(b)Principles of Consolidation

Variable interest entity

The consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and consolidated VIEs. All intercompany transactions and balances have been eliminated.

VIE agreements with Shenzhen Xiaoying, Beijing Ying Zhong Tong and their subsidiaries

To comply with PRC laws and regulations which prohibit or restrict foreign control of companies involved in certain restricted businesses, the Company operates its restricted businesses in the Chinese Mainland through Shenzhen Xiaoying, Beijing Ying Zhong Tong and their subsidiaries (collectively “the VIEs”), whose equity interests are held by certain individuals (“Nominee Shareholders”). The Company obtained control over the VIEs by entering into a series of contractual arrangements (“VIE agreements”) with the VIEs and their respective Nominee shareholders through Beijing WFOE. The Company concluded that the VIEs are consolidated VIEs of the Group, of which the Group is the ultimate primary beneficiary, given that the VIE agreements enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. As such, the Company consolidated the financial results of the VIEs in the Group’s consolidated financial statements.

Despite the lack of direct majority ownership, there exists a parent-subsidiary relationship between Beijing WFOE and the VIEs through the aforementioned agreements with the nominee shareholders of the VIEs. The following is a summary of the VIE agreements:

Pursuant to the voting rights proxy agreements signed between the VIEs’ nominee shareholders and Beijing WFOE, each nominee shareholder irrevocably appointed Beijing WFOE as its attorney-in-fact to exercise on each shareholder’s behalf and all rights that each shareholder has in respect of its equity interest in the VIEs (including but not limited to executing the exclusive right to the voting rights and the right to appoint directors and executive officers of the VIEs). The nominee shareholders cannot revoke the authorization and entrustment as long as the nominee shareholders remain a shareholder of the VIEs. For the arrangements among Beijing WFOE, each of the VIEs, and their shareholders, the power of attorney will remain in force for ten years. Unless a thirty-day notice is given by Beijing WFOE, this agreement shall be automatically renewed for another one year upon its expiration. The arrangement among Beijing WFOE and its shareholder does not specify its effective term.

Under the spouse consent agreement, each signing spouse acknowledges that the shares of the VIEs held by the relevant shareholder of the VIEs are the personal assets of such shareholder and not jointly owned by the couple. Each signing spouse also unconditionally and irrevocably gives up his or her rights to such shares and any associated economic rights or interests to which he or she may be entitled pursuant to applicable laws and undertakes not to make any assertion of rights to such shares and the underlying assets. Each signing spouse agrees that he or she will not carry out in any circumstances any conduct that are contradictory to the contractual arrangements and this consent agreement.

Pursuant to the exclusive call option agreement entered into between the VIEs’ nominee shareholders and Beijing WFOE, the nominee shareholders irrevocably granted Beijing WFOE a call option to request the nominee shareholders to transfer or sell any part or all of its equity interests in the VIEs, to Beijing WFOE, or their designees. The purchase price of the equity interests in the VIEs shall be equal to the minimum price required by Chinese Mainland law. Without Beijing WFOE’s prior written consent, the VIEs and its nominee shareholders shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, issue any additional equity or right to receive equity, provide any loans, distribute dividends in any form, etc. For the agreements among Beijing WFOE, each of the VIEs, and their shareholders, these arrangements will remain effective for ten years. Unless notified by Beijing WFOE, the parties to these agreements shall extend the term of these agreements for another ten years. The agreement among Beijing WFOE and its shareholder does not specify its effective term.

Pursuant to the exclusive business cooperation agreement entered into by Beijing WFOE and the VIEs, Beijing WFOE provides exclusive technical support and consulting services in return for fees based on 100% of the VIE’s total consolidated profit, which is adjustable at the sole discretion of Beijing WFOE. Without Beijing WFOE’s consent, the VIEs cannot procure services from any third party or enter into similar service arrangements with any other third party, except for those from Beijing WFOE. For the agreements between Beijing WFOE and each of the VIEs, unless Beijing WFOE terminates these agreements in advance, these agreements will remain effective for ten years. Unless agreed by both parties in writing, this agreement shall be automatically renewed for another ten years upon its expiration.

Each nominee shareholder of the VIEs has also entered into an equity pledge agreement with Beijing WFOE, pursuant to which each shareholder pledged his/her interest in Beijing WFOE to guarantee the performance of obligations of Beijing WFOE and its shareholders under the exclusive business cooperation agreement, exclusive call option agreement, and shareholders’ voting rights proxy agreement. If the VIEs or any of the nominee shareholder breaches its contractual obligations, Beijing WFOE will be entitled to certain rights and interests regarding the pledged equity interests including the right to dispose the pledged equity interests. None of the nominee shareholders shall, without the prior written consent of Beijing WFOE, assign or transfer to any third party, create or cause any security interest and any liability in whatsoever form to be created on, all or any part of the equity interests it holds in the VIEs. This agreement is not terminated until all of the agreements under the shareholders’ voting rights proxy agreement, exclusive call option agreement and the exclusive business cooperation agreement are fully performed.

The irrevocable power of attorney has conveyed all shareholder rights held by the VIEs’ shareholders to Beijing WFOE or any person designated by Beijing WFOE, including the right to appoint executive directors of the VIEs to conduct day to day management of the VIEs’ businesses, and to approve significant transactions of the VIEs. In addition, the exclusive call option agreement provides Beijing WFOE with a substantive kick-out right of the VIEs shareholders through an exclusive option to purchase all or any part of the shareholders’ equity interest in the VIEs. In addition, through the exclusive business cooperation agreement, Beijing WFOE demonstrates its ability and intention to continue to exercise the ability to absorb substantially all of the profits and all of the expected losses of the VIEs. The equity pledge agreements further secure the obligations of the shareholders of the VIEs under the above agreements.

Based on these contractual arrangements, the Company consolidates the VIEs in accordance with SEC Regulation S-X Rule 3A-02 and Accounting Standards Codification (“ASC”) topic 810 (“ASC Topic 810”), Consolidation.

Uncertainties in the Chinese Mainland legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of Chinese Mainland laws and regulations, the Chinese Mainland government could:

The Group believes that there are no assets held in the VIEs that can be used only to settle obligations of the VIEs, except for registered capital and the Chinese Mainland statutory reserves. As the VIEs are incorporated as limited liability companies under the Company Law of the PRC, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the VIEs. Relevant Chinese Mainland laws and regulations restrict the VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 17 for disclosure of restricted net assets.

Consolidated Trusts

As part of the Group’s efforts to develop new offerings for investors and institutional funding partners, the Group establishes business relationship with certain trusts which were administered by third-party trust companies. The trusts are set up to invest solely in the loans facilitated by the Group on its platform to provide returns to the beneficiaries of the trusts through interest payments made by the borrowers. The trusts are cooperated with financial institutional cooperators who provide credit insurance/financial guarantee services to protect funding providers against default for both the principal and interest. Both direct model and intermediary model are adopted for these trusts. Under direct model, loans are originated from trusts to borrowers while under intermediary model, the Group typically provides credit to the borrowers through an intermediary first and then transfers the loans to the trusts, which issue beneficial interests to the investors and institutional funding partners. The Group consolidates these trusts as the Group is the primary beneficiary, due to the following reasons: 1) the Group has the power to direct the operating activities of the trusts; 2) the Group absorbs or enjoys the potential residual losses or returns of these trusts. Under intermediary model, the transfer of loans to the Consolidated Trusts are not qualified for sale accounting, thus the trust is consolidated and the loan transfer is considered an intercompany transaction.

For Consolidated Trusts founded from January 1, 2022, the Group elected to apply amortized cost method to the loans (at the date of origination) and liabilities due to investors or institutional funding partners, to improve the understandability and relevance of financial information. That is, the loans are continued to be recorded on the Group’s consolidated balance sheets as loans held for investment under “Loans receivable from Xiaoying Credit Loans and other loans, net”, which is net of allowance of credit loss, and the proceeds received from the investors or institutional funding partners are recorded as trust liabilities under “Payable to investors and institutional funding partners at amortized cost”.

As of December 31,2024 and 2025, certain of the subsidiaries of the Group funded RMB737,200,000 and RMB768,500,000 to loan products facilitated on the Group’s platform through third-party trust companies. The trusts are consolidated by the Group and the underlying loans are recorded on the Group’s consolidated balance sheets as loans held for investment under “Loans receivable from Xiaoying Credit Loans and other loans, net”.

Consolidated Partnerships

The Group also develops the partnership business, where the Group and certain trusts jointly established several limited partnership enterprises, or LPs, to invest solely in the loans facilitated by the Group on its platform to provide returns to partners of the LPs through interest payments made by the borrowers. The Consolidated Partnerships are cooperated with financial institutional cooperators who provide credit insurance/financial guarantee services to protect funding providers against default for both the principal and interest. Intermediary model is adopted for the Consolidated Partnerships, the Group typically provides credit to the borrowers through an intermediary first and then transfers the loans to the LPs. The Group consolidates these LPs as the Group is the primary beneficiary, due to: 1) the Group has the power to direct the operating activities of the LPs; 2) the Group absorbs or enjoys the potential residual losses or returns of these LPs. The transfer of loans to the Consolidated Partnerships are not qualified for sale accounting, thus the LP is consolidated and the loan transfer is considered an intercompany transaction. The Group applies amortized cost to the loans and liabilities to trust partners in its consolidated financial statements. That is, the loans are recorded on the Group’s consolidated balance sheets under “Loans receivable from Xiaoying Credit Loans and other loans, net” and the proceeds received from the trust partners are recorded as LP liabilities under “Payable to investors and institutional funding partners at amortized cost”.

As of December 31, 2024 and 2025,one of the subsidiaries of the Group funded RMB145,742,384 and RMB35,105,859 to loan products facilitated on the Group’s platform through the LPs which are consolidated by the Group and the underlying loans are recorded on the Group’s consolidated balance sheets under “Loans receivable from Xiaoying Credit Loans and other loans, net”.

The following financial statement amounts and balances of the Consolidated Trusts and Partnerships are included in the accompanying consolidated financial statements after elimination of intercompany transactions and balances:

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The assets of the Consolidated Trusts and Partnerships can only be used to settle the obligations of the Consolidated Trusts and Partnerships.

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The following financial statement amounts and balances of the VIEs and Consolidated Trusts and Partnerships were included in the accompanying consolidated financial statements after elimination of intercompany transactions and balances:

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The VIEs and Consolidated Trusts and Partnerships contributed 31%, 31% and 25% of the Group’s consolidated revenue for the years ended December 31, 2023, 2024 and 2025, respectively. As of December 31, 2024 and 2025, the VIEs and Consolidated Trusts and Partnerships accounted for an aggregate of 53% and 48% of the consolidated total assets, and 53% and 53% of the consolidated total liabilities.

There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests that require the Company or its subsidiaries to provide financial support to the VIEs and Consolidated Trusts and Partnerships. However, if the VIEs were ever to need financial support, the Group may, at its option and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholders of the VIEs or entrustment loans to the VIEs.

(d)Revenue recognition

The Group provides services as an online marketplace connecting borrowers and institutional funding partners. Revenue is the transaction price the Group expects to be entitled to in exchange for the promised services in a contract in the ordinary course of the Group’s activities and is recorded net of value-added tax (“VAT”). The services to be accounted for include loan facilitation service, post-origination service (e.g., cash processing and collection services) and financial guarantee service.

The major product offered by the Group is Xiaoying Credit Loan, which mainly consists of Xiaoying Card Loan and other unsecured loan products that the Group introduce from time to time.

The Group provides services primarily in two business models. The first business model (“Direct Model”) involves the Group matching borrowers with institutional funding partners who directly funds the credit drawdowns to the borrowers. The Group has determined that it is not the legal lender or borrower in the loan origination and repayment process, but acting as an intermediary to bring the lender and the borrower together. Therefore, the Group does not record the loans receivable or payable arising from the loans facilitated between the institutional funding partners and borrowers on its platform.

The second business model (“Intermediary Model”), only the operations of Consolidated Trusts and Partnerships were under, involves the Group initially providing credit to borrowers through an intermediary and subsequently selling the loans including all of the creditor rights in the loans to external institutional funding partners within a short period of time. The Group cooperates with several microcredit companies who use their own funds to provide credit to borrowers first; these microcredit companies transfer their rights as creditors shortly to SPVs controlled by the Group at the price of the carrying amount of the outstanding loan principal balance and accumulated accrued interest not paid by the borrowers as of the day on which the creditor’s rights are legally transferred to SPVs. The SPVs further transfer their creditor’s rights to Consolidated Trusts and Partnerships in a short period at the price of the carrying amount of the outstanding loan principal balance and the accumulated accrued interest not paid by the borrowers as of the day on which the creditor’s rights are legally transferred. These loans carry the same insurance/ guarantee agreement with external financial institutional cooperators as loans facilitated under the Direct Model, which is attached to the loan and transfers along with the loan. The loans are initially recorded on the consolidated balance sheet as loans receivable from Xiaoying Credit Loans and other loans. Since the Group consolidates such trusts and partnerships under the VIE model (see accounting policy on “Consolidated Trusts” and “Consolidated Partnerships”), loans transferred to Consolidated Trusts and Partnerships do not qualify for sale accounting.

Loans facilitated by the Group typically have a term of less than 1 year. For each loan facilitated either in Direct Model or Intermediary Model, the Group charges a service fee (i) to the borrower indirectly through the Group’s VIEs or subsidiaries, or (ii) to the borrower indirectly through external financing guarantee company, or (iii) to institutional funding partner directly. No application fee is charged to borrowers or institutional funding partners.

For the loans facilitated that the Group collected service fees indirectly through the Group’s VIEs or subsidiaries, when borrowers who have the option of early repayment, they do not have the obligation to pay the remaining monthly service fees, the Group’s right to consideration for the service fees of facilitation service is conditional on whether or not the borrowers repay in advance. At contract inception, the Group determines the consideration based on historical experiences as well as the credit due diligence performed on each borrower prior to loan origination.

For the loans facilitated that the Group collected service fee indirectly through external financing guarantee company or directly from institutional funding partner, the Group’s transaction price includes variable consideration adjusted for default risk of the borrowers and prepayment risk of the borrowers. The Group determines the consideration based on historical experiences as well as the credit due diligence performed on each borrower prior to loan origination.

The Group provides guarantee which is directly or indirectly provided through financial institutional cooperators to institutional funding partners on certain loan products via its consolidated entities. If a borrower defaults, the Group makes its best efforts to collect the default loan. The Group directly makes payment to the defaulted principal and interest to institutional funding partners or indirectly makes payment to institutional funding partners through institutional cooperators, and deemed the guarantee as a guarantee service to the institutional funding partners and recognizes a stand-ready obligation for its guarantee exposure in accordance with ASC Topic 460, Guarantees which requires the guarantee to be measured initially at fair value based on the stand-ready obligation.

For certain loan products that the Group facilitate that are repaid in installments by borrowers, borrowers are required to enter into guarantee agreements with the Group while at the same time, the Group entered into a series of arrangements with various financial institutional cooperators and negotiate the upper limit (the “Cap”) of the compensation obligation prospectively with these financial institutional cooperators based on the expected loss rate. The Group received the guarantee fee at a pre-agreed rate from borrowers directly or from financial institutional cooperators indirectly. Upon borrower’s default, financial institutional cooperators reimburse the full loan principal and interest to the institutional funding partner first, and has the right to recourse to both the borrower and the Group. The Group’s contractual obligation is at any time it limited to the Cap which is either the lower of (1) total amount of guarantee fees contractually required to be collected from the borrowers for such loans facilitated during the current period on an aggregated basis, and (2) a certain percentage of the total principal of the loans facilitated stated in an annualized manner, as pre-agreed with financial institutional cooperators (the “Rate”); or the former (1). The contractual guarantee fees in (1) is not influenced by default or early repayment of borrowers. The Group has no obligation or intention to compensate financial institutional cooperators for any losses in excess of the contractual obligation. The Rate will be negotiated prospectively at each quarter between the two parties based on the expected loss rate. The actual loss in excess of the Cap is absorbed by financial institutional cooperators. Financial institutional cooperators ultimately bear substantially all of the credit risk. The Group’s exposure in this arrangement is limited to the default and prepayment risk in relation to the guarantee fee when the Group cannot collect the guarantee fee under the agreement with the borrower on an individual basis but is still obligated to compensate financial institutional cooperators up to the Cap on a pool basis. The Group evaluated the guarantee arrangement pursuant to ASC Topic 815, and concluded that the arrangement meets the definition of a derivative and that it is not eligible for the guarantee scope exception. Therefore, the guarantee is recognized as a derivative liability/asset at fair value and is not accounted for pursuant to ASC Topic 460 or 450. See accounting policy for financial guarantee derivative.

Direct Model

The Group has adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified ASC Topic 606.The core principle of the guidance is that an entity should 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 be entitled in exchange for those goods or services. To achieve that core principle, the Group applies the following steps:

The Group determines its customers to be both the borrowers and the institutional funding partners. The Group considers the loan facilitation service and post-origination service as two separate performance obligations under ASC Topic 606, as these two deliverables are distinct in that customers can benefit from each service on its own and the Group’s promises to deliver the services are separately identifiable from each other in the contract. While the post-origination service is within the scope of ASC Topic 860, the ASC Topic 606 revenue recognition model is applied due to the lack of definitive guidance in ASC Topic 860.

The Group determines the total transaction price to be the service fees chargeable to the borrowers indirectly through the Group’s VIEs or subsidiaries, or external financing guarantee companies or to certain institutional funding partners directly, including the guarantee fees charged by the Group under the separate guarantee agreement with the borrowers for certain type of Xiaoying Card Loans. The transaction price for loan facilitation and post-origination services includes variable consideration adjusted for default risk and prepayment risk of the borrowers. The Group estimates variable consideration for these contracts using the expected value methodology, including models to estimate the loss rates, the prepayment rates, and the weighted macroeconomic forecast, which are based on past events, current conditions, and reasonable and supportable forecasts over the life of the loans. The expected value of the consideration is the product of multiplying the loan principal and the pre-agreed service fee rates, adjusted for the loss rates and the prepayment rates. The loss rates are calculated using vintage-based loss rate model, adjusted for a weighted macroeconomic forecast. The models consider the historical loss experience period for the vintage-based loss rates, the historical prepayment experience period for the prepayment rates and the weighting of multiple macroeconomic forecast scenarios over the life of the loans and selected economic variables, including gross domestic product (GDP), unemployment rate, consumer price index (CPI) and other macro-economic variables. The transaction price is allocated amongst the financial guarantee service, if any, and two performance obligations.

The Group first allocates the transaction price to the financial guarantee, if any, that is recognized in accordance with either (1) ASC Topic 460, Guarantees which requires the guarantee to be measured initially at fair value based on the stand-ready obligation or (2) ASC Topic 815, which requires the guarantee to be measured initially and subsequently at fair value. Then the remaining considerations are allocated to the loan facilitation services and post-origination services using their relative standalone selling prices consistent with the guidance in ASC Topic 606. The Group does not have observable standalone selling price information for the loan facilitation services or post-origination services because it does not provide loan facilitation services or post-origination services on a standalone basis. There is no direct observable standalone selling price for similar services in the market that is reasonably available to the Group. As a result, the estimation of standalone selling price involves significant judgment. The Group uses an expected cost plus margin approach to estimate the standalone selling prices of loan facilitation services and post origination services as the basis of revenue allocation. In estimating its standalone selling price for the loan facilitation services and post-origination services, the Group considers the cost incurred to deliver such services, profit margin for similar arrangements, customer demand, effect of competitors on the Group’s services, and other market factors.

For each type of service, the Group recognizes revenue when (or as) the entity satisfies the service/performance obligation by transferring a promised good or service (that is, an asset) to a customer. Revenues from loan facilitation are recognized at the time a loan is originated between the borrower and the institutional funding partner and the principal loan balance is transferred to the borrower, at which time the facilitation service is completed. Revenues from post-origination services are recognized on a straight-line basis over the term of the underlying loans as the services are provided. The collection of service fees is not conditional on the provision of subsequent post-origination services.

Intermediary Model—Trust Model

The transfer of loans to institutional funding partners under the Intermediary Model often involves transferring the loans to a trust formed and operated by unrelated third-party trust companies. The Group consolidates such trusts under the VIE model (see accounting policy on “Consolidated Trusts”). Loans transferred to Consolidated Trusts do not qualify for sale accounting as the transfer is to a consolidated subsidiary.

The Group recognizes revenue under “Financing income” for the service fees and interests charged to the borrowers over the lifetime of the loans using effective interest method.

Intermediary Model—Partnership Model

The transfer of loans to institutional funding partners under the Intermediary Model involves transferring the loans to a limited partnership enterprise, or LP, formed and operated by unrelated third-party trust companies and the Group. The Group consolidates such partnerships under the VIE model (see accounting policy on “Consolidated Partnerships”). The loans are recorded as “Loans receivable from Xiaoying Credit Loans and other loans, net” in the consolidated balance sheets, and the Group elects to measure these loans at amortized cost at the time of origination. The Group recognizes revenue under “Financing income” for the service fees and interests charged to the borrowers over the lifetime of the loans using effective interest method.

Disaggregation of revenues

All of the Group’s revenue for the years ended December 31, 2023, 2024 and 2025 were generated from the Chinese Mainland. As the remaining duration of the Group’s performance obligations of the contracts is one year or less, the Group elects to apply the exemption of disclosing the aggregate amount of transaction price allocated to the performance obligations at the end of December 31, 2023, 2024 and 2025, The following table illustrates the disaggregation of revenue by product the Group offered in 2023, 2024 and 2025:

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Contract balances

The Group did not enter into contracts with customers that were greater than one year for substantially all products in the years ended December 31, 2023, 2024 and 2025. For the loans facilitated with borrowers who have the option of early repayment, they do not have the obligation to pay the remaining monthly service fees, the Group’s right to consideration for the service fees of facilitation service is conditional on whether or not the borrowers repay in advance. In these instances, the Group records a corresponding contract asset when recognizing revenue from loan facilitation service. The contract asset will not be reclassified to a receivable given that the right to invoice and the payment is due by the end of the credit periods. Revenue for these loan products is recognized when the collection of consideration becomes probable.

Remaining unsatisfied performance obligations as of December 31, 2023, 2024 and 2025 pertained to post-origination service in the amount of RMB287,607,599, RMB420,361,656 and RMB282,860,275 (US$40,448,481), respectively. All remaining unsatisfied performance obligations are to be recognized as revenue in the subsequent year.

Financing income

Financing income consists primarily of the financing fees the Group charges for the loans facilitated through the Consolidated Trusts and Consolidated Partnerships, including interest income and service fees generated from providing loan facilitation and post-origination services to the investors and institutional funding partners of the Consolidated Trusts and Consolidated Partnerships, and are recorded as revenue over the life of the underlying financing using the effective interest method.

Financing income also includes financing fees, including interest income and service fee, from loans receivables from Xiaoying Credit Loans and other loans that have not yet been transferred to external investors or institutional funding partners or have been transferred but such transaction does not qualify for sale accounting under the Intermediary Model.

Financing income also includes interest income generated from providing loans by the Group’s own fund from microcredit business, and are recorded as revenue over the life of the underlying financing using the effective interest method. When the collection of interest is no longer reasonably assured, the Group does not record financing income on accrual basis.

Other revenue

Other revenue primarily includes referral service fees for introducing borrowers to other platforms, commissions for insurance brokerage activity and technology service fees for providing assistant technology development services. The referral service fees for introducing borrowers to other platforms are recognized when the obligation is fulfilled and is confirmed by the other platforms. For insurance brokerage activities, the Group acts as an agent and recognizes revenue on a net basis, only to the extent that a significant reversal is not probable. The technology service fees are recognized when the assistant technology development services to third parties provided.

(f)Foreign currency translation

The functional currency of X Financial is in US dollars (“US$”). The functional currency of the Group’s subsidiaries and VIEs in the Chinese Mainland is Renminbi (“RMB”). The determination of the respective functional currency is based on the criteria stated in ASC Topic 830, Foreign Currency Matters. The Group also uses RMB as its reporting currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency are measured and recorded in the functional currency at the exchange rate prevailing on the transaction date. Translation gains and losses are recognized in the consolidated statements of comprehensive income.

The Company with functional currency of US$ translates its operating results and financial positions into RMB, the Group’s reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Equity amounts are translated at historical exchange rates. Revenues, expenses, gains and losses are translated using the average rates for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component in the consolidated statements of comprehensive income.

(h)Financial guarantee derivatives

The Group entered into a series of arrangements with various financial institutional cooperators for certain guarantee services. The agreements entitle the Group a right to receive guarantee fees and require the Group to make payment, up to a pre-agreed cap, to reimburse financial institutional cooperators for a pre-determined portion of borrower payment defaults and the guarantee fee amount that was not collected due to prepayments. The ‘dual-triggered’ financial guarantee is accounted for as a derivative under ASC Topic 815 because the financial guarantee scope exemption outlined in ASC 815-10-15-58 is not met.

The Group uses the discounted cash flow model to value these financial guarantee derivatives at inception and subsequent valuation dates. The fair value is categorized in the level 3 valuation hierarchy. This discounted cash flow model incorporates assumptions of the significant unobservable inputs such as the expected loss rates, prepayment rate and discount rate. The expected loss rate and prepayment rate is estimated by taking into consideration of historical loss experiences. The Group considers that the impact of discount rate, which is determined based on the market rates, to the fair value of financial guarantee derivatives is immaterial.

All financial guarantee derivatives are required to be recorded on the Group’s consolidated balance sheet at fair value. The Group signs contract separately for each project regardless of whether they are same counterparty. As no legally enforceable master netting agreement exists between the Group and the derivative counterparty, the Group does not net derivative assets and liabilities. The change in fair value of the financial guarantee derivative is recorded as change in fair value of financial guarantee derivatives in the consolidated statements of comprehensive income. The relative cash flows associated with the financial guarantee derivatives and their gains and losses are reported in operating activities in the consolidated statements of cash flow. Refer to Note 3 for further information of tabular disclosures on the amount and reporting for financial guarantee derivative assets, liabilities, gains and losses.

(j)Cash and Cash Equivalents

Cash and cash equivalents primarily consist of cash on hand and cash in bank which are highly liquid and insignificant risk of changes in value. As of December 31, 2024 and 2025, cash equivalents were comprised of term deposits in banks. All cash and cash equivalents are unrestricted as to withdrawal and use.

(l)Accounts receivable and contract assets, net

Accounts receivable and contract assets consist of accounts receivable and contract assets from the facilitation and post-origination service in relation to loans facilitated, from financing income generated from Consolidated Trusts and Partnerships and Quanbei Microcredit, from guarantee income generated from financing guarantee business, and from other revenue which mainly including referral service fees and insurance brokerage commissions. Contract assets represent the Group’s right to consideration in exchange for facilitation services that the Group has delivered to the customer before payment is due. The Group only recognizes accounts receivable and contract assets to the extent that the Group believes it is probable that they will collect substantially all of the consideration to which it will be entitled in exchange for the services delivered to the customer before the payment is due by the end of the credit periods. The general life time of accounts receivable and contract assets lasts no more than 12 months.

Accounts receivable and contract assets is stated at the historical carrying amount net of write-offs and allowance for credit losses. The Group establishes an allowance for credit losses in accordance with ASC Topic 326 based on estimates, historical experience of net loss rates, current economic conditions, reasonable and supportable forecasts of future economic conditions and other factors surrounding the credit risk of customers. The profile of the borrowers is similar under each product therefore the Group applies a consistent credit risk management framework to the entire portfolio of borrowers under each product. The Group also constantly monitors the financial condition and evaluates the credit quality of certain institutional funding partners and external financing guarantee companies from which the Group’s service fees are collected directly or indirectly. For individual counterparty where there is an observable indicator of loss, an individually evaluated allowance for credit losses is provided. The Group evaluates and adjusts its allowance for credit losses for accounts receivable and contract assets on a quarterly basis or more often as necessary. Uncollectible accounts receivable or contract assets are charged off when a settlement is reached for an amount that is less than the outstanding historical balance or when accounts receivable or contract assets are deemed uncollectible.

The following table presents the accounts receivable and contract assets from facilitation, post-origination, financing income, guarantee income and other revenue as of December 31, 2024 and 2025, respectively:

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The following tables present the aging of accounts receivable as of December 31, 2024 and 2025 respectively. For accounts receivable to be collected from borrowers, the Group charges off accounts receivable overdue more than 60 days. For accounts receivable to be collected indirectly through external financing guarantee company or directly from institutional funding partner, the Group charges off accounts receivable when accounts receivable are deemed uncollectible.

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The following tables present the movement of allowance for credit losses for accounts receivables and contract assets as of December 31, 2023, 2024 and 2025:

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During the year ended December 31, 2025, the gross charge-off recorded in the accounts receivables and contract assets amounted to RMB11,940,878 (US$1,707,523), RMB25,684,320 (US$3,672,809) and RMB38,563,712 (US$5,514,537), which originated from loans facilitated in 2023 and before, 2024 and 2025, respectively.