BlueCity Holdings Limited (“the Company”), through its wholly-owned subsidiaries, consolidated variable interest entity (“VIE”) and VIE’s subsidiaries (collectively referred to as “the Group”), is principally engaged in mobile-based social and entertainment services which includes live streaming, advertising, membership, merchandise sales and other services. The Group’s principal operations and geographic markets are in the People’s Republic of China (“PRC”).

The Group operates its business in the PRC through Beijing BlueCity Culture and Media Co., Ltd. (“BlueCity Culture Media”, or the “VIE”), a limited liability company established under the laws of the PRC on September 7, 2011. BlueCity Culture Media holds the necessary PRC operating licenses from the government in order to carry out mobile platform operations in China. The recognized and unrecognized revenue-producing assets that were held by VIE primarily consisted of network equipment, the website and ICP licenses. The equity interests of BlueCity Culture Media are legally held by Mr. Baoli Ma, founder, Chairman and Chief Executive Officer of the Group, and Mr. Changyou Ma, a family member of the founder, who act as nominee equity holders of the VIE on behalf of Beijing BlueCity Information & Technology Co., Ltd., (“BlueCity Information Technology”, or WFOE), the Company’s wholly owned subsidiary in the PRC. A series of contractual agreements, including Powers of Attorney, Exclusive Consulting and Service Agreement, Equity Interest Pledge Agreement, Exclusive Option Agreement and Spouse Consent Letter (collectively, the “VIE Agreements”), were entered among BlueCity Information Technology, BlueCity Culture Media and its nominee equity holders. Through the VIE Agreements, the nominee equity holders of the VIE have granted all their legal rights including voting rights and disposition rights of their equity interests in the VIE to WFOE. The nominee equity holders of the VIE do not participate significantly in income and loss and do not have the power to direct the activities of the VIE that most significantly impact their economic performance. Accordingly, the VIE is considered a variable interest entity.

In accordance with Accounting Standards Codification (“ASC”) 810-10-25-38A, the Company, through the WFOE, has a controlling financial interest in the VIE because the WFOE has (i) the power to direct activities of the VIE that most significantly impact the economic performance of the VIE; and (ii) the obligation to absorb the expected losses and the right to receive expected residual return of the VIE that could potentially be significant to the VIE. Thus, the Company, through the WFOE, is the primary beneficiary of the VIE.

Under the terms of the VIE Agreements, the WFOE has (i) the right to receive economic benefits that could potentially be significant to the VIE in the form of service fees under the Exclusive Consulting and Service Agreement; (ii) the right to receive all dividends declared by the VIE and the right to all undistributed earnings of the VIE; (iii) the obligation to absorb the substantially expected losses and the right to receive the residual benefits of the VIE through its exclusive option to acquire 100% of the equity interests in the VIE, to the extent permitted under PRC law. Accordingly, the financial statements of the VIE are consolidated in the Company’s consolidated financial statements.

Under the terms of the VIE Agreements, the VIE’s nominee equity holders have no rights to the net assets nor have the obligations to fund the deficit, and such rights and obligations have been vested to the Company. All of the deficit (net liabilities) and net loss of the VIE are attributed to the Company.

Pursuant to the Powers of Attorney, the equity holders of the VIE irrevocably appointed WFOE as their attorney-in-fact to exercise all equity holder rights, including, but not limited to: (1) the right to attend shareholders’ meeting of the VIE, (2) the right to vote on their behalf on all matters of the VIE requiring shareholder’s approval under the laws of China and the Articles of Association of the VIE, including but not limited to the sale or transfer or pledge or disposition of their shareholding in part or in whole, and (3) designate and appoint on behalf of such nominee equity holders the legal representative, the directors, supervisors, the chief executive officer and other senior management members of the VIE. Each Powers of Attorney agreement is irrevocable and continuously effective from the execution date.

WFOE and the VIE entered into an Exclusive Consulting and Service Agreement, whereby WFOE is engaged as the exclusive service provider for the provision of business support, technology and consulting services to the VIE. Unless a written consent is given by WFOE, the VIE is not allowed to engage a third party to provide such services. The VIE shall pay WFOE on a quarterly basis a service fee at an amount confirmed by WFOE. WFOE owns the exclusive intellectual property rights, whether created by WFOE or the VIE, as a result of the performance of the Exclusive Consulting and Service Agreement. The Exclusive Consulting and Service Agreement will be in effect permanent unless terminated by WFOE.

Pursuant to Equity Interest Pledge Agreement, the nominee equity holders of the VIE have pledged all of their equity interest in the VIE to guarantee the nominee equity holders’ and the VIE’s performance of their obligations under Exclusive Consulting and Service Agreement. If the VIE or the nominee equity holders breach their contractual obligations under these agreements, WFOE, as pledgee, will be entitled to certain rights regarding the pledged interests, including receiving proceeds from the auction or sale of all or part of the pledged interests of the VIE in accordance with the law. The nominee equity holders of the VIE agree that, during the term of the Equity Interest Pledge Agreement, they will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of WFOE. The Equity Interest Pledge Agreements remain effective until (i) the termination of the Exclusive Consulting and Services Agreement with all service fees under the Exclusive Consulting and Services Agreement have been paid and no further obligation shall be undertaken by the VIE; or (ii) the equity interests of the VIE have been transferred to WFOE or any third party designated by it. The pledge was registered with the relevant local administration for industry and commerce in November 2019 and will remain binding until the VIE and its nominee equity holders discharge all their obligations under the contractual arrangements. The registration of the equity pledge enables the WFOE to enforce the equity pledge against third parties who acquire the equity interests of the VIE in good faith.

Pursuant to the Exclusive Option Agreement, the equity holders of the VIE have irrevocably granted WFOE or any third party designated by WFOE an exclusive option to purchase, at its discretion, to the extent permitted under PRC law, all or part of the equity interests in the VIE. The purchase price shall be the minimum price permitted under PRC law and regulations, which price may be adjusted based on the valuation of the equity interests of the assets, if required by PRC laws and regulations. The equity holders should remit to the Company any amount that is paid by the Company or its designated person(s) in connection with the purchased equity interest. Without prior written consent of WFOE, the VIE and the equity holders shall not (i) transfer or otherwise dispose of, create any pledge or encumbrance on their equity interests in the VIE, (ii) change the VIE’s registered capital, or increase or decrease the VIE’s current equity interests owners, (iii) amend the VIE’s articles of association, or (iv) dispose or make the VIE’s management to dispose any assets of the VIE, other than in the ordinary course of business. The VIE and its equity holders shall appoint those individuals recommended by WFOE as directors of the VIE. The agreement will remain effective until WFOE has exercised all of its rights under the agreement, unless otherwise terminated by WFOE immediately in its sole discretion with written notice.

Pursuant to the Spouse Consent Letter, the spouse of Mr. Changyou Ma, confirmed that she can perform the obligations under VIE Agreements. The spouse of Mr. Changyou Ma agreed that the equity interest in VIE held by Mr. Changyou Ma and registered in the name of Mr. Changyou Ma will be disposed of pursuant to the Powers of Attorney, Exclusive Consulting and Service Agreement, Equity Interest Pledge Agreement and Exclusive Option Agreement. In addition, in the event that the spouse of Mr. Changyou Ma obtains any equity interest in the VIE for any reason, she agreed to be bound by the VIE Agreements.

The Company relies on the VIE Agreements to operate and control VIE. All of the VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment 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 the Company’s ability to enforce these contractual arrangements. In the event that the Company is unable to enforce these contractual arrangements, or if the Company suffers significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be difficult to exert effective control over VIE, and the Company’s ability to conduct its business and the results of operations and financial condition may be materially and adversely affected.

In the opinion of management, based on the legal opinion obtained from the Company’s PRC legal counsel, the above contractual arrangements are legally binding and enforceable and do not violate current PRC laws and regulations. However, there are uncertainties regarding the interpretation and application of existing and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the Company’s corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

If the imposition of any of these penalties or requirement to restructure the Company’s corporate structure causes it to lose the rights to direct the activities of the VIE or the Company’s right to receive its economic benefits, the Company would no longer be able to consolidate the financial results of the VIE in its consolidated financial statements. In the opinion of management, the likelihood of deconsolidation of the VIE is remote based on current facts and circumstances.

1. DESCRIPTION OF BUSINESS AND ORGANIZATION (Continued)

The equity interests of VIE are legally held by Mr. Baoli Ma and Mr. Changyou Ma as nominee equity holders on behalf of the Company. Mr. Baoli Ma holds 33.4% of the total ordinary shares and share options issued and outstanding of the Company as of December 31, 2020, assuming the vesting and exercising of all outstanding share options held by Mr. Baoli Ma as of such date. The Company cannot assure that when conflicts of interest arise, either of the nominee equity holders will act in the best interests of the Company or such conflicts will be resolved in the Company’s favor. Currently, the Company does not have any arrangements to address potential conflicts of interest between the nominee equity holders and the Company, except that the Company could exercise the purchase option under the Exclusive Option Agreement with the nominee equity holders to request them to transfer all of their equity ownership in VIE to a PRC entity or individual designated by the Company. The Company relies on the nominee equity holders, one of them is the Company’s director and owes a fiduciary duty to the Company, to comply with the terms and conditions of the contractual arrangements. Such fiduciary duty requires the director to act in good faith and in the best interests of the Company and not to use his positions for personal gains. If the Company cannot resolve any conflict of interest or dispute between the Company and the nominee equity holders of VIE, the Company would have to rely on legal proceedings, which could result in disruption of the Company’s business and subject the Company to substantial uncertainty as to the outcome of any such legal proceedings.

The Company’s involvement with the VIE under the VIE Agreements affected the Company’s consolidated financial position, results of operations and cash flows as indicated below.

The following consolidated assets and liabilities information of the Group’s VIE as of December 31, 2019 and 2020, and consolidated revenues, net loss and cash flow information for the years ended December 31, 2018, 2019 and 2020, have been included in the accompanying consolidated financial statements. All intercompany transactions and balances with the Company, and its wholly-owned subsidiaries have been eliminated upon consolidation.


	As of December 31,
	2019	2020
	RMB	RMB
Cash	16,334,782	42,017,215
Accounts receivable, net (net of allowance of nil as of December 31, 2019 and 2020, respectively)	1,217,559	5,588,023
Inventories	—	6,853,202
Prepayments and other current assets	10,176,208	32,496,610
Total current assets	27,728,549	86,955,050
Investment securities	50,000	50,000
Property and equipment, net	4,206,421	4,994,809
Intangible assets, net	—	52,084,512
Goodwill	—	3,054,923
Other non-current assets	476,724	1,749,304
Total non-current assets	4,733,145	61,933,548
Total assets	32,461,694	148,888,598
Accounts payable	—	6,817,776
Amounts due to related parties	18,601,875	129,873,104
Deferred revenue	865,167	34,541,710
Income tax payable	112,473	291,441
Accrued expenses and other current liabilities	29,575,764	49,315,134
Total current liabilities	49,155,279	220,839,165
Deferred income tax liabilities	—	10,954,883
Total non-current liabilities	—	10,954,883
Total liabilities	49,155,279	231,794,048

1. DESCRIPTION OF BUSINESS AND ORGANIZATION (Continued)


	For the Year Ended
	December 31,
	2018	2019	2020
	RMB	RMB	RMB
Revenues	38,365,840	42,007,427	651,069,900
Net loss	(13,713,598)	(8,856,826)	(79,742,764)
Net cash (used in)/provided by operating activities	(6,075,096)	7,844,615	63,292,545
Net cash used in investing activities	(1,473,710)	(2,901,588)	(12,532,972)
Net cash provided by/(used in) financing activities	3,569,123	5,430,598	(25,077,140)
Net (decrease)/increase in cash	(3,979,683)	10,373,625	25,682,433
Cash at the beginning of the year	9,940,840	5,961,157	16,334,782
Cash at the end of the year	5,961,157	16,334,782	42,017,215

In accordance with VIE Agreements, WFOE has the power to direct the activities of the VIE. Therefore, the Company considers that there are no assets in the VIE that can be used only to settle obligations of the VIE, except for paid in capital of RMB1 million as of December 31, 2019 and 2020. The creditors of the VIE do not have recourse to the general credit of WFOE.

During the years presented, the Company and its wholly-owned subsidiaries provided financial support to VIE that they were not previously contractually required to provide in the form of advances. To the extent VIE requires financial support, the WFOE may, at its option and to the extent permitted under the PRC law, provide such support to VIE through loans to VIE’s nominee equity holders or entrustment loans to VIE.