or Mr. Ning Ding fails to perform their obligations under the contractual arrangement of the Group’s VIEs, Guangzhou Tiya will be entitled to, among other things, a right to sell the pledged shares of Guangzhou Huanliao via an auction. This equity pledge agreement will remain in effect so long as any of the exclusive technical consulting and management service agreement, the operation agreement and the exclusive equity transfer option agreement, as mentioned below, remains in effect and any guaranteed obligation of Guangzhou Huanliao, or, to the extent applicable, its shareholders, remains outstanding under the VIEs arrangement.
Exclusive Equity Transfer Option Agreement
Pursuant to an exclusive equity transfer option agreements entered into
on
May 20, 2019 by and between Guangzhou Huanliao, Guangzhou Tiya and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao, Mr. Ning Ding exclusively granted Guangzhou Tiya or any party appointed by Guangzhou Tiya an irrevocable option to purchase all or part of the shares in Guangzhou Huanliao held by Mr. Ning Ding at a price no lower than the lowest price permitted by PRC law. Whether to exercise this option and the timing, methods and frequency of exercising such option are at the full discretion of Guangzhou Tiya. The exclusive equity transfer option agreement shall remain valid until all shares in Guangzhou Huanliao held by then shareholders of Guangzhou Huanliao, or all irrevocable options to purchase such shares, have been transferred to Guangzhou Tiya or its designated person. Guangzhou Tiya is entitled to terminate this exclusive equity transfer option agreement if a default occurs due to reasons not related to Guangzhou Tiya under this agreement.
Exclusive Technical Consulting and Service Agreement
Pursuant to an exclusive technology consulting and service agreement entered into
on
May 20, 2019 by and between Guangzhou Tiya and Guangzhou Huanliao, Guangzhou Huanliao agreed to appoint Guangzhou Tiya as its exclusive provider of technology services, including software development, internet maintenance, network security and other services in exchange for a service fee of an amount equal to 90% of the
after-tax
net profit of Guangzhou Huanliao, for a term of ten years starting from the date thereof. Guangzhou Tiya is entitled to terminate or extend the exclusive technical consulting and service agreement at its discretion.
F - 1
2

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization (Continued)

Contractual arrangements with VIEs (Continued)
Guangzhou Huanliao (Continued)
Operation Agreement
Pursuant to an operation agreement entered into on May 20, 2019 by and among Guangzhou Tiya, Guangzhou Huanliao and Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao, Mr. Ning Ding agreed that, without written consent of Guangzhou Tiya or a party designated by it, Guangzhou Huanliao shall refrain from conducting any action that may materially or adversely affect its assets, business, personnel, obligations, rights or operation, for a term of ten years starting from the date thereof. Such actions include, among other things, incurrence of debt to a third party, change of directors or senior management, acquisition or disposal of assets or shares, amendment to its articles of association or business scope and other matters. Guangzhou Tiya is also entitled to appoint directors and senior management of Guangzhou Huanliao and instruct Guangzhou Huanliao on matters relating to its daily operation, financial management. Guangzhou Huanliao is obligated to fully effectuate the appointment or instructions made by Guangzhou Tiya in methods consistent with applicable laws and articles of Guangzhou Huanliao. Guangzhou Tiya is entitled to terminate or extend the operation agreement at its discretion.
Power of Attorney
Pursuant to a series of power of attorney issued by Mr. Ning Ding, the sole shareholder of Guangzhou Huanliao on May 20, 2019, Mr. Ning Ding irrevocably appointed Guangzhou Tiya as his
attorney-in-fact
to act on his behalf on all shareholder matters of Guangzhou Huanliao and exercise all rights as the sole shareholder of Guangzhou Huanliao. This power of attorney shall remain valid until the abovementioned operating agreement or Guangzhou Tiya is terminated or dissolved.
Risks in relation to the VIE structure
A significant part of the Company’s business is conducted through the VIEs of the Group, of which the Company is the ultimate primary beneficiary. In the opinion of management, the contractual arrangements with the VIEs and the nominee shareholders are in compliance with PRC laws and regulations and are legally binding and enforceable. However, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including those that govern the contractual arrangements, which could limit the Group’s ability to enforce these contractual arrangements and if the nominee shareholders of the VIEs were to reduce their interests in the Group, their interest may diverge from that of the Group and that may potentially increase the risk that they would seek to act contrary to the contractual arrangements.
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, or the FIL, which took effect on January 1, 2020. The FIL does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign invested enterprises if they are ultimately “controlled” by foreign investors. Since the FIL is relatively new, uncertainties still exist in relation to its interpretation and implementation, and it is still unclear how the FIL would affect variable interest entity structure and business operation.
The Chief Executive Officer (CEO) along with the Chief Technology Officer (CTO) own the majority of the voting shares of the Company, they also own the majority of the voting shares of the VIEs. The enforceability, and therefore the benefits, of the contractual agreements between the Company and the VIE depend on these individuals enforcing the contracts. There is a risk that the benefits of ownership between the Company and the VIE may not be aligned in the future. Given the significance and importance of the VIEs, there would be a significant negative impact to the Company if these contracts were not enforced.
The Group’s operations depend on the VIEs to honour their contractual agreements with the Group and the Company’s ability to control the VIEs also depends on the authorization by the shareholders of the VIEs to exercise voting rights on all matters requiring shareholder approval in the VIEs. The Company believes that the agreements on authorization to exercise shareholder’s voting power are legally enforceable and the possibility that it will no longer be able to control and consolidate the VIEs as a result of the aforementioned risks and uncertainties is remote.
The Company’s ability to control the VIEs also depends on the Power of Attorney the shareholders has to vote on all matters requiring shareholder approval in the VIEs. As noted above, the Company believes these Power of Attorney are legally enforceable but may not be as effective as direct equity ownership.
In addition, if the Group’s corporate structure or the contractual arrangements with the VIEs were found to be in violation of any existing or future PRC laws and regulations, the PRC regulatory authorities could, within their respective jurisdictions:

| • |  | revoke the business licenses and/or operating licenses of the Group;

| • |  | confiscate any of the Group’s income that they deem to be obtained through illegal operations;

| • |  | discontinue or place restrictions or onerous conditions on the Group’s operations;

| • |  | place restrictions on the Group’s right to collect revenues;

F - 13

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization (Continued)

Risks in relation to the VIE structure (Continued)

| • |  | shut down the Group’s servers or block the Group’s apps/websites;

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

| • |  | impose additional conditions or requirements with which the Group may not be able to comply; or

| • |  | taking other regulatory or enforcement actions against the Group that could be harmful to the Group’s business.

| • |  | impose fines on the Group;

The imposition of any of these restrictions or actions could result in a material adverse effect on the Group’s ability to conduct its business. In such case, the Group may not be able to operate or control the VIEs, which may result in deconsolidation of the VIEs in the Group’s consolidated financial statements. In the opinion of the Company’s management, the likelihood for the Group to lose such ability is remote based on current facts and circumstances. The Group believes that the contractual arrangements among each of the VIEs, their respective shareholders and relevant wholly foreign owned enterprises are in compliance with PRC law and are legally enforceable. The Group’s operations depend on the VIEs to honor their contractual arrangements with the Group. These contractual arrangements are governed by PRC law and disputes arising out of these agreements are expected to be decided by arbitration in the PRC. Management believes that each of the contractual arrangements constitutes valid and legally binding obligations of each party to such contractual arrangements under PRC laws. However, the interpretation and implementation of the laws and regulations in the PRC and their application on the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the Group herein in respect of the legality, binding effect and enforceability of each of the contractual arrangements. Meanwhile, since the PRC legal system continues to evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to the Group to enforce the contractual arrangements should the VIEs or the nominee shareholders of the VIEs fail to perform their obligations under those arrangements.
F - 1
4

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization (Continued)

Risks in relation to the VIE structure (Continued)
The following combined financial information of the VIEs as of December 31, 2020 and 2021 and for the years ended December 31, 2019, 2020 and 2021 was included in the accompanying consolidated financial statements of the Group as follows:

|  | As of December 31, 2020 |  |  | As of December 31, 2021 |
|  | RMB |  |  | RMB |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 148,979 |  |  |  | 191,549 |
Short-term investments |  |  | 73,022 |  |  |  | — |
Restricted cash |  |  | 3,695 |  |  |  | 3,023 |
Accounts receivable, net |  |  | 2,642 |  |  |  | 1 |
Prepayments and other current assets |  |  | 13,190 |  |  |  | 20,245 |
Amount due from the subsidiaries of the Group |  |  | 500 |  |  |  | 197 |
Total current assets |  |  | 242,028 |  |  |  | 215,015 |
Non-current assets: |  |  |  |  |  |  |  |
Property, equipment and leasehold improvement, net |  |  | 34,342 |  |  |  | 28,580 |
Intangible assets, net |  |  | 2,929 |  |  |  | 2,245 |
Right-of-use assets, net |  |  | 3,841 |  |  |  | 9,653 |
Other non-current assets |  |  | 711 |  |  |  | 799 |
Total non-current assets |  |  | 41,823 |  |  |  | 41,277 |
TOTAL ASSETS |  |  | 283,851 |  |  |  | 256,292 |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  |  | 73,986 |  |  |  | 70,639 |
Deferred revenue |  |  | 16,226 |  |  |  | 19,118 |
Salary and welfare payable |  |  | 88,464 |  |  |  | 116,204 |
Taxes payable |  |  | 4,559 |  |  |  | 4,940 |
Short-term loans |  |  | 39,508 |  |  |  | 68,999 |
Lease liabilities due within one year |  |  | 3,542 |  |  |  | 5,767 |
Accrued expenses and other current liabilities |  |  | 41,559 |  |  |  | 42,803 |
Amount due to the subsidiaries of the Group |  |  | 385,583 |  |  |  | 377,331 |
Total current liabilities |  |  | 653,427 |  |  |  | 705,801 |
Non-current liabilities: |  |  |  |  |  |  |  |
Lease liabilities |  |  | 587 |  |  |  | 4,132 |
Total non-current liabilities |  |  | 587 |  |  |  | 4,132 |
TOTAL LIABILITIES |  |  | 654,014 |  |  |  | 709,933 |

The VIEs hold assets with no carrying value in the consolidated balance sheet that are important to the Company’s ability to produce revenue (referred to as unrecognized revenue-producing assets). Unrecognized revenue-producing assets held by the VIEs mainly include the ICP License and the Internet Culture Operating License. Recognized revenue-producing assets held by the VIEs mainly include copyrights, trademarks and domain names.

|  | For the year ended |
|  | December 31, 2019 |  |  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |  |  | RMB |
Net revenues |  |  | 1,179,468 |  |  |  | 1,456,190 |  |  |  | 1,975,758 |
Net loss |  |  | (116,891 | ) |  |  | (84,441 | ) |  |  | (81,551 | )

Included in the net loss of the VIEs are charges for technical development or technical service fees paid to other entities within the Group. The amount of such fees were nil, RMB26.9 million, and RMB9.6 million in 2019, 2020 and 2021, respectively.
F - 15

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

1. | Organization and Reorganization (Continued)

Risks in relation to the VIE structure (Continued)

|  | For the year ended |
|  | December 31, 2019 |  |  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |  |  | RMB |
Net cash (used in)/generated from operating activities |  |  | (73,015 | ) |  |  | 17,425 |  |  |  | (17,723 | )
Net cash (used in)/generated from investing activities |  |  | (29,164 | ) |  |  | (94,559 | ) |  |  | 52,323 |
Net cash generated from financing activities |  |  | 38,854 |  |  |  | 187,752 |  |  |  | 7,298 |
Net (decrease)/increase in cash, cash equivalents and restricted cash |  |  | (63,325 | ) |  |  | 110,618 |  |  |  | 41,898 |

For the years ended December 31, 2019, 2020 and 2021, net cash generated from financial activities in the VIEs consist of: i) net borrowing from/(net repayments to) the Group companies, amounted to RMB38.9 million, RMB148.8 million and RMB(22.2) million, respectively. and ii) net proceeds from bank loans of nil, RMB39.0 million and RMB29.5 million, respectively.
In accordance with various contractual agreements, the Company has the power to direct the activities of the VIEs and their subsidiaries and can have assets transferred out of the VIEs. Therefore, the Company considers that there are no assets in the respective VIEs that can be used only to settle obligations of the respective VIEs, except for the registered capital of the VIEs amounted to approximately
RMB51.0 million
as of December 31, 2020 and 2021. As the respective VIEs are incorporated as limited liability companies under the PRC Company Law, creditors do not have recourse to the general credit of the Company for the liabilities of the respective VIEs. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. As the Group is conducting a significant portion of businesses in the PRC through the VIEs, the Group may provide additional financial support on a discretionary basis in the future, which could expose the Group to a loss.
There is no VIEs in the Group where the Company or any subsidiary has a variable interest but is not the primary beneficiary.
Liquidity
The Group incurred net loss of RMB133.0 million, RMB82.2 million and RMB127.3 million for the years ended December 31, 2019, 2020 and 2021, respectively.
Net cash (used in)/generated from operating activities were
RMB(95.8) million, RMB40.0 million and RMB (40.4) million for the years ended December 31, 2019, 2020 and 2021, respectively. Accumulated deficit was RMB2,239.3 million and RMB2,366.5 million as of December 31, 2020 and 2021, respectively.
The
Group assesses its liquidity by its ability to generate cash from operating activities and attract investors’ investments.
The Group’s principal sources of liquidity have been cash generated from its operations and contributions from its shareholders, as well as short term borrowings. As
of December 31, 2021, it had RMB533.3 million (US$83.7 million) in cash and cash
equivalents which are readily convertible to fixed amounts of cash and with original maturities from the date of purchase with terms of three months or less. The Group had a positive working capital (defined as total current assets deducted by total current liabilities)
of RMB211.0 million (US$33.1
million) as of December 31, 2021 primarily due to the net proceeds received from public offerings. Therefore, the Group believes its current cash and cash equivalents will be sufficient to meet the cash requirements to fund planned operations and other commitments for at least the next twelve months. The Group’s consolidated financial statements have been prepared based on the Company continuing as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

2. | Significant Accounting Policies

| a) | Basis of presentation

The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Significant accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are summarized below.
F - 1
6

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| b) | Principles of consolidation

The consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and subsidiaries of VIEs for which the Company is the ultimate primary beneficiary.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power, has the power to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of the board of directors, or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
A consolidated VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, has the power to direct the activities that most significantly impact the entity’s economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All transactions and balances among the Company, its subsidiaries, VIEs and subsidiaries of VIEs have been eliminated upon consolidation.

| c) | Use of estimates

The preparation of the Group’s consolidated financial statements in conformity with the U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the balance sheet date and reported revenues and expenses during the reported years in the consolidated financial statements and accompanying notes. Such accounting estimates include, but are not limited to, assessment of average user relationship period for podcast business, assessment for the impairment of long-lived assets, provision for income taxes and valuation allowance for deferred tax assets, fair value of ordinary shares and preferred shares before IPO, and valuation and recognition of share-based compensation expenses.

| d) | Functional currency and foreign currency translation

The Group uses Renminbi (“RMB”) as its reporting currency. The functional currency of the Company and its overseas subsidiaries which incorporated in the Cayman Islands, British Virgin Islands, Hong Kong, and Singapore is United States dollars (“US$”). The functional currency of the Group’s PRC entities is RMB.
In the consolidated financial statements, the financial information of the Company and other entities located outside of the PRC have been translated into RMB. Assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at historical exchange rates, and revenues, and expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as foreign currency translation adjustments and are shown as a component of other comprehensive income/(loss) in the consolidated statements of operations and comprehensive loss.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance sheet dates. Net gains and losses resulting from foreign exchange transactions are included in foreign exchange gains/(losses) in the consolidated statements of operations and comprehensive loss.

| e) | Convenience Translation

Translations of balances in the consolidated balance sheets, the consolidated statements of operations and comprehensive loss and the consolidated statements of cash flows from RMB into US$ as of and for the year ended December 31, 2021 are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.3726, representing the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on December 3
0
, 2021.
No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into U.S. dollars at such rate or at any other rate.
F - 1
7

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| f) | Fair value measurements

Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value:

• |  | Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

• |  | Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical asset or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

• |  | Level 3 applies to asset or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Group’s financial instruments include cash and cash equivalents, short-term investments, restricted cash, accounts receivable, other receivables (included in “Prepayments and other current assets”), accounts payable and other payables (included in “Accrued expenses and other current liabilities”), short-term loans of which the carrying values approximate their fair value.
See Note 2
0
for additional information.

| g) | Cash and cash equivalents

Cash and cash equivalents mainly represent cash and demand deposits placed with financial institutions, and highly liquid investments that are readily convertible to known amounts of cash and with original maturities from the date of purchase with terms of three months or less.
As of December 31, 2020 and 2021, the Group had cash held in accounts managed by online payment platforms such as Alipay and WeChat Pay in connection with the collection of service fees online for a total amount of RMB11.6 million and RMB11.3 million, respectively, which have been classified as cash and cash equivalents on the consolidated balance sheets.
As of December 31, 2020 and 2021, the Group had approximately RMB152.0 million and RMB237.8 million cash and cash equivalents held by its PRC subsidiaries and VIEs, representing 48.2% and 44.6% of total cash and cash equivalents of the
Group, respectively. Cash transfers from the Company’s PRC subsidiaries and VIEs to their parent companies outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may temporarily restrict the ability of the PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations.
The Group had no lien arrangements during the years ended December 31, 2020 and 2021.

| h) | Restricted cash

Cash that is restricted as to withdrawal or for use or pledged as security is reported separately on the consolidated balance sheets. As of December 31, 2021, bank balance of the Group amounted to RMB4.2 million was restricted, among which RMB1.2 million was restricted for security against the Company’s credit card and RMB3.0
million, of which full provision was recorded, was restricted due to an ongoing investigation of an end consumer of the platform as requested by the local authorities.
F - 1
8

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| i) | Short-term investments

In accordance with ASC 825, for investments in financial instruments with a variable interest rate indexed to the performance of underlying assets, the Company elected the fair value method at the date of initial recognition and carried these investments subsequently at fair value. Changes in the fair value are reflected in the consolidated statements of operation and comprehensive loss. To estimate fair value, the Company refers to the quoted rate of return provided by financial institutions at the end of each period and classifies the valuation techniques that use these inputs as level 2 of fair value measurement. Since these investments’ maturity dates are within one year, they are classified as short-term investments. The Company recorded investment income from its short-term investments
of
nil, RMB 1.2 million,
RMB0.5
million in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2019, 2020 and 2021.

| j) | Accounts receivable

The carrying value of accounts receivable is reduced by an allowance that reflects the Group’s best estimate of the amounts that will not be collected. Many factors are considered in estimating the general allowance, including but not limited to reviewing accounts receivable balances, historical bad debt rates, aging analysis, customer credit worthiness and industry trend analysis. The Group also makes specific allowance if there is evidence showing that the receivable is unlikely to be collected. Accounts receivable balances are written off against the allowance when they are determined to be uncollectible.

| k) | Property, equipment and leasehold improvement, net

Property, equipment and leasehold improvement are stated at cost less accumulated depreciation and impairment, if any. Depreciation is computed using the straight-line method over the following estimated useful lives:

Electronic equipment |  | 3 years
Furniture and office equipment |  | 5 years
Vehicles |  | 4 years
Leasehold improvement |  | shorter of expected lives of leasehold improvement and lease term

Expenditures for maintenance and repairs are expensed as incurred. The gain or loss on the disposal of property, equipment and leasehold improvement is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations and comprehensive loss.

| l) | Intangible assets, net

Intangible assets mainly consist of copyright, software, trademark and others. Identifiable intangible assets are carried at acquisition cost less accumulated amortization and impairment loss, if any. Finite-lived intangible assets are tested for impairment if impairment indicators arise. Amortization of finite-lived intangible assets is computed using the straight-line method over their estimated useful lives, which are as follows:

Copyright |  | 1-3 years
Software |  | 1- 5 years
Trademark and others |  | 3- 5 years

| m) | Impairment of long-lived assets

Long-lived assets are evaluated for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. No impairment charge was recognized for any of the years presented.
F - 19

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| n) | Revenue recognition

The Group’s revenues comprise audio entertainment revenue, podcast, advertising and other revenue.
The Group adopted ASC Topic 606, “Revenue from Contracts with Customers” for all years presented. Consistent with the criteria of Topic 606, the Group recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services using the five steps defined under ASC Topic 606.
Audio entertainment revenue
The Group is principally engaged in operating its own audio entertainment live streaming platform, which enable hosts and users to interact with each other during audio entertainment live streaming services. Audio entertainment revenue is generated from sales of virtual items on the platform. The Group has a recharge system for users to purchase the Group’s virtual currency which is then used to purchase virtual items for use. Users can recharge via bank transfer and various online third-party payment platforms, including AliPay, WeChat Pay and other payment platforms. Virtual currency is
non-refundable
and without expiry. The virtual currency is often consumed soon after it is purchased based on history of turnover of the virtual currency. Unconsumed virtual currency is recorded as deferred revenue. Virtual currencies used to purchase virtual items are recognized as revenue according to the prescribed revenue recognition policies of virtual items addressed below unless otherwise stated.
The Group engages hosts to provide audio entertainment live streaming services. The Group shares a portion of the sales proceeds of virtual items (“revenue sharing fee”) with hosts and their respective guilds in accordance with their audio entertainment live streaming service agreements.
The Group evaluates and determines that it is the principal and views users to be its customers. The Group reports audio entertainment revenues on a gross basis. Accordingly, the amounts billed to users are recorded as revenues and revenue sharing fee paid to hosts and their respective guilds are recorded as cost of revenues. Where the Group is the principal, it controls the virtual items before they are transferred to users. Its control is evidenced by the Group’s sole ability to monetize the virtual items before they are transferred to users, and is further supported by the Group being primarily responsible to users and having a level of discretion in establishing pricing. The Group designs, creates and offers various virtual items for sale to users with
pre-determined
stand-alone selling price. Virtual items are categorized as consumable and time-based items. Consumable items are consumed upon purchase while time-based items could be used for a fixed period of time such as a virtual special symbol that can be purchased and displayed on the users’ profile over a fixed period of time. Users can purchase either consumable or time-based items and present these virtual items to hosts to show support for their favorite hosts or purchase time-based virtual items that enhance the users’ personal profile.
Revenue related to each consumable item is a single performance obligation provided on a consumption basis and is recognized at the point in time when the virtual item is transferred directly to the users and consumed by them. Revenue related to time-based virtual items is recognized ratably over the contract period. During the years ended December 31, 2019, 2020 and 2021, the weighted average contract period for the time-based virtual items purchased were 97 days, 124 days and 117 days, respectively. The Group does not have further performance obligations to user
s
after the virtual items are consumed immediately or after the stated contract period of time for time-based items.
Podcast revenue
The Group provides users certain subscription services which entitle paying subscribers access to listen to specific podcast content on the platform. The subscription fee is time-based and is collected upfront from subscribers.
The receipt of subscription fee is initially recorded as deferred revenue. The Group satisfies its performance obligation by providing services throughout the estimated average user relationship period as the subscription period is generally perpetual. Revenue is recognized ratably over the estimated average user relationship period. The estimated average user relationship period is based on data collected from those paying users who have subscribed to podcast content. The Group estimates the average user relationship period for a podcast content to be the date a user subscribes to it through the date the Group estimates the paying user listens to the content for the last time. The determination of the estimated average user relationship period is based on the Group’s best estimate that takes into account all known and relevant information at the time of assessment. Any adjustments arising from changes in the estimated average user relationship period as a result of new information will be accounted as a change in accounting estimate in accordance with
ASC 250 Accounting Changes and Error Corrections
.
F - 2
0

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| n) | Revenue recognition (Continued)

The podcast contents are licensed by broadcasters to the Group. The Group records revenue on a gross basis considering the Group: (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price.
Contract liabilities
Contract liabilities primarily consist of deferred revenue which comprises unconsumed virtual currency, unamortized revenue from time-based virtual items and unamortized subscription fees for podcast services:

|  | January 1, 2019 |  |  | December 31, 2019 |  |  | December 31, 2020 |  |  | December 31, 2021 |
Deferred revenue |  |  | 10,668 |  |  |  | 14,530 |  |  |  | 17,001 |  |  |  | 20,657 |

During the years ended December 31, 2019, 2020 and 2021, the Group recognized revenue amounted to RMB8.9 million, RMB9.9 million and RMB11.0 million, respectively that was included in the corresponding opening deferred revenue balance
on
January 1, 2019, December 31, 2019 and 2020.
During the years ended December 31, 2019, 2020 and 2021, the Group did not have any arrangement where the performance obligations had already been satisfied in the past year but recognized the corresponding revenue in the current year.
Advertising revenue
The Group generates advertisement revenues from rendering various forms of advertisement services by way of advertisement display on its audio entertainment live streaming platform. Advertisements on the Group’s platform are generally charged on the basis of duration whereby revenue is recognized ratably over the contract period of display. The Group provides sales incentives in the forms of discounts and rebates to advertisement agencies based on purchase volume. Revenue is recognized based on the price charged to the advertisers or agencies, net of sales incentives provided to the agencies. Sales incentives are recorded at the time of revenue recognition based on the contracted rebate rates and contract amount.
The accounts receivable arises primarily from its advertising customers.

|  | December 31, 2020 |  |  | December 31, 2021 |
Accounts receivable |  |  | 8,361 |  |  |  | 6,458 |

Please see Note 4 for additional information.
There were no material contract assets as of December 31, 2020 and 2021.
Practical Expedients
The Group has used the following practical expedients as allowed under ASC Topic 606:
(i) The transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied has not been disclosed, as substantially all of the Group’s contracts have an original expected duration of one year or less.
(ii) Payment terms and conditions vary by contract type, although terms generally include a requirement of prepayment or payment within one year or less. The Group has determined that its contracts generally do not include a significant financing component.
(iii) Costs to obtain a contract with a customer were expensed as incurred when the amortization period would have been one year or less.
F - 2
1

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| o) | Deferred revenue

Deferred revenue primarily consists of unconsumed virtual currency, unamortized revenue from time-based virtual items and unamortized subscription fees for podcast contents in the Group’s platform, where there is still an obligation to be provided by the Group, which will be recognized as revenue when all of the revenue recognition criteria are met.

| p) | Cost of revenue

Amounts recorded as cost of revenue relate to direct expenses incurred in order to generate revenue. Such costs are recorded as incurred. Cost of revenues consists primarily of revenue sharing fees, salary and welfare benefits, payment handling costs, bandwidth costs and other costs. Revenue sharing fees represent the Company’s payments to hosts or guilds based on a percentage of revenue from sales of virtual items and certain performance-based incentives.

| q) | Research and development expenses

Research and development expenses mainly consist of salary and welfare benefits and bandwidth costs incurred for the development and enhancement to the Company’s websites and platform of applications.

| r) | Selling and marketing expenses

Selling and marketing expenses consist primarily of advertising and promotional expenses, salary and welfare benefits to the Group’s sales and marketing personnel. Advertising and promotional expenses consist primarily of costs for the promotion of corporate image and mobile app, organization of offline events between hosts and users. The Group expenses all advertising and promotional expenses as incurred and classifies them under selling and marketing expenses. For the years ended December 31, 2019, 2020 and 2021, advertising and promotional expenses were RMB191.1 million, RMB127.4 million and RMB360.2 million, respectively.

| s) | Leases

Adoption of the New Lease Accounting Standard
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
No. 2016-02,
Leases
(“ASU
2016-02”).
Further, as a clarification of the new guidance, the FASB issued several amendments and updates. The Group adopted the new lease guidance beginning January 1, 2020 by applying the modified retrospective method to those contracts that are not completed as of January 1, 2020, with the comparative information not being adjusted and continues to be reported under historic accounting standards. There is no impact to retained earnings at adoption.
The Group has elected to utilize the package of practical expedients at the time of adoption, which allows the Group to (1) not reassess whether any expired or existing contracts are or contain leases, (2) not reassess the lease classification of any expired or existing leases, and (3) not reassess initial direct costs for any existing leases. The Company also has elected to utilize the short-term lease recognition exemption and, for those leases that qualified, the Group did not recognize operating lease
right-of-use
(“ROU”) assets or operating lease liabilities.
The impact of adoption of the new guidance on January 1, 2020, was not material; the Group recognized operating lease ROU assets and operating lease
liabilities of RMB11.7 million (including current portion of RMB8.3 million and
non-current
portion of RMB3.4 million).
The Group determines if an arrangement is a lease and determines the classification of the lease, as either operating or finance, at commencement. The Group has operating leases for office buildings and has no finance leases as of
December 31, 2020 and 2021.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the lease payments over the lease term at commencement date.
F - 2
2

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| s) | Leases (Continued)

As the Group’s leases do not provide an implicit rate, an incremental borrowing rate is used based on the information available at the commencement date, to determine the present value of lease payments. The incremental borrowing rate approximates the rate the Group would pay to borrow in the currency of the lease payments for the weighted-average life of the lease.
The operating lease ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives and initial direct costs incurred if any. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Group will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Group’s lease agreements contain both lease and
non-lease
components, which are accounted for separately based on their relative standalone price.

| t) | Government grants

Government grants represent cash subsidies received from the PRC government by the Group. Government grants are in connection with the Group’s contributions to research and development activities, and tax refunds in local business districts.

| u) | Share-based compensation

Share-based compensation expenses arise from share-based awards, including share options for the purchase of ordinary shares, restricted shares and restricted share units.
The Company accounts for share-based awards granted to employee and
non-employee
in accordance with ASC 718 Stock Compensation. Share-based compensation expenses are recognized in the consolidated financial statements based on their grant date fair values. The fair value of share option is affected by the fair value of ordinary shares as well as assumptions regarding a number of complex and subjective variables, including the expected volatility of the fair value of ordinary shares, actual and projected employee share option exercise behavior, risk-free interest rates and expected dividends. The fair value of restricted share, restricted share units and share options with little to no exercise price, are generally measured as the grant date price of the Company’s ordinary shares. Prior to the IPO in January 2020, the fair value of the Company’s ordinary shares was assessed using the income approach/discounted cash flow method, with a discount for lack of marketability, given that the shares underlying the awards were not publicly traded at the time of grant. With the completion of the IPO, it is no longer necessary to estimate the fair value of ordinary shares as the market price of the Company’s publicly traded ADSs is used as an indicator of fair value of the ordinary shares.
The Company has never declared or paid any cash dividends on its capital stock, and the Group does not anticipate any dividend payments in the foreseeable future. The contractual term is the contract life of the options. The Group estimated the risk-free interest rate based on the market yield of US Government Bonds with maturities of ten years as of the valuation date, plus a country default risk spread between China and US.
No
share based awards was granted for the year ended December 31, 2019, and all share-based awards granted in 2020 and 2021 were with little to
no
exercise price for which fair value was measured as the grant date price of the Company’s ordinary shares.
Share-based compensation expenses are recorded net of actual forfeitures. For a cliff-vesting award or award with graded-vesting features and service conditions only, the Company uses straight-line method to recognize compensation cost over the total requisite service period for the entire award. For an award with performance and/or service condition that affects vesting, the performance and/or service condition is not considered in determining the award’s fair value on the grant date. The Company recognizes compensation expenses for awards with performance conditions if and when the Company concludes that it is probable that the performance condition will be achieved, net of actual
pre-vesting
forfeitures over the requisite service period, using graded-vesting method. The Company reassesses the probability of vesting at each reporting period for awards with performance conditions and adjusts compensation expenses based on its probability assessment, unless on certain situations, the Company may not be able to determine that it is probable that a performance condition will be satisfied until the event
occurs.
F - 2
3

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| v) | Employee benefits

PRC Contribution Plan
Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to the employees. Chinese labor regulations require that the PRC subsidiaries, VIEs and subsidiaries of VIEs of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries, up to a maximum amount specified by the local government. The Group has no legal obligation for the benefits beyond the contributions made. The total amounts of such employee benefit expenses, which were expensed as incurred, were approximately RMB36.0 million, RMB38.5 million and RMB57.2 million for the years ended December 31, 2019, 2020 and 2021, respectively.

| w) | Taxation

Income taxes
Current income taxes are provided on the basis of income/(loss) for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and any tax loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or tax laws is recognized in the consolidated statements of operations in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the amount of deferred income tax assets if it is considered more likely than not that some portion or all of the deferred income tax assets will not be realized.
Uncertain tax positions
In order to assess uncertain tax positions, the Group applies a more likely than not threshold and a
two-step
approach for the tax position measurement and financial statement recognition. Under the
two-step
approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Group recognizes interest and penalties, if any, under accrued expenses and other current liabilities on its consolidated balance sheet and under other expenses in its consolidated statement of operations and comprehensive loss. The Group did not have any significant unrecognized uncertain tax positions as of December 31, 2020 and 2021, and for the years ended December 31, 2019, 2020 and 2021.

| x) | Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence, such as a family member or relative, shareholder, or a related corporation.
F - 2
4

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| y) | Net loss per share

Loss per share is computed in accordance with ASC 260, Earnings per Share. The
two-class
method is used for computing earnings per share in the event the Group has net income available for distribution. Under the
two-class
method, net income is allocated between ordinary shares and participating securities based on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting period had been distributed. The Company’s preferred shares were participating securities because they were entitled to receive dividends or distributions on an as converted basis. For the years presented herein, the computation of basic earnings per share using the
two-class
method was not applicable as the Group was in a net loss position and net loss was not allocated to other participating securities because in accordance with their contractual terms they were not obligated to share in the losses.
Basic net loss per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of ordinary shares and potential ordinary shares outstanding during the period under treasury stock method. Potential ordinary shares include options to purchase ordinary shares, restricted shares, restricted share units and preferred shares, unless they were anti-dilutive. The computation of diluted net income/(loss) per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect (i.e., an increase in earnings per share amounts or a decrease in loss per share amounts) on net income/(loss) per share.

| z) | Statutory reserves

In accordance with China’s Company Laws, the Company’s VIEs and subsidiaries of VIEs in PRC must make appropriations from their
after-tax
profit, if any (as determined under the accounting principles generally acceptable in the People’s Republic of China (“PRC GAAP”)) to
non-distributable
reserve funds including (i) statutory surplus fund and (ii) discretionary surplus fund. The appropriation to the statutory surplus fund must be at least 10% of the
after-tax
profits calculated in accordance with PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered capital of the respective company. Appropriation to the discretionary surplus fund is made at the discretion of the respective company.
Pursuant to the laws applicable to China’s Foreign Investment Enterprises, the Company’s subsidiary that is a foreign investment enterprise in China have to make appropriations from their
after-tax
profit, if any (as determined under PRC GAAP) to reserve funds including (i) general reserve fund, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The appropriation to the general reserve fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not required if the general reserve fund has reached 50% of the registered capital of the subsidiary. Appropriations to the other two reserve funds are at the subsidiary’s discretion.
The Group has not appropriated any amount to statutory reserves for the years ended December 31, 2019, 2020 and 2021, because the Company’s Chinese subsidiaries,
the
VIEs and subsidiaries of VIEs were in the position of accumulated deficit as of December 31, 2019, 2020 and 2021.

| aa) | Comprehensive loss

Comprehensive loss is defined to include all changes in (deficit)/equity of the Group during a period arising from transactions and other events and circumstances excluding transactions resulting from investments by shareholders and distributions to shareholders. Other comprehensive income/(loss), as presented on the consolidated balance sheets, consists of accumulated foreign currency translation adjustments.

| bb) | Segment reporting

The Group uses the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Group’s chief operating decision maker for making operating decisions, allocating resources and assessing performance as the source for determining the Group’s reportable segments. Management has determined that the Group operates in one segment, as that term is defined by FASB ASC Topic 280, Segment reporting.
F - 2
5

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| cc) | Concentration and credit risk

Advertising and promotional service providers
The Group relied on advertising and promotional service providers and their affiliates to promote its platform and enhance brand awareness through a variety of online and offline marketing and brand promotion activities. The number of advertising and promotional service providers during the years ended December 31, 2019, 2020 and 2021 are as follows:

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
Total number of advertising and promotional service providers |  |  | 236 |  |  |  | 203 |  |  |  | 198 |
Number of service providers that accounted for 10% or more of the Group’s advertising and promotional expenses |  |  | 2 |  |  |  | 3 |  |  |  | 2 |
Total percentage of the Group’s advertising and promotional expenses that were paid to these service providers who accounted for 10% or more of the Group’s advertising and promotional service expenses |  |  | 36.0 | % |  |  | 38.1 | % |  |  | 44.9 | %

Credit risk
Financial instruments that potentially subject the Group to the concentration of credit risk consist of cash and cash equivalents, short-term investments, restricted cash, accounts receivable and other receivables (recorded in “Prepayments and other current assets”). As of December 31, 2020 and 2021, substantially all of the Group’s cash and cash equivalents, restricted cash and short-term investments were held in financial institutions which management consider being of high credit quality. Accounts receivable is typically unsecured and is generally derived from revenue earned from advertising business.
Major customers for advertising business
There were two and one customers that had receivable balances derived from advertising business exceeding l0% of the total accounts receivable balances of the Group as of December 31, 2020 and 2021, respectively, as follows:

|  | December 31, 2020 |  |  | December 31, 2021 |
Customer A |  |  | 68.3 | % |  |  | 87.3 | %
Customer B |  |  | 21.5 | % |  |  | — |

| dd) | Recently issued accounting pronouncements

The Group qualifies as an “emerging growth company”, or “EGC”, pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. As an EGC, the Group 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.
Recent accounting pronouncements not yet adopted
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Topic 842 currently provides lessees that are not public business entities with a practical expedient that allows them to elect, as an accounting policy, to use a risk-free rate as the discount rate for all leases. In November 2021, the FASB issued amendments in Accounting Standards Update No. 2021-09 (the “Update”), which allow non-public business entities as lessees to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. An entity that makes the risk-free rate election is required to disclose which asset classes it has elected to apply a risk-free rate. The amendments require that when the rate implicit in the lease is readily determinable for any individual lease, the lessee use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election. The effective date for this Update is different for entities that have not yet adopted Topic 842 as of November 11, 2021, and those that have. Entities that have not yet adopted Topic 842 as of November 11, 2021, are required to adopt the amendments in this Update at the same time that they adopt Topic 842. For entities that have adopted Topic 842 as of November 11, 2021, the amendments in this Update are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application is permitted. Entities are required to apply the amendments on a modified retrospective basis to leases that exist at the beginning of the fiscal year of adoption of a final Update. The adoption of the amendments should not be considered an event that would cause remeasurement and reallocation of the consideration in the contract (including lease payments) or reassessment of lease term or classification. The Group had adopted the Topic 842 in the year ended December 31, 2020 and will adopt this Update in the year ending December 31, 2022 as an EGC. The Group is currently evaluating the impact of adopting this standard and does not expect significant impact on its consolidated financial statements.
F - 2
6

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2. | Significant Accounting Policies (Continued)

| dd) | Recently issued accounting pronouncements (Continued)

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, to remove certain exceptions to the general principles in Topic 740 and to simplify accounting for income taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Group is to adopt this ASU in the year ending December 31, 2022 and interim periods within the year ending December 31, 2023 as an EGC. The Group is currently evaluating the impact of adopting this standard and does not expect significant impact on its consolidated financial statements.
In June 2016, the FASB amended guidance related to the impairment of financial instruments as part of ASU
2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was further amended by ASU 2019-10 in November 2019, for public business entities that meet the definition of an U.S. Securities and Exchange Commission (“SEC”) filer, excluding entities eligible to be SRCs as defined by the SEC, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company is required to recognize an allowance based on its estimate of expected credit loss. The Group is to adopt the Topic 326 in the year ending December 31, 2023 as an EGC and it is currently evaluating the impact of this new guidance on its consolidated financial statements.

3. | Cash and Cash Equivalents

The following is a summary of cash and cash equivalents:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Cash and cash equivalents: |  |  |  |  |  |  |  |
RMB |  |  | 152,032 |  |  |  | 237,393 |
US$ |  |  | 161,663 |  |  |  | 291,776 |
Others |  |  | 1,764 |  |  |  | 4,124 |
Total cash and cash equivalents |  |  | 315,459 |  |  |  | 533,293 |

4. | Accounts Receivable, Net

Accounts receivable, net is consisted of the following:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Accounts receivable, gross: |  |  | 8,361 |  |  |  | 6,458 |
Less: allowance for doubtful accounts |  |  | — |  |  |  | — |
Accounts receivable, net |  |  | 8,361 |  |  |  | 6,458 |

The Group closely monitors the collection of its accounts receivable and records allowance for doubtful accounts against aged accounts receivable and for specifically identified
non-recoverable
amounts. If the economic situation and the financial condition of a customer deteriorate resulting in an impairment of the customer’s ability to make payments, additional allowances might be required. Receivable balances are written off when they are determined to be uncollectable.
F - 27

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

5. | Prepayments and Other Current Assets

The following is a summary of prepayments and other current assets:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Deposits |  |  | 3,509 |  |  |  | 7,786 |
Prepaid service fees |  |  | 5,234 |  |  |  | 7,868 |
Prepaid promotional expenses |  |  | 3,971 |  |  |  | 4,536 |
Staff advances |  |  | 141 |  |  |  | 495 |
Receivables from third-party online payment platform |  |  | 1,511 |  |  |  | 5,652 |
Deductible Value Added Tax (“VAT”) |  |  | 1,283 |  |  |  | 2,946 |
Others |  |  | 3,722 |  |  |  | 4,321 |
Total |  |  | 19,371 |  |  |  | 33,604 |

6. | Property, Equipment and Leasehold Improvement, Net

The following is a summary of property, equipment and leasehold improvement, net:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Electronic equipment |  |  | 65,352 |  |  |  | 76,401 |
Furniture and office equipment |  |  | 1,530 |  |  |  | 1,729 |
Vehicles |  |  | 597 |  |  |  | 2,793 |
Leasehold improvement |  |  | 5,392 |  |  |  | 10,012 |
Total property, equipment and leasehold improvement |  |  | 72,871 |  |  |  | 90,935 |
Less: accumulated depreciation |  |  | (38,353 | ) |  |  | (57,544 | )
Property, equipment and leasehold improvement, net |  |  | 34,518 |  |  |  | 33,391 |

Depreciation expenses were RMB10.8 million, RMB17.7 million and RMB19.2 million for the years ended December 31, 2019, 2020 and 2021, respectively. No impairment charge was recognized for any of the years presented.

7. | Intangible Assets

The following table summarizes the Group’s intangible assets:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Gross carrying amount |  |  |  |  |  |  |  |
Copyright |  |  | 8,488 |  |  |  | 8,492 |
Software |  |  | 2,851 |  |  |  | 3,080 |
Trademark and others |  |  | 2,446 |  |  |  | 3,215 |
Total gross carrying amount |  |  | 13,785 |  |  |  | 14,787 |
Less: accumulated amortization |  |  |  |  |  |  |  |
Copyright |  |  | (8,468 | ) |  |  | (8,696 | )
Software |  |  | (1,503 | ) |  |  | (2,032 | )
Trademark and others |  |  | (885 | ) |  |  | (1,814 | )
Total accumulated amortization |  |  | (10,856 | ) |  |  | (12,542 | )
Intangible assets, net |  |  | 2,929 |  |  |  | 2,245 |

Amortization expense for the years ended December 31, 2019, 2020 and 2021 were RMB1.8 million, RMB1.6 million and RMB1.7 million, respectively.
F - 28

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

7. | Intangible Assets (Continued)

The estimated amortization expenses for each of the following five years are as follows:

|  | Amortization expense of intangible assets |
|  | RMB |
2022 |  |  | 1,276 |
2023 |  |  | 660 |
2024 |  |  | 204 |
2025 |  |  | 91 |
2026 |  |  | 14 |

8. | Leases

The Group’s operating leases mainly related to offices facilities
.
As of December 31, 2020 and 2021, the Group recognized the following items related to operating leases on its consolidated balance sheet:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Operating lease ROU assets |  |  | 4,282 |  |  |  | 28,941 |
Operating lease liabilities-non-current |  |  | (587 | ) |  |  | (17,076 | )
Operating lease liabilities-current |  |  | (3,709 | ) |  |  | (13,929 | )
Total operating lease liabilities |  |  | (4,296 | ) |  |  | (31,005 | )
Weighted average remaining lease term |  |  | 1.3 years |  |  |  | 2.5 years |
Weighted average discount rate |  |  | 7.0 | % |  |  | 7.0 | %

The components of lease cost for the years ended December 31, 2020 and 2021 were as follows:

|  | For the year ended December 31, |
|  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |
Operating lease cost |  |  | 8,569 |  |  |  | 10,329 |
Short-term lease cost |  |  | 7,456 |  |  |  | 9,353 |
Total lease cost |  |  | 16,025 |  |  |  | 19,682 |

No lease cost was capitalized as part of the cost of another assets.
Supplemental cash flow information related to the operating leases was as follows:

|  | For the year ended December 31, |
|  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |
Cash paid for operating leases |  |  | 8,867 |  |  |  | 9,786 |
Right-of-use assets obtained in exchange for operating lease liabilities |  |  | 12,851 |  |  |  | 34,988 |

A summary of maturity of operating lease liabilities under the Group’s
non-cancellable
operating leases as of December 31, 2021 is as follows:

|  | December 31, 2021 |
|  | RMB |
2021 |  |  | — |
2022 |  |  | 14,446 |
2023 |  |  | 13,080 |
2024 |  |  | 5,969 |
Total lease payment |  |  | 33,495 |
Less: interest |  |  | (2,490 | )
Present value of operating lease liability |  |  | 31,005 |

F - 29

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

8. | Leases (Continued)

The increase of operating lease assets obtained in exchange for operating lease liabilities in 2021 was mainly due to the renewal of lease agreements
that
expired
,
and several new lease agreements signed by the Group in 2021. As of December 31, 2020 and 2021, the Group had
no operating leases that had not yet commenced.

9. | Taxation

a) | Income taxes

Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain. Additionally, upon payments of dividends by the Company in the Cayman Islands to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Under the current laws of the British Virgin Islands, entities incorporated in British Virgin Islands are exempted from income tax on their foreign-derived incomes in the BVI. There are no withholding taxes in the BVI.
Singapore
Under the Singapore tax laws, subsidiaries in Singapore are subject to a unified 17% tax rate, except for certain entities that are entitled to preferential tax treatments, and there are no withholding taxes in Singapore on remittance of dividends.
For the years ended December 31, 2020 and 2021, the
Company’s overseas entity recognized income tax expense amounted to RMB1.0
million and RMB0.3 million, respectively, for the assessable profits base on the existing legislation, interpretation and practice of Singapore.
Hong Kong
Subsidiary incorporated in Hong Kong is subject to Hong Kong profits tax at a rate of 16.5% for taxable income earned in Hong Kong before April 1, 2018. Starting from the financial year commencing on April 1, 2018, the
two-tiered
profits tax regime took effect, under which the tax rate is 8.25% for assessable profits on the first HK$2 million and 16.5% for any assessable profits in excess of HK$2 million. As an anti-avoidance measure, a group of “connected entities” can only nominate one entity within the Group to enjoy the reduced tax rate for a given year of assessment.
China
Under the Enterprise Income Tax Law of the PRC, the Company’s Chinese subsidiaries, VIEs and subsidiaries of VIEs are subject to an income tax of
25%
,
except for Guangzhou Lizhi and Guangzhou Huanliao. Due to their current status of entitled High and New Technology Enterprise (“HNTE”), Guangzhou Lizhi and Guangzhou Huanliao enjoy a preferential tax rate of 15% starting from 2017 and 2021, respectively. This status is subject to annual evaluation and a requirement that Guangzhou Lizhi reapply for HNTE status every three years.
The following table presents a reconciliation of the differences between the statutory income tax rate and the Company’s effective income tax rate for the years ended December 31, 2019, 2020 and 2021:

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | % |  |  | % |  |  | % |
Statutory income tax rate of the PRC |  |  | 25.0 |  |  |  | 25.0 |  |  |  | 25.0 |
Tax rate difference from preferential tax treatments and statutory rate in other jurisdictions |  |  | (7.4 | ) |  |  | (16.3 | ) |  |  | (16.5 | )
Effect of withholding taxes |  |  | — |  |  |  | — |  |  |  | (0.3 | )
Permanent differences |  |  | 5.6 |  |  |  | 16.9 |  |  |  | 26.6 |
Change in valuation allowances |  |  | (23.2 | ) |  |  | (26.8 | ) |  |  | (35.2 | )
Effective income tax rate |  |  | — |  |  |  | (1.2 | ) |  |  | (0.4 | )

F - 30

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

9. | Taxation (Continued)

a) | Income taxes (Continued)

As of December 31, 2021, certain entities of the Company had net operating tax loss carry forwards as follows:

|  | RMB |
Loss expiring in 2022 |  |  | 7,626 |
Loss expiring in 2023 |  |  | 5,620 |
Loss expiring in 2024 |  |  | 18,949 |
Loss expiring in 2025 |  |  | 22,150 |
Loss expiring in 2026 |  |  | 64,533 |
Loss expiring in 2027 |  |  | 15,141 |
Loss expiring in 2028 |  |  | 47,863 |
Loss expiring in 2029 |  |  | 156,879 |
Loss expiring in 2030 |  |  | 156,066 |
Loss expiring in 2031 |  |  | 207,664 |
|  |  | 702,491 |

b) | Deferred tax assets and liabilities

The following table presents the tax impact of significant temporary differences that give rise to the deferred tax assets as of December 31, 2020 and 2021:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Deferred tax assets: |  |  |  |  |  |  |  |
Net operating tax loss carry forwards |  |  | 72,988 |  |  |  | 112,248 |
Advertising expenses in excess of deduction limit |  |  | 709 |  |  |  | 63 |
Deferred revenue |  |  | 910 |  |  |  | 527 |
Total deferred tax assets |  |  | 74,607 |  |  |  | 112,838 |
Less: valuation allowances |  |  | (74,607 | ) |  |  | (112,838 | )
Net deferred tax assets |  |  | — |  |  |  | — |

The Group does not believe that sufficient positive evidence exists to conclude that the recoverability of deferred tax assets of certain entities of the Group is more likely than not to be realized. Consequently, the Group has provided full valuation allowances on the related deferred tax assets. The following table sets forth the movement of the aggregate valuation allowances for deferred tax assets for the years presented:

|  | Balance at January 1 |  |  | Movement* |  |  | Balance at December 31 |
|  | RMB |  |  | RMB |  |  | RMB |
2019 |  |  | (50,499 | ) |  |  | (29,821 | ) |  |  | (80,320 | )
2020 |  |  | (80,320 | ) |  |  | 5,713 |  |  |  | (74,607 | )
2021 |  |  | (74,607 | ) |  |  | (38,231 | ) |  |  | (112,838 | )

* | The movement in valuation allowances were due to the changes of deferred tax assets recognized for net operating tax loss carry forwards, advertising expenses in excess of deduction limit and deferred revenue.

F - 31

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

9. | Taxation (Continued)

c) | Withholding income tax

The enterprise income tax (“EIT”) Law also imposes a withholding income tax of 10% on dividends distributed by a foreign-invested entity (“FIE”) to its immediate holding company outside of China, if such immediate holding company is considered as a
non-resident
enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where the Company incorporated, does not have such tax treaty with China. According to the arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by a FIE in China to its immediate holding company in Hong Kong will be subject to withholding
tax at a rate that may be lowered to 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). The State Administration of Taxation (“SAT”) further promulgated Circular 601 on October 27, 2009, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form” principle to determine whether or not to grant the tax treaty benefits. Further, the SAT promulgated the Notice on Issues Related to the “Beneficial Owner” in Tax Treaties in February 2018, which requires the “beneficial owner” to have ownership and the right to dispose of the income or the rights and properties giving rise to the income and generally engage in substantive business activities and sets forth certain detailed factors in determining the “beneficial owner” status.
To the extent that subsidiaries, VIEs and subsidiaries of VIEs of the Group have undistributed earnings, the Company will accrue appropriate expected withholding tax associated with repatriation of such undistributed earnings. As of December 31, 2020 and 2021, the Company did not record any such withholding tax of its subsidiaries,
the
VIEs and subsidiaries of VIEs in the PRC as they are still in accumulated deficit position.

10. | Taxes Payable

The Group’s subsidiaries,
the
VIEs and subsidiaries of VIEs incorporated in China are subject to 6% VAT for services rendered.
The following is a summary of taxes payable as of December 31, 2020 and 2021:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
VAT payables |  |  | 2,830 |  |  |  | 2,058 |
Withholding individual income taxes for employees |  |  | 1,533 |  |  |  | 2,334 |
Income tax payable |  |  | 999 |  |  |  | 450 |
Others |  |  | 447 |  |  |  | 722 |
Total |  |  | 5,809 |  |  |  | 5,564 |

11. | Short-term Loans

Guangzhou Lizhi entered into agreements with banks, pursuant to which it has obtained total credit facilities of RMB100 million. The total unused credit line amount
was
RMB
4.8
million as of December 31, 2021.
Certain of these facilities are subject to the Group’s fulfillments of financial or non-financial covenants, none of which are significant, and for which Guangzhou Lizhi is in compliance as of December 31, 2021.
During the year ended December 31, 2021, the loans obtained by Guangzhou Lizhi have
a maturity of less than
six months
and the weighted average interest rate for the outstanding loans was
5.3
%.
As of December 31, 2021, the balance of short-term loans was RMB69.0 million.
F - 32

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

12. | Accrued Expenses and Other Current Liabilities

The following is a summary of accrued expenses and other current liabilities as of December 31, 2020 and 2021:

|  | December 31, 2020 |  |  | December 31, 2021 |
|  | RMB |  |  | RMB |
Advertising and promotional expenses |  |  | 33,808 |  |  |  | 32,849 |
Professional service fees |  |  | 7,719 |  |  |  | 7,690 |
Payable for property, equipment and leasehold improvement, net |  |  | 1,526 |  |  |  | 681 |
Accrued sales rebates for advertising business |  |  | 3,286 |  |  |  | 2,660 |
Accrued legal cost |  |  | 1,101 |  |  |  | 4,863 |
Others |  |  | 3,607 |  |  |  | 4,743 |
Total |  |  | 51,047 |  |  |  | 53,486 |

13. | Cost of Revenues

The following is a summary of cost of revenues for the years ended December 31, 2019, 2020 and 2021:

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |
Revenue sharing fees |  |  | 850,167 |  |  |  | 1,031,903 |  |  |  | 1,357,270 |
Salary and welfare benefits |  |  | 29,072 |  |  |  | 41,159 |  |  |  | 52,268 |
Payment handling costs |  |  | 15,573 |  |  |  | 22,692 |  |  |  | 32,506 |
Bandwidth costs |  |  | 5,702 |  |  |  | 11,226 |  |  |  | 30,889 |
Share-based compensation expense |  |  | — |  |  |  | 14,789 |  |  |  | 11,484 |
Others |  |  | 9,641 |  |  |  | 12,909 |  |  |  | 18,088 |
Total |  |  | 910,155 |  |  |  | 1,134,678 |  |  |  | 1,502,505 |

14. | Pre-IPO Preferred Shares

Series A, B, C, C1, C1+, D and D1 convertible redeemable preferred shares are collectively referred to as the “Preferred Shares”.
Series A financing
In March 2011, the Group raised an aggregate of US$1,000,000 from the issuance of 10,000,000 Series A preferred shares of the Group to Matrix Partners China I Hong Kong Limited. These 10,000,000 Series A preferred shares were subdivided into 100,000,000 Series A preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
Series B financing
In March 2012, the Group raised an aggregate of US$2,500,000 from the issuance of 1,666,666 and 6,666,666 Series B preferred shares of the Group to Morningside China TMT Fund II, L.P. and Matrix Partners China I Hong Kong Limited, respectively. These 8,333,332 Series B preferred shares were subdivided into 83,333,320 Series B preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
In February 2014, the Group raised an aggregated of US$1,000,000 from the issuance of 3,333,333 Series B preferred shares of the Group to Morningside China TMT Fund II, L.P. These 3,333,333 Series B preferred shares were subdivided into 33,333,330 Series B preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
Series C financing
In December 2014, the Group issued 1,266,247 and 1,266,247 Series C preferred shares of the Group to Matrix Partners China I Hong Kong and Morningside China TMT Fund II, L.P. upon the conversion of the 2014 Loan, respectively. These 2,532,494 Series C preferred shares were subdivided into 25,324,940 Series C preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
F - 33

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

14. | Pre-IPO Preferred Shares (Continued)

In December 2014, the Group raised an aggregate of US$10,894,477 from the issuance of 5,192,086 and 6,533,753 Series C preferred shares of the Group to Matrix Partners China I Hong Kong and Morningside China TMT Top Up Fund, L.P., respectively. These 11,725,839 Series C preferred shares were subdivided into 117,258,390 Series C preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
Series C1 financing
In January 2015, the Group raised an aggregate of US$3,223,675 from the issuance of 1,734,868 and 1,734,868 Series C+ preferred shares of the Group to People Better Limited and Shunwei Internet Limited, respectively. These 3,469,736 Series C1 preferred shares were subdivided into 34,697,360 Series C1 preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
Series C1+ financing
In December 2017, the Group issued 2,691,209 Series C1+ preferred shares of the Group to the Group B upon the conversion of the 2016 June and October Loan and the 2017 November Loan. These 2,691,209 Series C1+ preferred shares were subdivided into 26,912,090 Series C1+ preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
Series D financing
In June 2017, the Group raised an aggregate of US$22,000,000 from the issuance of 8,810,504 Series D preferred shares of the Group to Cyber Dreamer Limited. These 8,810,504 Series D preferred shares were subdivided into 88,105,040 Series D preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
In July 2017, the Group raised an aggregate of US$10,000,000 from the issuance of 4,004,775 Series D preferred shares of the Group to Cyber Dreamer Limited. These 4,004,775 Series D preferred shares were subdivided into 40,047,750 Series D preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
On October 18, 2019, Cyber Dreamer Limited transferred an aggregate of 17,597,981 Series D preferred shares of the Group to a third party.
Series D1 financing
In July 2017, the Group raised an aggregate of US$5,000,000 from the issuance of 2,002,387 Series D1 preferred shares of the Group to Evolution Media China L.P. These 2,002,387 Series D1 preferred shares were subdivided into 20,023,870 Series D1 preferred shares at par value of US$0.0001 upon a 1:10 share split in July 2018.
The key terms of the Preferred Shares are as follows:
Conversion right
The Series A, B, C, C1, C1+, D and D1 preferred shares were convertible, at the option of the holders at any time after the original issue date of the relevant series of preferred shares into such number of fully paid and
non-assessable
ordinary Shares. Each preferred share shall automatically be converted into ordinary shares at the then effective conversion price upon the closing of a QIPO, which meant the Company been registered under the applicable securities laws with a
pre-offering
valuation of at least US$400,000,000, and gross proceeds to the Company in excess of US$70,000,000. If the offering does not constitute a QIPO, it is at the option of holders of preferred shares to convert. No fractional ordinary share shall be issued upon conversion of the preferred shares. In lieu of any fractional ordinary shares to which the holder would otherwise be entitled, the Group shall pay cash equal to such fraction multiplied by the then effective conversion price for any such series of preferred shares. In December 2019, agreed by written consent from the Company’s shareholders, foregoing QIPO has been amended to that, the Company been registered under the applicable securities laws with a
pre-offering
valuation of at least US$400,000,000, and gross proceeds to the Company in excess of US$40,000,000, pursuant to which, the completion of IPO in January 2020 had triggered the automatic conversion of all series of preferred shares into ordinary shares.
F - 34

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

14. | Pre-IPO Preferred Shares (Continued)

Conversion right (Continued)
The conversion ratio for each preferred share shall be determined by dividing the issue price by the then conversion price, in effect at the time of the conversion. The conversion price shall initially be equal to the issue price per ordinary share. No adjustment in the conversion price for any series of preferred shares shall be made in respect of the issuance of additional ordinary shares unless the consideration per share for an additional ordinary share issued or deemed to be issued by the Group is less than the conversion price for such series in effect on the date of and immediately prior to such issuance.
Redemption right
At any time on or after the earlier of: (i) the Redemption Start Date for each series of preferred shares; or (ii) the date on which a holder of any equity securities of the Group has requested a redemption of its shares, and subject to the law, at the option of a holder of the preferred shares, the Group shall redeem all or any part of the outstanding preferred shares held by the requesting holder as elected by such holder out of funds legally available therefor including capital, at the redemption price. “Redemption Start Date” means (i) with respect to the Series C1+, D and D1 preferred shares, December 31, 2020; (ii) with respect to the Series A, B, C and C1 preferred shares, December 31, 2018.
The Series A redemption price shall be equal to the greater of (i) an amount equal to: Series A issue price * 2, plus all declared but unpaid dividends thereon up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; or (ii) the fair market value of the Series A Shares, the valuation of which shall be determined through an independent appraisal performed by an appraiser selected jointly by the Board and the holders of at least a majority of outstanding Series A Shares; provided that such valuation shall not take into account any liquidity or minority interest discounts.
The Series B redemption price shall be equal to the greater of (i) an amount equal to: Series B issue price * (1.20)N, N = a fraction, the numerator of which is the number of calendar days between the Series B original issue date and the redemption date and the denominator of which is 365, plus all declared but unpaid dividends thereon up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; or (ii) the fair market value of the Series B shares, the valuation of which shall be determined through an independent appraisal performed by an appraiser selected jointly by the Board and the holders of at least a majority of outstanding Series B shares; provided that such valuation shall not take into account any liquidity or minority interest discounts.
The Series C redemption price shall be equal to the greater of (i) an amount equal to: Series C issue price * (1.20)N, N = a fraction, the numerator of which is the number of calendar days between the Series C original issue date and the redemption date and the denominator of which is 365, plus all declared but unpaid dividends thereon up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; or (ii) the fair market value of the Series C shares, the valuation of which shall be determined through an independent appraisal performed by an appraiser selected jointly by the Board and the holders of at least a majority of outstanding Series C shares; provided that such valuation shall not take into account any liquidity or minority interest discounts.
The Series C1 redemption price shall be equal to the greater of (i) an amount equal to: Series C1 issue price * (1.20)N, N = a fraction, the numerator of which is the number of calendar days between the Series C1 original issue date and the redemption date and the denominator of which is 365, plus all declared but unpaid dividends thereon up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; or (ii) the fair market value of the Series C1 shares, the valuation of which shall be determined through an independent appraisal performed by an appraiser selected jointly by the Board and the holders of at least a majority of outstanding Series C1 shares; provided that such valuation shall not take into account any liquidity or minority interest discounts.
The Series C1+ redemption price shall be equal to the greater of (i) an amount equal to: Series C1+ issue price * (1.20)N, N = a fraction, the numerator of which is the number of calendar days between the Series C1+ original issue date and the redemption date and the denominator of which is 365, plus all declared but unpaid dividends thereon up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; or (ii) the fair market value of the Series C1+ shares, the valuation of which shall be determined through an independent appraisal performed by an appraiser selected jointly by the Board and the holders of at least a majority of outstanding Series C1+ shares; provided that such valuation shall not take into account any liquidity or minority interest discounts.
F - 35

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

14. | Pre-IPO Preferred Shares (Continued)

Redemption right (Continued)
The Series D redemption price shall be equal to the greater of (i) an amount equal to: Series D issue price * (1.10)N, N = a fraction, the numerator of which is the number of calendar days between the Series D original issue date and the redemption date and the denominator of which is 365, plus all declared but unpaid dividends thereon up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; or (ii) the fair market value of the Series D shares, the valuation of which shall be determined through an independent appraisal performed by an appraiser selected jointly by the Board and the holders of at least a majority of outstanding Series D shares; provided that such valuation shall not take into account any liquidity or minority interest discounts.
The Series D1 redemption price shall be equal to the greater of (i) an amount equal to: Series D1 issue price * (1.10)N, N = a fraction, the numerator of which is the number of calendar days between the Series D1 original issue date and the redemption date and the denominator of which is 365, plus all declared but unpaid dividends thereon up to the date of redemption, proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations or mergers; or (ii) the fair market value of the Series D1 shares, the valuation of which shall be determined through an independent appraisal performed by an appraiser selected jointly by the Board and the holders of at least a majority of outstanding Series D1 shares; provided that such valuation shall not take into account any liquidity or minority interest discounts.
Upon issuance of Series D preferred shares, redemption dates and liquidation prices for Series A, B, C and C1 preferred shares were changed to be aligned with the terms stipulated in the Share Purchase Agreement of Series D preferred shares. Based on the independent valuations, the Group compared the fair value of Series A, B, C and C1 preferred shares immediately before and after the modifications, and it’s determined that the changes of the fair value was lower than 10%, therefore, the changes to redemption dates and liquidation prices should be accounted for as modification to related preferred shares.
Dividend rights
No dividends or other distributions shall be made or declared, whether in cash, in property, or in any other shares of the Group, unless and until dividends have been paid in full on the Preferred Shares.
Liquidation rights
After setting aside or paying in full of the Series D and D1 preference amount, the Series C, C1 and C1+ preference amount, the Series B preference amount and the Series A preference amount, the remaining assets of the Group available for distribution to members, if any, shall be distributed to the holders of the preferred shares and ordinary shares on a pro rata basis, based on the number of ordinary shares then held by each holder on an
as-converted
basis.
Voting rights
Each Preferred Share confers the right to receive notice of, attend and vote at any general meeting of members.
Accounting of Preferred Shares
The Group had classified the Preferred Shares in the mezzanine equity of the consolidated balance sheets. In addition, the Group recorded accretions on the Preferred Shares to the redemption value from the issuance dates to the earliest redemption dates. The accretions were recorded against retained earnings, or in the absence of retained earnings, by charges against additional
paid-in
capital. Once additional
paid-in
capital had been exhausted, additional charges were recorded by increasing the accumulated deficit. Each issuance of the Preferred Shares was recognized at the respective issue price at the date of issuance net of issuance costs.
The Group had determined that there was no beneficial conversion feature attributable to all preferred shares because the initial effective conversion prices of these preferred shares were higher than the fair value of the Group’s common shares determined by the Group taking into account independent valuations. The Group had classified all Preferred Shares as mezzanine equity in the consolidated balance sheet as they were contingently redeemable at the options of the holders.
All series of Preferred Shares were converted into Class A ordinary shares at the time of the Company’s IPO. Accordingly, no additional accretion has been recorded since conversion, and there is no longer mezzanine equity.
F - 36

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

14. | Pre-IPO Preferred Shares (Continued)

The Group’s preferred shares activities for the years ended December 31, 2019 and 2020 are summariz
e
d below:

|  | Series A Preferred Shares |  |  | Series B Preferred Shares |  |  | Series C Preferred Shares |  |  | Series C1 Preferred Shares |  |  | Series C1+ Preferred Shares |  |  | Series D Preferred Shares |  |  | Series D1 Preferred Shares |  |  | Mezzanine Equity |
|  | Number of shares |  |  | Amount |  |  | Number of shares |  |  | Amount |  |  | Number of shares |  |  | Amount |  |  | Number of shares |  |  | Amount |  |  | Number of shares |  |  | Amount |  |  | Number of shares |  |  | Amount |  |  | Number of shares |  |  | Amount |  |  | Total number of shares |  |  | Total amount |
|  |  |  |  | RMB |  |  |  |  |  | RMB |  |  |  |  |  | RMB |  |  |  |  |  | RMB |  |  |  |  |  | RMB |  |  |  |  |  | RMB |  |  |  |  |  | RMB |  |  |  |  |  | RMB |
Balance as of January 1, 2019 |  |  | 100,000,000 |  |  |  | 164,733 |  |  |  | 116,666,650 |  |  |  | 195,422 |  |  |  | 142,583,330 |  |  |  | 249,150 |  |  |  | 34,697,360 |  |  |  | 60,433 |  |  |  | 26,912,090 |  |  |  | 49,539 |  |  |  | 128,152,790 |  |  |  | 250,098 |  |  |  | 20,023,870 |  |  |  | 37,429 |  |  |  | 569,036,090 |  |  |  | 1,006,804 |
Accretions to Preferred Shares redemption value |  |  | — |  |  |  | 180,143 |  |  |  | — |  |  |  | 205,054 |  |  |  | — |  |  |  | 236,152 |  |  |  | — |  |  |  | 57,540 |  |  |  | — |  |  |  | 43,427 |  |  |  | — |  |  |  | 188,341 |  |  |  | — |  |  |  | 29,529 |  |  |  | — |  |  |  | 940,186 |
Balance as of December 31, 2019 |  |  | 100,000,000 |  |  |  | 344,876 |  |  |  | 116,666,650 |  |  |  | 400,476 |  |  |  | 142,583,330 |  |  |  | 485,302 |  |  |  | 34,697,360 |  |  |  | 117,973 |  |  |  | 26,912,090 |  |  |  | 92,966 |  |  |  | 128,152,790 |  |  |  | 438,439 |  |  |  | 20,023,870 |  |  |  | 66,958 |  |  |  | 569,036,090 |  |  |  | 1,946,990 |
Balance as of January 1, 2020 |  |  | 100,000,000 |  |  |  | 344,876 |  |  |  | 116,666,650 |  |  |  | 400,476 |  |  |  | 142,583,330 |  |  |  | 485,302 |  |  |  | 34,697,360 |  |  |  | 117,973 |  |  |  | 26,912,090 |  |  |  | 92,966 |  |  |  | 128,152,790 |  |  |  | 438,439 |  |  |  | 20,023,870 |  |  |  | 66,958 |  |  |  | 569,036,090 |  |  |  | 1,946,990 |
Accretions to Preferred Shares redemption value |  |  | — |  |  |  | 29,021 |  |  |  | — |  |  |  | 33,342 |  |  |  | — |  |  |  | 38,707 |  |  |  | — |  |  |  | 9,424 |  |  |  | — |  |  |  | 7,015 |  |  |  | — |  |  |  | 31,610 |  |  |  | — |  |  |  | 4,947 |  |  |  | — |  |  |  | 154,066 |
Conversion of preferred shares to Class A ordinary shares upon the completion of the IPO |  |  | (100,000,000 | ) |  |  | (373,897 | ) |  |  | (116,666,650 | ) |  |  | (433,818 | ) |  |  | (142,583,330 | ) |  |  | (524,009 | ) |  |  | (34,697,360 | ) |  |  | (127,397 | ) |  |  | (26,912,090 | ) |  |  | (99,981 | ) |  |  | (128,152,790 | ) |  |  | (470,049 | ) |  |  | (20,023,870 | ) |  |  | (71,905 | ) |  |  | (569,036,090 | ) |  |  | (2,101,056 | )
Balance as of December 31, 2020 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |

F - 3
7

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

15. | Share-based Compensation

(a) | Description of stock incentive plan

2012 Incentive Plan
In September 2012, the Group permitted the grant of options of the Company to relevant directors and officers of the
Company (the “2012 Incentive Plan”).
Option awards are granted with an exercise price determined by the Board of Directors. Those options awards generally vest over a period of four years. Vested options shall be held by the CEO of the Company in trust and may be exercised/transferred after the completion of IPO. In September 2018, the 2012 Incentive Plan was cancelled without the concurrent grant of a replacement award, the Group would recognize any remaining unrecognized compensation cost; however, the 2012 Incentive Plan effectively has no value because it is not probable of vesting until the IPO is completed. Therefore, the Company concluded the cancellation of the 2012 Incentive Plan has no accounting implications and did not recognize share-based compensation expenses in the consolidated statements of operations and comprehensive loss.
2018 Incentive Plan
In September 2018 and April 2019, the Group permitted the grant of options and restricted shares of the Company to relevant directors, officers, other employees and consultants of the Company (the “2018 Incentive Plan”). Option awards are granted with an exercise price determined by the Board of Directors. Those options and restricted shares awards generally vest over a period
of four years.
Both vested options and restricted shares shall be held by the CEO of the Company in trust and may be exercised/transferred after the completion of IPO.
2019 Incentive Plan and related amendments
On May 31, 2019, in connection with the Reorganization in 2019, the Board of Directors of the Company approved the 2019 Share Incentive Plan (the “2019 Incentive Plan”) whereby the incentive share options and restricted shares granted to employees and
non-employees
by Lizhi BVI in the 2018 Incentive Plan shall be replaced and superseded by the exact number of share options and restricted shares of the Company for each grantee (the “2019 Replacement”). There is no change of fair value, vesting schedule and other key terms of such award agreements entered into with each grantee and the classification of share-based awards immediately before and after the 2019 Replacement, thus, the 2019 Replacement was not considered a modification of share-based awards.
On March 18, 2020, the 2019 Incentive Plan was further amended and restated, to increase the maximum aggregate number of Class A ordinary shares authorized to issue from 40,000,000 to 100,000,000
(the “Amended and Restated 2019 Share Incentive Plan”). On September
17
, 2021, the Second Amended and Restated 2019 Share Incentive Plan was adopted to replace the Amended and Restated 2019 Share Incentive Plan in its entirety, increasing the maximum aggregate number of Class A ordinary shares
authorized to issue from 100,000,000 to
170,000,000.
Kastle Limited and Futu Securities(Hong Kong) Limited hold certain Class A ordinary shares for the benefit of certain Company’s senior management, directors and employees before the corresponding share awards granted to such senior management, directors and employees are vested or exercised. The corresponding share awards were included in the outstanding options, restricted shares and restricted share units as of December 31, 2021. As of December 31, 2021, Kastle Limited and Futu Securities(Hong Kong) Limited hold 9,020,630 and 7,140,380 ordinary shares respectively.
F - 3
8

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

15. | Share-based Compensation (Continued)

(a) | Description of stock incentive plan (Continued)

Share-based compensation recognized for the years ended December 31, 2019, 2020 and 2021 is as follows:

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |  |  | US$ |
Cost of revenues |  |  | — |  |  |  | 14,789 |  |  |  | 11,484 |  |  |  | 1,802 |
Selling and marketing expenses |  |  | — |  |  |  | 2,370 |  |  |  | 3,431 |  |  |  | 538 |
General and administrative expenses |  |  | — |  |  |  | 16,128 |  |  |  | 12,496 |  |  |  | 1,961 |
Research and development expenses |  |  | — |  |  |  | 17,454 |  |  |  | 9,948 |  |  |  | 1,561 |
Total |  |  | — |  |  |  | 50,741 |  |  |  | 37,359 |  |  |  | 5,862 |

As of December 31, 2020 and 2021, total unrecognized compensation expenses related to unvested awards granted under
the Second Amended
and Restated 2019 Share Incentive Plan were RMB62.6 million and RMB75.3 million (US$11.9 million), respectively. As of December 31, 2020 and 2021, the weighted average remaining vesting period for
share-based awards
were 2.70 and 2.58 years, respectively.
During the year
s
ended December 31, 2019, 2020 and 2021, there was no cash settled equity instrument granted under share-based payment arrangements, and no
compensation cost for share-based payment arrangements was capitalized as part of the cost of an asset.

(b) | Stock options activities

The following table presents a summary of the Company’s stock options activities for the years ended December 31, 2019, 2020
and 2021.

|  | Employees |  |  | Consultants |  |  | Total |  |  | Weighted average exercise price |  |  | Remaining contractual life |  |  | Aggregated intrinsic value |
|  | (in thousands) |  |  | (in thousands) |  |  | (in thousands) |  |  | US$ |  |  |  |  |  | RMB |
Outstanding at January 1, 2019 |  |  | 12,665 |  |  |  | 500 |  |  |  | 13,165 |  |  |  | 0.0001 |  |  |  | 3.75 |  |  |  | 20,514 |
Forfeited |  |  | (844 | ) |  |  | — |  |  |  | (844 | ) |  |  | 0.0001 |  |  |  | — |  |  |  | — |
Outstanding at December 31, 2019 |  |  | 11,821 |  |  |  | 500 |  |  |  | 12,321 |  |  |  | 0.0001 |  |  |  | 2.75 |  |  |  | 43,011 |
Exercisable as of December 31, 2019 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Outstanding at January 1, 2020 |  |  | 11,821 |  |  |  | 500 |  |  |  | 12,321 |  |  |  | 0.0001 |  |  |  | 2.75 |  |  |  | 43,011 |
Granted |  |  | 32,932 |  |  |  | 363 |  |  |  | 33,295 |  |  |  | 0.0001 |  |  |  | — |  |  |  | — |
Exercised |  |  | (3,235 | ) |  |  | — |  |  |  | (3,235 | ) |  |  | 0.0001 |  |  |  | — |  |  |  | — |
Forfeited |  |  | (3,714 | ) |  |  | — |  |  |  | (3,714 | ) |  |  | 0.0001 |  |  |  | — |  |  |  | — |
Outstanding at December 31, 2020 |  |  | 37,804 |  |  |  | 863 |  |  |  | 38,667 |  |  |  | 0.0001 |  |  |  | 3.09 |  |  |  | 48,921 |
Exercisable as of December 31, 2020 |  |  | 5,002 |  |  |  | 250 |  |  |  | 5,252 |  |  |  | 0.0001 |  |  |  | — |  |  |  | 6,644 |
Outstanding at January 1, 2021 |  |  | 37,804 |  |  |  | 863 |  |  |  | 38,667 |  |  |  | 0.0001 |  |  |  | 3.09 |  |  |  | 48,921 |
Granted |  |  | 32,389 |  |  |  | — |  |  |  | 32,389 |  |  |  | 0.0001 |  |  |  | — |  |  |  | — |
Exercised |  |  | (4,925 | ) |  |  | — |  |  |  | (4,925 | ) |  |  | 0.0001 |  |  |  | — |  |  |  | — |
Forfeited |  |  | (15,571 | ) |  |  | — |  |  |  | (15,571 | ) |  |  | 0.0001 |  |  |  | — |  |  |  | — |
Outstanding at December 31, 2021 |  |  | 49,697 |  |  |  | 863 |  |  |  | 50,560 |  |  |  | 0.0001 |  |  |  | 2.56 |  |  |  | 29,786 |
Exercisable as of December 31, 2021 |  |  | 8,216 |  |  |  | 341 |  |  |  | 8,557 |  |  |  | 0.0001 |  |  |  | — |  |  |  | 5,041 |

F -
39

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

15. | Share-based Compensation (Continued)

(b) | Stock options activities (Continued)

The granted options awards will be vested over a period from nil to four years. The weighted average grant date fair value of options granted for the years ended December 31, 2019, 2020 and 2021 were nil, RMB1.96 and RMB1.44 (US$0.23) per option, respectively.

(c) | Restricted shares activities

The following table sets forth the summary of restricted shares activities:

|  | Number of Restricted Shares Granted |  |  | Weighted-Average Grant Date Fair Value |
|  | (in thousands) |  |  | US$ |
January 1, 2019 |  |  | 14,500 |  |  |  | 0.21 |
Awarded |  |  | 10,428 |  |  |  | 0.26 |
Vested |  |  | — |  |  |  | — |
Outstanding at December 31, 2019 |  |  | 24,928 |  |  |  | 0.23 |
January 1, 2020 |  |  | 24,928 |  |  |  | 0.23 |
Awarded |  |  | 2,607 |  |  |  | 0.27 |
Forfeited |  |  | (7,821 | ) |  |  | 0.26 |
Vested |  |  | (9,857 | ) |  |  | 0.22 |
Outstanding at December 31, 2020 |  |  | 9,857 |  |  |  | 0.23 |
January 1, 2021 |  |  | 9,857 |  |  |  | 0.23 |
Awarded |  |  | — |  |  |  | — |
Forfeited |  |  | — |  |  |  | — |
Vested |  |  | (6,232 | ) |  |  | 0.24 |
Outstanding at December 31, 2021 |  |  | 3,625 |  |  |  | 0.21 |

The granted restricted shares will be vested over a period from one to four years.
F - 4
0

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

15. | Share-based Compensation (Continued)

(d) | Restricted share units activities

(i)
Pursuant to the Second Amended
and Restated 2019 Share Incentive Plan, 9,611,020 and 13,080,200
restricted share units were granted to certain employees in 2020 and 2021, respectively. These restricted share unit awards will be vested over a period of four years, with a summary of activities as follows:

|  | Number of Restricted Share Units Granted |  |  | Weighted-Average Grant Date Fair Value |
|  | (in thousands) |  |  | (in thousands) |
|  |  |  |  | US$ |
January 1, 2020 |  |  | — |  |  |  | — |
Awarded |  |  | 9,611 |  |  |  | 0.22 |
Forfeited |  |  | (5,101 | ) |  |  | 0.24 |
Vested |  |  | — |  |  |  | — |
Outstanding at December 31, 2020 |  |  | 4,510 |  |  |  | 0.20 |
January 1, 2021 |  |  | 4,510 |  |  |  | 0.20 |
Awarded |  |  | 13,080 |  |  |  | 0.30 |
Forfeited |  |  | (2,308 | ) |  |  | 0.20 |
Vested |  |  | (3,018 | ) |  |  | 0.19 |
Outstanding at December 31, 2021 |  |  | 12,264 |  |  |  | 0.31 |

(ii)
Pursuant to the Second Amended
and Restated 2019 Share Incentive Plan, the Company granted restricted share units with fixed monetary amount to certain employees in 2020 and 2021 with vesting period from one to four years. These share-settled obligations require that the variable number of shares to be issued based on an average market price for the shares over the last 30 days before each vesting day. As the monetary value of such obligation is predominantly based on a fixed monetary amount known at inception, the obligation is classified as a liability under paragraph
480-10-25-14(a).
Upon issuance of the shares to settle the obligation, equity is increased by the amount of the liability with no gain or loss recognized. For the years ended December 31,
2019,
2020 and 2021,
nil,
190,160 and 1,812,960 restricted share units have been vested, respectively.

(e) | Founders’ shares

In accordance with the restricted share agreement dated as of March 7, 2011, all ordinary shares ultimately owned by the Company’s founders became subject to four-year vesting schedule, with 25%
vesting on each anniversary of this date of over four years. In the event the founder’s relationship with the Group terminates, directly or indirectly, upon (i) the voluntary termination by the founder of his employment with the Group, or (ii) the termination by the Group of the founder’s employment for any event of default, then the Company shall have the right to repurchase from the founder all of the restricted shares that have not been released from the repurchase right. All of the restricted shares were released from the repurchase right upon completion of the IPO in January 2020. The Company accounted for this arrangement similar to a reverse stock split, followed by the grant of restricted stock awards subject to service vesting conditions, though these founders’ shares are legally outstanding from the grant day. Accordingly, compensation cost was measured based on the fair value of the ordinary shares at the grant date and is recognized over the requisite service period.
F - 4
1

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

16. | Net Loss per Share

The Group incurred losses for the years ended December 31, 2019, 2020 and 2021, hence restricted shares, restricted share units and share options granted were anti-dilutive and should be excluded from the calculation of diluted net loss per share of the Company.
The following table sets forth a summary that been excluded from the calculation of diluted net loss per share of the Company for the periods been presented.

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
Preferred shares |  |  | 569,036,090 |  |  |  | — |  |  |  | — |
Share options |  |  | — |  |  |  | 2,092,300 |  |  |  | 7,036,117 |
Restricted shares |  |  | — |  |  |  | 3,141,612 |  |  |  | 5,680,877 |
Restricted share units |  |  | — |  |  |  | — |  |  |  | 2,462,618 |
Total |  |  | 569,036,090 |  |  |  | 5,233,912 |  |  |  | 15,179,612 |

The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31, 2019, 2020 and 2021:

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |
Net loss |  |  | (132,957 | ) |  |  | (82,184 | ) |  |  | (127,250 | )
Less: accretions to preferred shares redemption value |  |  | (940,186 | ) |  |  | (154,066 | ) |  |  | — |
Net loss attributable to Lizhi Inc.’s ordinary shareholders |  |  | (1,073,143 | ) |  |  | (236,250 | ) |  |  | (127,250 | )
Denominator: |  |  |  |  |  |  |  |  |  |  |  |
Weighted average number of ordinary shares outstanding, basic |  |  | 260,000,000 |  |  |  | 883,202,412 |  |  |  | 991,715,849 |
Weighted average number of ordinary shares outstanding, diluted |  |  | 260,000,000 |  |  |  | 883,202,412 |  |  |  | 991,715,849 |
Weighted average number of ADSs outstanding, basic |  |  | 13,000,000 |  |  |  | 44,160,121 |  |  |  | 49,585,792 |
Weighted average number of ADSs outstanding, diluted |  |  | 13,000,000 |  |  |  | 44,160,121 |  |  |  | 49,585,792 |
Basic net loss per share attributable to Lizhi Inc.’s ordinary shareholders |  |  | (4.13 | ) |  |  | (0.27 | ) |  |  | (0.13 | )
Diluted net loss per share attributable to Lizhi Inc.’s ordinary shareholders |  |  | (4.13 | ) |  |  | (0.27 | ) |  |  | (0.13 | )
Basic net loss per ADSs attributable to Lizhi Inc.’s ordinary shareholders |  |  | (82.55 | ) |  |  | (5.35 | ) |  |  | (2.57 | )
Diluted net loss per ADSs attributable to Lizhi Inc.’s ordinary shareholders |  |  | (82.55 | ) |  |  | (5.35 | ) |  |  | (2.57 | )

17. | Commitments and Contingencies

Litigation
In January 2021, certain of the Group’s current and former directors and officers, underwriters and certain other parties were named as defendants in two putative securities class actions filed in the Supreme Court of the State of New York, County of New York and the U.S. District Court for the Eastern District of New York, respectively. The actions are both purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of their trading in the ADSs. Both actions allege that the Registration Statement dated January 16, 2020 contained material misstatements and/or omissions regarding the impact of COVID-19 on the Group in violation of the U.S. Securities Act of 1933. The defendants’ motion to dismiss was granted by the State Court on March 3, 2022. The motion to dismiss filed in the Federal Court is still pending. These actions remain in their preliminary stages. The Group are currently unable to estimate the potential loss, if any, associated with the resolution of such lawsuits, if they proceed.
From time to time, the Group is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of any unresolved matters, individually and in the aggregate, is reasonably possible to have a material adverse effect on the Group’s financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties and the Group’s view of these matters may change in the future. The Group records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Group reviews the need for any such liability on a regular basis. The Group has not recorded any material liabilities in this regard as of December 31, 2020 and 2021.
F - 4
2

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

18. | Subsequent Events

Since 2020, the outbreak of the
COVID-19
pandemic has spread worldwide, caused and may continue to cause, companies including the Group, to implement temporary adjustments of work schemes allowing employees to work from home and other measures that may impact the operation. The Company have taken various preventative and quarantine measures, however, the situation in China and other countries and regions is still evolving, bringing with it unprecedented levels of macroeconomic disruption and uncertainties across the globe. It also caused significant volatility across the financial markets. The Company believes that its current cash and cash equivalents, together with cash generating from operating or financing activities, will be sufficient to meet its present anticipated working capital requirements and capital expenditures. However, the extent to which COVID-19 impacts the operating results, or the volatility in financial markets, will depend on future developments, which are highly uncertain and cannot be predicted. As a result, the Company cannot reasonably estimate the impact to its future results of operations, cash flows, or financial condition for the remainder of fiscal year 2022.

19. | Segment Information

In accordance with ASC 280, Segment Reporting, the Group’s chief operating decision maker (“CODM”), concluded by the Company to be Mr. Jinnan (Marco) Lai, Chairman of the Board of Directors and CEO, reviews the consolidated results when making decisions about allocating resources and assessing performance of the Group as a whole. Information regarding the business segments provided to the Group’s CODM is at the revenue level and the Group currently does not allocate operating costs or assets to its segments, as its CODM does not use such information to allocate resources or evaluate the performance of the operating segments. As the Group’s long-lived assets are substantially located in the PRC and substantially the Group’s revenues are derived from the PRC, no geographical information is presented.
The Group’s principal business segments at revenue level are as below:

|  | For the year ended December 31, |
|  | 2019 |  |  | 2020 |  |  | 2021 |
|  | RMB |  |  | RMB |  |  | RMB |
Audio entertainment |  |  | 1,167,934 |  |  |  | 1,481,120 |  |  |  | 2,101,475 |
Podcast, advertising and others |  |  | 12,663 |  |  |  | 21,788 |  |  |  | 18,039 |
Total |  |  | 1,180,597 |  |  |  | 1,502,908 |  |  |  | 2,119,514 |

F - 4
3

Table of Contents
LIZHI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(All amounts in thousands, except for share, ADS, per share and per ADS data)

2 0 . | Fair Value Measurement

Recurring
When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rate and currency rate.
The following table sets forth the Company’s financial instruments measured or disclosed at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2020. No balance of financial instruments measured or disclosed at fair value on a recurring basis as of December 31, 2021.

|  | Fair Value Measurement at December 31, 2020 Using |
|  | Quoted Prices in Active Market for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Unobservable inputs (Level 3) |  |  | Fair Value at December 31, 2020 |
|  | RMB |  |  | RMB |  |  | RMB |  |  | RMB |  |  | US$ |
Short-term investments |  |  | — |  |  |  | 73,022 |  |  |  | — |  |  |  | 73,022 |  |  |  | 11,191 |
Total |  |  | — |  |  |  | 73,022 |  |  |  | — |  |  |  | 73,022 |  |  |  | 11,191 |

The Company’s other financial instruments, including cash and cash equivalents, accounts receivable, other receivables (included in “Prepayments and other current assets”), accounts payable, other payables (included in “Accrued expenses and other current liabilities”) and short-term loans are not measured at fair value in the consolidated balance sheets, as their carrying values approximated fair value due to their short-term maturity.
Non-recurring
As of December 31, 2020 and 2021, the group had no financial assets or financial liabilities that are measured
at
fair value
at
non-recurring
basis. The Group’s
non-financial
assets, such as intangible assets, property, equipment and leasehold improvement and other
non-current
assets, would be measured at fair value on
non-recurring
basis whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable.

2 1 . | Restricted Net Assets

Relevant PRC laws and regulations permit PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, the Company’s PRC subsidiaries, VIEs and subsidiaries of VIEs can only distribute dividends upon approval of the shareholders after they have met the PRC requirements for appropriation to the general reserve fund and the statutory surplus fund, respectively. The general reserve fund and the statutory surplus fund require that annual appropriations of
10%
of net
after-tax
income should be set aside prior to payment of any dividends, until the reserve fund reached 50% of the registered capital of the respective company. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries, VIEs and subsidiaries of VIEs are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances, which restricted portion amounted to approximately
RMB46.2
million as of December 31, 2021. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries, VIEs and subsidiaries of VIEs for working capital and other funding purposes, nor any remaining, undistributed earnings existed in its PRC subsidiaries as of December 31, 2021, the Company may in the future require additional cash resources from its PRC subsidiaries, VIEs and subsidiaries of VIEs due to changes in business conditions, to fund future acquisitions and developments, or merely declare and pay dividends to or distributions to the Company’s shareholders, if any.
F - 44