moho-20f_20201231.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(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, 2020

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: 001-39121

 

ECMOHO Limited

(Exact name of Registrant as specified in its charter)

 

N/A

(Translation of Registrant’s name into English)

 

Cayman Islands

3rd Floor, 1000 Tianyaoqiao Road

Xuhui District

Shanghai, 200030

The People’s Republic of China

(Jurisdiction of incorporation or organization)

(Address of principal executive offices)

Zoe Wang

Tel.: +86 21 6417 2213

Email: ir@ecmoho.com

Address:

3rd Floor, 1000 Tianyaoqiao Road

Xuhui District

Shanghai, 200030

The People’s Republic of China

(Name, Telephone, Email 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(s) 

 

Name of each exchange on which registered 

American depositary shares, each representing four Class A ordinary shares

Class A ordinary shares, par value US$0.00001 per share*

 

MOHO

 

The Nasdaq Stock Market LLC

 

The Nasdaq Stock Market LLC

 

*Not for trading, but only in connection with the listing on the Nasdaq Stock Market LLC of American depositary shares, each representing four (4) Class A ordinary Shares.  


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 December 31, 2020, there were (i) 69,361,833 Class A ordinary shares, par value US$0.00001 per share, including 50,605,596 Class A ordinary shares represented by 12,651,399 American depositary shares, and (ii) 71,355,616 Class B ordinary shares, par value US$0.00001 per share.  Each American depositary share represents four (4) Class A ordinary shares as of December 31, 2020.  

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 the definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer      Accelerated filer      Non-accelerated filer      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

 

 

PART I

 

 

 

1

 

Item 1.

 

Identity of Directors, Senior Management and Advisers

1

 

Item 2.

 

Offer Statistics and Expected Timetable

1

 

Item 3.

 

Key Information

1

 

Item 4.

 

Information on the Company

40

 

Item 4A.

 

Unresolved Staff Comments

64

 

Item 5.

 

Operating and Financial Review and Prospects

64

 

Item 6.

 

Directors, Senior Management and Employees

78

 

Item 7.

 

Major Shareholders and Related Party Transactions

86

 

Item 8.

 

Financial Information

91

 

Item 9.

 

The Offer and Listing

92

 

Item 10.

 

Additional Information

92

 

Item 11.

 

Quantitative and Qualitative Disclosures about Market Risk

103

 

Item 12.

 

Description of Securities Other than Equity Securities

104

PART II

 

 

 

107

 

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

107

 

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

107

 

Item 15.

 

Controls and Procedures

107

 

Item 16A.

 

Audit Committee Financial Expert

109

 

Item 16B.

 

Code of Ethics

109

 

Item 16C.

 

Principal Accountant Fees and Services

109

 

Item 16D.

 

Exemptions from the Listing Standards for Audit Committees

109

 

Item 16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

110

 

Item 16F.

 

Change in Registrant’s Certifying Accountant

110

 

Item 16G.

 

Corporate Governance

110

 

Item 16H.

 

Mine Safety Disclosure

111

PART III

 

 

 

112

 

Item 17.

 

Financial Statements

112

 

Item 18.

 

Financial Statements

112

 

Item 19.

 

Exhibits

112

 

 

Conventions that apply to this Annual Report on Form 20-F

In this annual report on Form 20-F, each of the following terms has the meaning ascribed to it below:

 

“we,” “us,” “our company” and “our” refer to ECMOHO Limited, a Cayman Islands exempted company with limited liability (or its predecessors as the context requires), and its subsidiaries, consolidated affiliated entities (including our variable interest entity) and their respective subsidiaries;

 

 

“ADRs” refers to our American depository receipts, which evidence our ADSs;

 

 

“ADSs” refers to our American depositary shares, each of which represents four (4) of our Class A ordinary shares;

 

 

“brand partners” refers to owners of non-proprietary brands (represented in our brand portfolio), each of which is managed by a dedicated operations team;

 

 

“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report on Form 20-F only, Taiwan, Hong Kong and Macau;

 

 

“Class A ordinary share” refers to a Class A ordinary share in the capital of our company, with a par value of US$0.00001 per share;

 

 

“Class B ordinary share” refers to a Class B ordinary share in the capital of our company, with a par value of US$0.00001 per share;

 

i


 

 

 

“ECMOHO Hong Kong” refers to ECMOHO (Hong Kong) Health Technology Limited, a limited company established under the Laws of Hong Kong;

 

 

“ECMOHO Shanghai” refers to Shanghai ECMOHO Health Biotechnology Co, Ltd., a limited liability company established under the Laws of the PRC;

 

 

“EIT Law” refers to the Enterprise Income Tax Law of the PRC;

 

 

“initial public offering” refers to our initial public offering of 4,675,000 ADSs (including ADSs sold in connection with the over-allotment offering), representing 18,700,000 of our Class A ordinary shares;

 

 

“integrated solution provider” refers to entities that provide services connecting producers with consumers by combining global sourcing capabilities with local distribution channels and coverage.  Such providers typically offer integrated solutions consisting of one-stop information technology solutions, online and offline store operations, digital marketing, warehousing and logistics, and customer management;

 

 

“KOLs” refers to key opinion leaders who have extensive experience or industry insights in the various subsectors of the health and wellness industry;

 

 

“major brand partners” refers to our brand partners, each of which contributed over US$10.0 million to our product sales revenues in the designated period;

 

 

“ordinary shares” refers, collectively, to our Class A ordinary shares and Class B ordinary shares;

 

 

“our variable interest entity” or “our VIE” refers to Shanghai Yibo;

 

 

“RMB” or “Renminbi” refers to the legal currency of China;

 

 

“Shanghai Yibo” refers to Shanghai Yibo Medical Equipment Co., Ltd.;

 

 

“SKU” refers to stock keeping unit, which, for the purpose of this annual report on Form 20-F, can be a combination of other stock keeping units;

 

 

“US$” or “U.S. dollars” refers to the legal currency of the United States of America;

 

 

“Xianggui Shanghai” refers to Xianggui (Shanghai) Biotechnology Co., Ltd; and

 

 

“Yang Infinity” refers to Yang Infinity (Shanghai) Biotechnology Co., Limited.

Cautionary Note Regarding Forward-looking Statements

This annual report on Form 20-F contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act.  All statements other than statements of historical fact in this annual report on Form 20-F are forward-looking statements.  These forward-looking statements can be identified by words or phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “should,” “will” and similar expressions.  These forward-looking statements include, without limitation, statements relating to:

 

the continued growth of the e-commerce market or the health and wellness industry in China;

 

 

our ability to manage the expansion of our business and implement our business strategies;

 

 

our ability to anticipate changes in customer and consumer preferences;

 

 

our ability to maintain and develop favorable relationships with e-commerce channels, brand partners, content generators and other third parties involved in our ecosystem;

 

ii


 

 

 

our ability to compete with other companies and new entrants to the market;

 

 

our capital needs and ability to source such capital on acceptable terms;

 

 

dependence on key management personnel and quality and retention of personnel generally;

 

 

regulatory changes in the PRC and compliance with such regulations;

 

 

the impact of the COVID-19 pandemic on the PRC economy, our major brand partners in the United States and Europe and our operations and financial performance;

 

 

our ability to effectively manage our inventory and warehousing capabilities;

 

 

our own information technology systems and infrastructure;

 

 

other factors that may affect our business, financial condition and results of operations; and

 

 

other risk factors discussed under “Item 3. Key Information—D. Risk Factors.”

Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information.  Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the current economic environment.  Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements.  These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements.  

All forward-looking statements included herein are based upon information available to us on the date hereof and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  

 

 

 

 

iii


 

 

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

A.  Selected Financial Data

The following tables set forth selected consolidated financial data for our company.  The selected consolidated statements of operations and comprehensive income/(loss) data and the selected consolidated statements of cash flow data for the years ended December 31, 2018, 2019 and 2020 and the selected consolidated balance sheets data as of December 31, 2019 and 2020 have been derived from our audited U.S. GAAP consolidated financial statements, which are included in this annual report on Form 20-F beginning on page F-1. The selected consolidated statements of operations and comprehensive income/(loss) data and the selected consolidated statements of cash flow data for the years ended December 31, 2017 and the selected consolidated balance sheets data as of December 31, 2017 and 2018 have been derived from our audited U.S. GAAP consolidated financial statements not included in this annual report on Form 20-F.

You should read our selected financial data in conjunction with “Item 3. Key Information—D.  Risk Factors,” “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements included elsewhere in this annual report on Form 20-F.  Historical results for any period are not necessarily indicative of results for any future period.

1


 

Selected Consolidated Statements of Operations and Comprehensive Income/(Loss) Data

The following table sets forth our selected consolidated results of operations for the periods presented, both in absolute terms and as a percentage of our total net revenues for the periods presented.

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

Amount

 

 

% of total

net revenues

 

 

Amount

 

 

% of total

net revenues

 

 

Amount

 

 

% of total

net revenues

 

 

Amount

 

 

% of total

net revenues

 

 

 

(in thousands of U.S. dollars, except for share, per share data and percentages)

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

95,573

 

 

 

97.3

%

 

 

176,098

 

 

 

88.5

%

 

 

302,099

 

 

 

91.7

%

 

 

300,156

 

 

 

98.4

%

Services

 

 

2,665

 

 

 

2.7

 

 

 

22,917

 

 

 

11.5

 

 

 

27,381

 

 

 

8.3

 

 

 

4,783

 

 

 

1.6

 

Total net revenues

 

 

98,238

 

 

 

100.0

 

 

 

199,015

 

 

 

100.0

 

 

 

329,480

 

 

 

100.0

 

 

 

304,939

 

 

 

100.0

 

Total cost of revenue

 

 

(69,124

)

 

 

(70.4

)

 

 

(140,153

)

 

 

(70.4

)

 

 

(257,431

)

 

 

(78.1

)

 

 

(246,300

)

 

 

(80.8

)

Gross profit

 

 

29,114

 

 

 

29.6

 

 

 

58,862

 

 

 

29.6

 

 

 

72,049

 

 

 

21.9

 

 

 

58,639

 

 

 

19.2

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment expenses

 

 

(6,217

)

 

 

(6.3

)

 

 

(13,097

)

 

 

(6.6

)

 

 

(16,957

)

 

 

(5.1

)

 

 

(14,398

)

 

 

(4.7

)

Sales and marketing expenses

 

 

(15,529

)

 

 

(15.8

)

 

 

(27,462

)

 

 

(13.8

)

 

 

(40,206

)

 

 

(12.2

)

 

 

(45,754

)

 

 

(15.0

)

General and administrative expenses

 

 

(4,004

)

 

 

(4.1

)

 

 

(9,069

)

 

 

(4.6

)

 

 

(8,497

)

 

 

(2.6

)

 

 

(11,037

)

 

 

(3.6

)

Research and development expenses

 

 

(485

)

 

 

(0.5

)

 

 

(1,669

)

 

 

(0.8

)

 

 

(1,808

)

 

 

(0.5

)

 

 

(1,106

)

 

 

(0.4

)

Other operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35

 

 

 

0.0

 

 

 

 

 

 

 

Total operating expenses

 

 

(26,235

)

 

 

(26.7

)

 

 

(51,297

)

 

 

(25.8

)

 

 

(67,433

)

 

 

(20.5

)

 

 

(72,295

)

 

 

(23.7

)

Operating income/(loss)

 

 

2,879

 

 

 

2.9

 

 

 

7,565

 

 

 

3.8

 

 

 

4,616

 

 

 

1.4

 

 

 

(13,656

)

 

 

(4.5

)

Finance expenses, net

 

 

(145

)

 

 

(0.1

)

 

 

(926

)

 

 

(0.4

)

 

 

(2,513

)

 

 

(0.8

)

 

 

(2,615

)

 

 

(0.9

)

Foreign exchange (loss)/gain, net

 

 

106

 

 

 

0.1

 

 

 

(306

)

 

 

(0.2

)

 

 

(393

)

 

 

(0.1

)

 

 

979

 

 

 

0.3

 

Other income, net

 

 

(36

)

 

 

0.0

 

 

 

234

 

 

 

0.1

 

 

 

475

 

 

 

0.1

 

 

 

1,800

 

 

 

0.6

 

Income/(loss) before income tax

   expenses

 

 

2,804

 

 

 

2.9

 

 

 

6,567

 

 

 

3.3

 

 

 

2,185

 

 

 

0.7

 

 

 

(13,492

)

 

 

(4.4

)

Income taxes (expenses)/benefits

 

 

(80

)

 

 

(0.1

)

 

 

(417

)

 

 

(0.2

)

 

 

(250

)

 

 

(0.1

)

 

 

7

 

 

0.0

 

Net income/(loss)

 

 

2,724

 

 

 

2.8

%

 

 

6,150

 

 

 

3.1

%

 

 

1,935

 

 

 

0.6

%

 

 

(13,485

)

 

 

(4.4

%)

Net income/(loss) attributable to

   ECMOHO Limited

 

 

2,825

 

 

 

2.9

%

 

 

6,124

 

 

 

3.1

%

 

 

2,297

 

 

 

0.7

%

 

 

(13,299

)

 

 

(4.4

%)

Less: Accretion on Round A convertible

   redeemable preferred shares to

   redemption value

 

 

(1,559

)

 

 

 

 

 

 

(1,018

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Accretion on Round B convertible

   redeemable preferred shares to

   redemption value

 

 

(2,413

)

 

 

 

 

 

 

(1,575

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Accretion on Series A convertible

   redeemable preferred shares to

   redemption value

 

 

 

 

 

 

 

 

 

(445

)

 

 

 

 

 

 

(1,023

)

 

 

 

 

 

 

 

 

 

 

 

Less: Accretion to redemption value of

   redeemable non-controlling

   interests

 

 

 

 

 

 

 

 

 

(130

)

 

 

 

 

 

 

(312

)

 

 

 

 

 

 

 

 

 

 

 

Less: Extinguishment of convertible

   redeemable preferred shares

 

 

 

 

 

 

 

 

 

(24,764

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/income attributable to

   ECMOHO Limited’s ordinary

   shareholders

 

 

(1,147

)

 

 

 

 

 

 

(21,808

)

 

 

 

 

 

 

962

 

 

 

 

 

 

 

(13,299

)

 

 

 

 

2


 

 

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands of U.S. dollars, except for share and per share data)

 

Net (loss)/income attributable to ECMOHO Limited’s ordinary

   shareholders

 

 

(1,147

)

 

 

(21,808

)

 

 

962

 

 

 

(13,299

)

Net (loss)/earnings per share attributable to ECMOHO

   Limited’s ordinary shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—basic

 

 

(0.01

)

 

 

(0.26

)

 

 

0.01

 

 

 

(0.10

)

—diluted

 

 

(0.01

)

 

 

(0.26

)

 

 

0.01

 

 

 

(0.10

)

Weighted average number of Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—basic

 

 

81,162,400

 

 

 

84,970,000

 

 

 

98,104,216

 

 

 

139,619,496

 

—diluted

 

 

81,162,400

 

 

 

84,970,000

 

 

 

115,644,864

 

 

 

139,619,496

 

 

Selected Consolidated Cash Flow Data

The following table presents our selected consolidated cash flow data for the periods indicated.

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

(in thousands of U.S. dollars)

 

Net cash (used in)/provided by in operating activities

 

 

(2,444

)

 

 

(40,756

)

 

 

(14,189

)

 

 

21,601

 

Net cash used in investing activities

 

 

(508

)

 

 

(1,748

)

 

 

(813

)

 

 

(6,644

)

Net cash provided by/(used in) financing activities

 

 

1,583

 

 

 

44,036

 

 

 

54,337

 

 

 

(22,786

)

Cash, cash equivalents and restricted cash at beginning of the year

 

 

12,079

 

 

 

10,689

 

 

 

12,965

 

 

 

51,099

 

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

 

 

10,689

 

 

 

12,965

 

 

 

51,099

 

 

 

45,284

 

 

Selected Consolidated Balance Sheet Data

The following table presents our selected consolidated balance sheet data for the periods indicated.

 

 

 

As of December 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(in thousands of U.S. dollars)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

10,689

 

 

 

10,336

 

 

 

49,099

 

 

 

45,284

 

Accounts receivable, net

 

 

12,322

 

 

 

33,840

 

 

 

49,829

 

 

 

42,006

 

Inventories, net

 

 

17,366

 

 

 

53,683

 

 

 

49,895

 

 

 

33,263

 

Total current assets

 

 

44,513

 

 

 

111,747

 

 

 

172,189

 

 

 

130,399

 

Total assets

 

 

48,447

 

 

 

117,772

 

 

 

178,460

 

 

 

142,628

 

Total current liabilities

 

 

24,280

 

 

 

74,829

 

 

 

93,562

 

 

 

61,111

 

Total liabilities

 

 

24,831

 

 

 

75,148

 

 

 

93,770

 

 

 

63,074

 

Total mezzanine equity

 

 

43,974

 

 

 

74,847

 

 

 

 

 

 

 

Total shareholders’ (deficit)/equity

 

 

(20,646

)

 

 

(32,223

)

 

 

84,690

 

 

 

79,554

 

 

Non-GAAP Measures

We use the following non-GAAP performance indicators to monitor financial performance: adjusted operating income/(loss) and adjusted net income/(loss).  

We use adjusted operating income/(loss) and adjusted net income/(loss), each a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes.  Adjusted operating income/(loss) represents operating income/(loss) excluding share-based compensation expenses.  Adjusted net income/(loss) represents net income/(loss) excluding share-based compensation expenses.  These adjustments have no impact on income tax.  

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

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

(unaudited)

 

 

 

(in thousands of U.S. dollars)

 

 

 

 

 

Adjusted operating income/(loss)

 

 

2,879

 

 

 

7,922

 

 

 

6,191

 

 

 

(13,181

)

Adjusted net income/(loss)

 

 

2,724

 

 

 

6,507

 

 

 

3,510

 

 

 

(13,010

)

 

 The non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP.  They should not be considered in isolation or construed as alternatives to net loss or any other measure of performance or as an indicator of our operating performance.  Investors are encouraged to review the historical non-GAAP financial measures in light of the most directly comparable GAAP measures, as shown below.  The non-GAAP financial measures presented here may not be comparable to similarly titled measures presented by other companies.  Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data.  We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

The table sets forth a reconciliation of our adjusted operating income/(loss) and adjusted net income/(loss) in the years presented to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, which are operating income/(loss) and net income/(loss):

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

(unaudited)

 

 

 

(in thousands of U.S. dollars)

 

Operating income/(loss)

 

 

2,879

 

 

 

7,565

 

 

 

4,616

 

 

 

(13,656

)

Add: share-based compensation expenses

 

 

 

 

 

357

 

 

 

1,575

 

 

 

475

 

Adjusted operating income/(loss)

 

 

2,879

 

 

 

7,922

 

 

 

6,191

 

 

 

(13,181

)

Net income/(loss)

 

 

2,724

 

 

 

6,150

 

 

 

1,935

 

 

 

(13,485

)

Add: share-based compensation expenses

 

 

 

 

 

357

 

 

 

1,575

 

 

 

475

 

Adjusted net income/(loss)

 

 

2,724

 

 

 

6,507

 

 

 

3,510

 

 

 

(13,010

)

 

Exchange Rate Information

Our reporting currency is the U.S. dollar.  This annual report on Form 20-F contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader.  Unless otherwise stated, all translations of Renminbi into U.S. dollars as at December 31, 2020 were made at RMB6.5249 to US$1.00, the exchange rate set by the People’s Bank of China on December 31, 2020. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.

B.  Capitalization and Indebtedness

Not applicable.  

C.  Reasons for the Offer and Use of Proceeds

Not applicable.  

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D.  Risk Factors

This section describes the risks that we currently believe may materially affect our business, financial condition and results of operations.  The factors below should be considered in connection with any forward-looking statements in this annual report on Form 20-F.  Although we will make reasonable efforts to mitigate or minimize these risks, one or more of a combination of these risks could materially and adversely impact our business, revenues, sales, net assets, financial condition, results of operations, liquidity, capital resources and prospects.  Additional risks and uncertainties that we are unaware of, or that we currently believe to be immaterial, may also become important factors that affect us.  

Summary Risk Factors

Risks Related to Our Business and Industry

 

Our company’s business, financial position, liquidity and results of operations have been, and are likely to continue to be, materially and adversely affected by the COVID-19 pandemic.

 

If the e-commerce market or the health and wellness industry in China does not grow, or grows more slowly than we expect, the demand for our products and solutions could be materially and adversely affected.

 

We may not be able to effectively manage the expansion of our business or optimally implement our business strategies.

 

If we fail to anticipate evolving consumer preferences for health and wellness products and/or fail to cater effectively to consumer demands, our ability to attract and retain customers may be materially and adversely affected.

 

Our success depends on our ability to maintain relationships with existing brand partners and to develop relationships with new brand partners.

 

We may be unable to compete effectively against stronger and better-resourced e-commerce companies, offline competitors or new entrants to the health and wellness market, and we may lose market share as a result.

 

We may need additional capital but may not be able to obtain it on acceptable terms, or at all.

 

We depend on key management as well as experienced and capable personnel generally, and any failure to attract, motivate or retain our staff could hinder our ability to maintain and grow our business.

 

We are subject to evolving regulatory requirements, non-compliance with which, or changes in which, may materially and adversely affect our business and prospects.

 

We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if property or people are harmed by the products sold on our platform.

Risks Related to Our Corporate Structure

 

We are a “controlled company” within the meaning of the Nasdaq corporate governance requirements, which may result in public investors having less protection than they would if we were not a controlled company.

 

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

 

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

 

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

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Risks Related to Doing Business in China

 

Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.

 

There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of healthcare industry and Internet-related businesses, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

 

Recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the PCAOB, proposed rule changes submitted by Nasdaq, the newly enacted Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB.  These developments could add uncertainties to the trading of our ADSs on U.S. stock exchanges.

Risks Related to Our ADSs

 

The trading price of our ADSs may be volatile, which could result in substantial losses to you.

 

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.

 

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

Risks Related to Our Business and Industry

Our company’s business, financial position, liquidity and results of operations have been, and are likely to continue to be, materially and adversely affected by the COVID-19 pandemic.

Since late-January 2020 following the outbreak of a novel strain of coronavirus that causes the disease now known as COVID-19, the Chinese government has imposed a series of strict and protracted containment measures, including city lockdowns and travel restrictions across the country.  Despite these efforts, the disease has continued to spread globally and, in March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and recommended the implementation of containment and mitigation measures worldwide.  

Governments across the globe have responded to contain the spread and reduce the risk of exposure to infection through international travel restrictions, lockdowns of cities and wider regions, business closures and strict social distancing measures.  In China, as of the date of this annual report, such measures appear to have successfully contained the spread of the virus, with restrictions now being lifted across the country and businesses resuming operations.  While other parts of the world are showing increased control over the spread of the virus, substantial uncertainty surrounding the duration of existing restrictions remains.  

The COVID-19 pandemic and the associated efforts to contain the spread of the disease have caused unprecedented disruptions to the global economy, impacted business operations across many industries and geographies and created significant volatility and uncertainty, all of which have had a material adverse effect on our results of operations, cash flows and overall financial position.  For example, during the implementation of lockdown measures in China, our operations were affected as many of our employees were unable to return to work following the Lunar New Year public holiday.  We only resumed full operations and achieved full staffing levels in mid-March 2020. Moreover, during the first quarter of calendar year 2020, some of our third-party business partners in China, in particular domestic logistics and transport services providers, experienced temporary shut-downs or worker absenteeism and were unable to meet their obligations to us.  This has had an adverse impact on our ability to promptly provide our customers with the products they purchased, which, in turn, has affected our financial performance. Although domestic logistics and transport services providers have recovered and resumed their ordinary course of business, there has been and may continue to be a significant increase in international freight costs in light of the COVID-19 pandemic due to tight supply chain capacity, which has had and may continue to have an impact on our fulfillment expenses.  Furthermore, we have experienced and

6


 

expect to continue to experience disruptions to our supply chains if our brand partners, especially international brand partners based in the United States and Europe, are severely impacted by the COVID-19 pandemic or government-imposed containment measures.  If we are unable to procure products from our major brand partners when required, our operations, financial condition and results of operations may be adversely impacted in the foreseeable future and such impacts may be material.  If we choose to increase the levels of inventory we hold, when possible, to minimize the risk of experiencing product shortages, we may be exposed to increased inventory risk due to accumulated excess inventory, which may have an adverse impact on our results of operations and financial condition.  See “—If we fail to effectively manage our inventory, our reputation, results of operations and financial condition may be materially and adversely affected.” Additionally, our ability to enter into agreements with new brand partners has been impacted by pandemic related restrictions on business travels, causing a decrease in the number of brand partners, which could significantly reduce our revenues.  If we fail to find alternative brand partners or otherwise grow our brand partner base, our results of operations may be materially and adversely affected.  We also modified our business practices in response to the COVID-19 pandemic.  We have started to provide technology solutions including e-commerce business solutions, digital marketing services and e-commerce third-party operation management services to our brand partners and terminated business relationships with some of our then existing brand partners under which we were subject to less favorable terms.  However, the impact of our new initiatives in response to COVID-19 is uncertain and we may be subject to additional risks in this regard.

We are currently unable to predict with certainty the duration and severity of the COVID-19 pandemic, and its ultimate impact on our business, financial condition, liquidity and results of operations, as these depend on rapidly evolving and uncertain developments and factors that are beyond our control.  Such factors include the speed of the contagion, the ultimate effect of the various containment measures imposed, the development of effective medical treatment solutions, financial and market reactions to the foregoing and general consumer sentiment. COVID-19-related disruptions have had an adverse impact on our results of operations in 2020. Specifically, we experienced a 0.6% decrease in product sales revenues from US$302.1 million in 2019 to US$300.2 million in 2020 and an 82.6% decrease in service revenues from US$27.4 million in 2019 to US$4.8 million in 2020. The COVID-19 outbreak may continue to have an adverse impact on our results of operations in the foreseeable future.

Each of the following risk factors should be read in the context of the foregoing uncertain trends, events and developments as they affect us, whether or not we make specific reference to the COVID-19 pandemic, given the potentially materially adverse effect of the pandemic on our business.  

If the e-commerce market or the health and wellness industry in China does not grow, or grows more slowly than we expect, the demand for our products and solutions could be materially and adversely affected.  

Continued demand for our products and solutions depends on whether the e-commerce market and the health and wellness industry in China will continue to grow.  The long-term viability and prospects of the online retail business in China remain relatively untested.  Our future results of operations will depend on numerous factors affecting the development of the e-commerce industry in China, which may be beyond our control, including:

 

the penetration rates of Internet services, personal computers and mobile connectivity;

 

the trust and confidence level of e-commerce consumers in China, as well as changes in consumers’ demographics and preferences;

 

whether alternative retail channels or business models that better address the needs and preferences of consumers emerge in China; and

 

the development of fulfillment, payment and other ancillary services associated with online purchasing.  

Additionally, our future results of operations will depend on numerous factors affecting the development of the health and wellness industry in China, including:

 

changes in the spending power of Chinese consumers;

 

the prevalence of health issues and chronic diseases among Chinese consumers;

 

the impact of the COVID-19 pandemic; and

 

the ongoing health and wellness market deficiencies and consumer mistrust of incumbent health and wellness product and service providers.  

7


 

If consumer utilization of e-commerce channels in China does not grow, or grows more slowly than we expect, demand for our products and services would be adversely affected, our revenues would be negatively impacted and our ability to pursue our growth strategies would be compromised.  

We may not be able to effectively manage the expansion of our business or optimally implement our business strategies.  

To realize our mission of providing comprehensive health and wellness solutions to our consumers, we have implemented expansion strategy and have experienced rapid growth in recent years.  However, there is no assurance that we will be able to maintain our historical growth rates in future periods.  Our revenue growth may slow or even decline for many reasons, including competition, and industry and economy conditions. We have continued to widen our relationships with existing brand partners to include more offerings, procuring new brand partners with different products, improving our logistic and fulfillment capabilities to support our expanded offering and growing through acquisitions of complementary businesses. We have also continued to strengthen our multi-channel value proposition by leveraging new ways to market and distribute products, including social media platforms, short video platforms and offline promotions. Additionally, we are exploring new business opportunities in providing technology solutions including e-commerce business solutions, digital marketing services and e-commerce third-party operation management services.  In particular, we plan to put more emphasis on offering brand partners with technology-centric services to add value and therefore reinforce our relationship.  To execute our business initiatives and promote service-oriented business model, we need to upgrade our technology infrastructure and recruit and train more technical staff, which will lead to increased costs and expenses. This expansion has contributed to a heightened level of complexity of our business, in terms of both the type and scale of our operations, which may place a significant strain on our operational, financial and technical resources and increase demands on our management and employees. We cannot assure you that we will be able to continue to manage our growth, improve our profitability or execute our strategies effectively, and any failure to do so may materially and adversely affect our business and prospects.

We are also continuously executing a number of growth initiatives, strategies and operating plans designed to enhance our business, including launching various new services, such as offering strategy, marketing, products, digitalization, consumer insights, supply chain and SaaS solutions to assist our business partners deliver customized products and services to consumers.  The anticipated benefits from these efforts are based on assumptions that may prove to be inaccurate.  Moreover, we may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits that we expect to achieve, such as expanding our product and service offerings, or it may be more costly to do so than we anticipate.  In addition, profitability, if any, in the new areas that we expand into may be lower than in our existing business, and we may not be successful enough in these newer areas to recoup our investments in them.  If any of these circumstances were to occur, our business, financial condition and results of operations may be materially and adversely affected.

If we fail to anticipate evolving consumer preferences for health and wellness products and/or fail to cater effectively to consumer demands, our ability to attract and retain customers may be materially and adversely affected.  

Our ability to attract and retain our consumers depends largely on our ability to offer health and wellness products that they find attractive.  The success of our business relies on our ability to anticipate changes in consumer preferences, demographic shifts in our consumer base and broader evolving trends in the industry, and to respond to such changes in a timely and cost-effective manner.  If we rely on misleading industry intelligence or consistently misinterpret the consumer data we collect, we may fail to cater to the preferences of our consumers or fail to continue to retain our consumers.  Consequently, our business, financial condition and results of operations may be materially and adversely affected.  

Our success depends on our ability to maintain relationships with existing brand partners and to develop relationships with new brand partners.  

Our success is closely tied to our relationships with our existing brand partners, who supply the products that we sell through various platforms.  We also identify and target potential new brand partners whose products complement our established inventory or that represent new opportunities for us to meet consumer demand.  Many of our brand partners deal with us on a non-exclusive basis, and a number of our brand partner relationships are relatively recent, having been established over the last three to four years.  Because of these factors, we face, and expect to continue to face, constant and intense competition for the business of our brand partners from other Chinese distributors in the health and wellness market.  Our relationships with our brand partners may weaken and we may lose our market share if our competitors offer their services to them.  The e-commerce market is characterized by rapid technological developments and frequent changes in regulation, specifications and other requirements for how our brand partners should sell their merchandise through particular channels.  This could negatively affect our ability to retain existing brand partners and attract new brand partners, our future financial and operating results, and our potential for growth.  If we are unable to maintain these relationships or enter into advantageous new arrangements through our targeted approaches to specific potential brand partners, our ability to attract new brand partners may decrease.  

8


 

In addition, a small number of brand partners contribute a significant portion of our total revenues.  For example, in 2020, the single largest brand partner in terms of the revenue contribution of its products accounted for 14% of our total net revenues.  In the same period, the ten largest brand partners in terms of the revenue contribution of their products, in the aggregate, accounted for 80% of our total net revenues. Moreover, three of the ten largest brand partners in terms of revenue contribution in 2020 are under the common control of a global food and beverage company.  While our relationships with these three brand partners were developed independently and they are each managed by a dedicated operations team, we cannot assure you that failure to maintain a satisfactory relationship with one of these brand partners in the future will not adversely affect our reputation with the other brand partners under common control.  Furthermore, the loss of one or more of our largest brand partners may result in a material and adverse effect on our financial condition and results of operation.  

In such a rapidly changing market, the needs of our brand partners are also constantly evolving to keep pace with consumer demands.  If we fail to respond to the evolving needs of our brand partners, our continuing relationships with existing brand partners, our reputation and the demand for our services may be adversely affected.  This may have a material and adverse impact on our business, financial position and results of operations.  

We may be unable to compete effectively against stronger and better-resourced e-commerce companies, offline competitors or new entrants to the health and wellness market, and we may lose market share as a result.  

The health and wellness market is intensely competitive in China.  We may not be able to command the same price for our services and solutions or we may face a decrease in our market share, which may affect our future financial and operating results, and our ability to grow our business.  In addition, competition may intensify if our competitors increase their resources and product range and if established companies in other market segments or geographic markets expand into our market segments or geographic markets.  If we cannot compete successfully, our business, financial condition and operating results could be materially and adversely affected.  

We face competition in a number of areas.  We compete to attract, engage and retain consumers based on the variety, value and personalization of the products and services we offer, and overall user experience and convenience.  We compete to attract and retain brand partners based on our scale of operation and the capability of engaging consumers, the sales and growth solutions offered to brand partners as a result of our consumer and industry analysis and the efficiency of our logistics infrastructure in facilitating the delivery of our brand partners’ products to consumers.  We also compete for experienced and effective talent and personnel, who serve critical functions in the development of our products and our ecosystem.  

Our ability to compete effectively depends on a number of factors, some of which may be beyond our control, including brand partners choosing to develop in-house e-commerce platforms or infrastructure, offline competitors with a broader product range, e-commerce channels deciding to directly compete with us and consolidations within the Chinese health and wellness industry that may result in stronger competitors.  

If we are not able to compete effectively, we may lose market share and face a decrease in consumer engagement and sales, which could materially and adversely affect our business, financial condition and results of operations as well as our reputation.  

Some of our current or future competitors may have, or may develop, greater brand recognition, better supplier relationships, larger customer bases or greater financial, technical or marketing resources than us.  Any smaller companies or potential new entrants to the Chinese health and wellness market may be acquired by, receive investment from or enter into strategic relationships with well-established and well-financed companies or investors which may enhance their competitive positions.  Some of our competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies and devote substantially more resources to their technology and infrastructure systems than us.  We cannot be certain that we will be able to compete successfully against current or future competitors, and competitive pressures may have a material adverse effect on our business, financial condition and results of operations.  

We may need additional capital but may not be able to obtain it on acceptable terms, or at all.  

In order for us to continue to grow, we need significant amount of working capital to fund our inventory.  In addition, we may require additional capital in case of operating losses as well as any investments or acquisitions we may decide to pursue.  For example, net cash used in operating activities reached US$40.8 million in 2018 and US$14.2 million in 2019.  While we recorded net cash provided by operating activities of US$21.6 million in 2020,  we may continue to incur operating cash outflows in the future due to the expansion of our business and the corresponding increase in inventory.  See “—If we fail to effectively manage our inventory, our reputation, results of operations and financial condition may be materially and adversely affected.”  

9


 

If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities, including convertible notes, or obtain new or expanded credit facilities.  

Our ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition, results of operations, cash flows, share price performance, liquidity of international capital and lending markets and the PRC governmental regulations over foreign investment and the health and wellness industry.  Any debt financing, if available, may involve restrictive covenants and could restrict our operational flexibility and reduce our profitability.  In addition, incurring indebtedness would subject us to increased debt service obligations.  There can be no assurance that financing would be available in a timely manner or in amounts or on terms acceptable to us, or at all, particularly in light of the ongoing COVID-19 pandemic.  Any such failure could severely restrict our liquidity as well as have a material adverse effect on our business, financial condition and results of operations.  Moreover, any issuance of equity or equity-linked securities could result in significant dilution to the interests of our existing shareholders.  

If we are unable to obtain increased financing, any resultant cash flow shortage may materially affect our ability to procure products from our brand partners and meet our financial obligations, which may damage our reputation and brand partner relationships.  Such damage to our reputation or relationships would have a material and adverse effect on our business, financial condition and results of operations.  

We depend on key management as well as experienced and capable personnel generally, and any failure to attract, motivate or retain our staff could hinder our ability to maintain and grow our business.  

Our future success depends substantially upon the continued service of our key executives and other key employees, particularly our co-founders, Ms. Wang and Mr. Zeng.  If we lose the services of any member of management or key personnel, we may not be able to locate suitable or qualified replacements, and we may incur additional expenses to recruit and train new staff, which could severely disrupt our business and growth.  

The size and scope of our ecosystem also require us to hire and retain a wide range of experienced and capable personnel who can adapt to a dynamic, competitive and challenging business environment.  We will need to continue to attract and retain experienced and capable personnel at all levels as we expand our business and operations.  Competition for such talent is intense, and the availability of suitable and qualified candidates in the PRC is limited.  This high level of competition could compel us to offer higher compensation and other benefits to attract and retain the right candidate.  Even if we were to offer higher compensation and other benefits, there is no assurance that these individuals will choose to join us or continue to work for us.  Any failure to attract or retain key management and personnel could severely disrupt our business and growth.  

We are subject to evolving regulatory requirements, non-compliance with which, or changes in which, may materially and adversely affect our business and prospects.  

As a provider of an e-commerce platform for health and wellness products, we are subject to legal and regulatory requirements applicable to multiple industries in the PRC.  These industries primarily include the Internet and health and wellness industries.  We have been subject to penalties by PRC regulatory authorities in the past due to our failure to comply with their requirements, including those in relation to pricing.  

The regulations to which we are subject in this area are new and evolving.  As a result, the interpretation of these laws and their enforcement is often uncertain.  Predicting the application of these laws can be difficult, and unexpected outcomes in the interpretation and enforcement of the applicable regulations may have an adverse impact on our business and operations.  Additionally, any future changes in regulation may render our business non-compliant or require changes to our business practices or licensing arrangements to ensure compliance.  These changes may involve significant costs, which in turn may adversely affect our business and prospects.  

Various regulatory authorities of the PRC government regulate value-added telecommunications services, food business, pharmaceutical operations and services, online drug and medical device operations and online trading and e-commerce.  Violations of regulations may lead to the imposition of significant penalties which may affect our business, operations, reputation and financial prospects.  In respect of the healthcare industry, in particular, any violation of the relevant laws, rules and regulations may result in harsh penalties and, under certain circumstances, lead to criminal prosecution.  

As we introduce new products and services to our customers, we may be required to comply with additional laws and regulations that are yet to be determined.  To comply with such additional laws and regulations, we may be required to obtain necessary certificates, licenses or permits, as well as expend additional resources to monitor regulatory and policy developments.  Our

10


 

failure to adequately comply with such additional laws and regulations may delay, or possibly prevent, some of our products or services from being offered to users, which may have a material adverse effect on our business, financial condition and results of operations.  

Additionally, the PRC has enacted laws and regulations governing Internet access and the distribution of products, services, news, information, audio-video programs and other content through the Internet.  The PRC government has prohibited the distribution of information through the Internet that it deems to be in violation of PRC laws and regulations.  If any of the information disseminated through our marketplaces and websites were deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations.  

We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if property or people are harmed by the products sold on our platform.  

Due to several high-profile consumer complaint incidents that have occurred in China in recent years and attendant media and advocacy group attention, there has been increased governmental focus in the PRC on consumer protection.  Operators of e-commerce marketplaces and platforms are subject to certain provisions of consumer protection laws even where such operator is not the seller of the product or service purchased by the consumer.  In addition, if we do not take appropriate remedial action against sellers or service providers for actions they engage in that we know, or should have known, would infringe upon the rights and interests of consumers, we may be held jointly and severally liable with the seller or service provider for such infringement.  

Moreover, applicable PRC consumer protection laws hold that trading platforms will be held liable for failing to meet any undertakings such platforms make to consumers with regard to products listed on their websites.  Furthermore, we are required to report to the State Administration for Market Regulation, or the SAMR, or its local branches any violation of applicable laws, regulations or SAMR rules by sellers or service providers, such as sales of goods without proper license or authorization, and to take appropriate remedial measures, including ceasing to provide services to such sellers or service providers.  If claims are brought against us under any of these laws, we could be subject to damages and reputational damage as well as action by regulators, which could have a material adverse effect on our business, financial condition and results of operations.  

We do not maintain product liability insurance for products and services transacted on our platform, and any other insurance policies may not cover us, adequately or at all, for any liability we may incur. Even unsuccessful claims could result in the expenditure of funds and management time and resources and could materially reduce our net income and profitability.  

If counterfeit products are distributed by us, our reputation and financial results could be materially and adversely affected.  

We source health and wellness products from reputable brand partners.  However, their measures of safeguarding against counterfeit products may not be adequate.  In addition, we engage third-party warehousing and logistics service providers and third-party couriers to conduct product fulfillment, and we may not be able to detect and prevent all potential instances of misconduct or negligence committed by them or by our employees involved in the fulfillment process.  If counterfeit products are distributed by us, we may suffer reputational damage.  If we are deemed to have participated or assisted in infringement activities associated with counterfeit products, we may be subject to sanctions under applicable laws and regulations, which may include injunctions to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability, depending on the gravity of such misconduct.  Furthermore, counterfeit products may be defective or inferior in quality as compared to authentic products and may pose safety risks to consumers.  If consumers are injured by counterfeit products distributed by us, we may be subject to lawsuits, severe administrative penalties and criminal liability.  See “—We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if property or people are harmed by the products sold on our platform.”

If we fail to effectively manage our inventory, our reputation, results of operations and financial condition may be materially and adversely affected.  

In order to operate our business effectively and meet our consumers’ demands and expectations, we must maintain a certain level of inventory to ensure prompt deliveries when required.  We determine the levels of inventory we hold on the basis of our experience, assessment of consumer demand in a certain period of time and the lead time required to have the inventory in our warehouse.  

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We forecast consumer demand by relying on a number of factors, including:

 

the purchase history of consumers;

 

performance metrics from our customers, especially third-party e-commerce channels;

 

market intelligence, including intelligence on product innovation and introduction;

 

changes in consumer spending patterns; and

 

event-driven factors, such as cyclical demand for preventative products.  

We use such metrics to forecast consumer demand more accurately and thereby optimize our inventory management in terms of product portfolio and volume.  

However, forecasts are inherently uncertain, and demand for products can change significantly between the inventory order date and the projected sale date.  In addition, the acquisition of certain types of inventory may require significant lead time and prepayment and they may not be returnable. Moreover, while we are in the process of negotiating with new suppliers to have them repurchase unsold items upon termination of agreements, we normally do not have the right to return the unsold items to our suppliers, save for in a limited range of circumstances, such as in the case of quality defects, as set out in our supply agreements.

If we overestimate demand for our products, we may be exposed to increased inventory risks due to accumulated excess inventory.  Prolonged periods of excess inventory may lead to pressures on our warehousing system and fulfillment capabilities, increases in inventory holding costs and the risk of inventory obsolescence.  In addition, if we fail to manage our inventory effectively, we may experience a decline in inventory values and significant inventory write-downs or write-offs due to product expiration.  Moreover, we may be required to lower sale prices in order to reduce inventory levels, which may lead to lower gross margins.  Conversely, if we underestimate demand for our products, or if our brand partners fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in lost revenues and diminished consumer satisfaction, which could harm our business and reputation.  

Any of the above may materially and adversely affect our results of operations and financial condition.  As we plan to continue to expand our product offerings, we may continue to face challenges in effectively managing our inventory.  

Any interruption in our product inventory or fulfillment operations may have an adverse impact on our business.  

Our ability to process and fulfill orders accurately depends on the efficient operation of our fulfillment and logistics network and our ability to accurately take orders through the various platforms on which we distribute products and our ability to fulfill such orders.  Our fulfillment and logistics infrastructure, including our warehousing facilities and transportation services, may be vulnerable to damage or interruption caused by fire, flood, power outage, telecommunications failure, break-ins, earthquake, human error, transportation disruptions and other events.  If any of our fulfillment and logistics infrastructures were to be rendered incapable of operations, then we may be unable to fulfill any orders.  We do not carry business interruption insurance, and the occurrence of any of the foregoing risks could have a material adverse effect on our business, prospects, financial condition and results of operations.  

As a result of the COVID-19 pandemic, our third-party couriers have been unable to consistently fulfill online orders to our customers in a timely manner.  We also experienced delays in getting products from our suppliers and incurred higher shipping costs in inbound and outbound shipments, all of which have had an adverse impact on our business. Although domestic logistics and transport services providers have recovered and resumed their ordinary course of business, there has been and may continue to be a significant increase in international freight costs in light of the COVID-19 pandemic, which has had and may continue to have an impact on our fulfillment expenses.  See “—Our company’s business, financial position, liquidity and results of operations have been, and are likely to continue to be, materially and adversely affected by the COVID-19 pandemic.”  

Our results of operations are subject to fluctuations due to the seasonality of our business and other events.  

We have experienced and expect to continue to experience seasonal fluctuations in our financial performance.  These seasonal patterns have caused and will continue to cause fluctuations in our operating results.  Historically, we have recorded stronger performance in the fourth quarter, primarily because consumers increase their purchases during e-commerce festivals in China, such as the periods around Singles Day (which is an online sales promotion event that falls on November 11 of each year) and Double Twelves (which is another online sales promotion event that falls on December 12 of each year).  In addition, we generally experience

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a lower level of sales activity in the first quarter due to the Lunar New Year public holiday, during which the volumes of online purchases and logistical operations drop significantly due to vacations and business closures.  

In anticipation of increased sales activity prior to shopping festivals, we increase our inventory levels and incur additional expenses such as procuring additional working capital and increasing the size of our workforce on a temporary basis.  If our seasonal sales patterns become more pronounced in the future, this may strain our personnel, customer service operations, fulfillment operations and shipment activities and may cause a shortfall in revenues compared to expenses in a given period.  As a result, our financial results may be materially and adversely affected.  In addition to increasing our own inventory levels, we also rely on our brand partners to increase their inventory levels to match projected seasonal demand.  If we and our brand partners do not increase inventory levels for popular products in sufficient amounts or if we are unable to restock popular products from our brand partners in a timely manner, we may fail to fulfill customer demand.  This may harm our reputation and damage the trust that consumers have in our business, which is a key part of our business model.  As a result, we may experience a material and adverse effect on our financial conditions and results of operations.  

Our dependence on a small number of e-commerce channels could materially and adversely affect our business or results of operations.  

We depend on a small number of e-commerce channels to sell products to consumers.  As a result, we derive a substantial portion of our revenue from activity on these channels.  For example, in 2018, 2019 and 2020, sales on Alibaba’s Tmall platform contributed approximately 34%, 21% and 20% of our total net revenues, respectively.

If the sales on e-commerce channels in China do not grow or grow more slowly than we expect, demand for our products would be adversely affected, our revenues would be negatively impacted, and our ability to pursue our growth strategy would be compromised.  Moreover, if the e-commerce channels that we rely on are not successful in attracting consumers or their reputations are adversely affected for any reason, we may experience reduced demand for our products.  

Our business may be harmed if the e-commerce channels we rely upon decide to make significant changes to their respective business models, policies, systems or plans.  Currently, large e-commerce channels influence to a certain extent terms that affect our profitability and financial condition, including the return policies we offer and the sharing of marketing expenses and payables or receivables between the e-commerce channels and us.  We may not be able to negotiate such policies or agreements on terms most favorable to us in the future.  

In addition, we cannot guarantee that we will be able to access such e-commerce channels in the long term.  If we fail to maintain our relationships with such channels, they may decide at any time and for any reason to significantly limit our ability to integrate our solutions with their platforms.  Given that online retail in China is dominated by a few large e-commerce channels, we may not be able to adapt or build new relationships on terms favorable to us with any other emerging channels.  

Any of the above may adversely affect our revenue, financial condition and results of operations.  

We use third-party couriers to deliver orders.  If these couriers fail to provide reliable delivery services on commercially acceptable terms, our business and reputation may be materially and adversely affected.  

We maintain cooperation arrangements with third-party couriers to deliver our products to our customers.  We rely on a select number of third-party delivery services, for example Cainiao, the primary deliverer of cross-border sales through the Tmall platform.  In 2018, 2019 and 2020, Cainiao was paid approximately 39%, 32% and 29%, respectively, of our third-party delivery fees, and the goods delivered by Cainiao accounted for approximately 19%, 11% and 13%, respectively, of our revenue in the same periods.  As such, we may face adverse consequences if there are interruptions to, or failures in, these third parties’ delivery services.  Such interruptions or failures could prevent the timely or proper delivery of our products to consumers, eroding consumer confidence and reducing repeat orders.  These interruptions may be due to events that are beyond our control or the control of these delivery companies, such as inclement weather, natural disasters, transportation disruptions, including as a result of public health emergencies, or labor unrest.  While we may claim compensation for disruptions under our standard agreements with third-party delivery services, such claims are subject to a complicated review process and we cannot provide assurance that any compensation payments would make up for the lost consumer goodwill.  Also, any significant increase in delivery fees charged by these third parties may result in a significant increase in our online distribution expenses.  If we fail to find other reliable third-party couriers on commercially acceptable terms, our profitability may be harmed.  

In addition, if our third-party couriers fail to comply with applicable PRC rules and regulations, our delivery services may be materially and adversely affected.  We may not be able to find alternative delivery companies to provide delivery services in a timely

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and reliable manner, or at all.  Delivery of our products could also be affected or interrupted by the merger, acquisition, insolvency or government shut-down of the delivery companies we engage to make deliveries.  If our products are not delivered in proper condition or on a timely basis, our reputation could suffer and we may experience a material adverse effect on our financial condition and results of operations.  

We have adopted favorable return policies with certain customers and a higher-than-expected rate of returns could materially and adversely affect our results of operations and financial condition.  

In certain instances, we sell the products of our brand partners to third-party e-commerce platforms, which in turn sell those products to consumers.  We have adopted contractual product return policies with certain of these third-party e-commerce platforms.  These return policies are generally favorable to the third-party e-commerce platforms, and provide in certain cases that products may be returned in unlimited quantities and without cause, albeit subject to a limited return period.  If we experience a higher-than-expected rate of returns from these third-party e-commerce platforms, this may result in wastage, overstock and monetary loss, which may materially and adversely affect our financial condition and results of operations.  

In addition, we may from time to time be required to amend our existing return policies or implement new return policies pursuant to changes in applicable laws and regulations, which may lead to a larger group of customers being able to take advantage of our return policies, potentially resulting in increased costs.  If our return policy is misused, we may experience significantly increased costs, which may materially and adversely affect our financial condition and results of operations.  If we seek to set limits on such return policies in order to reduce costs, the reaction from our customers may be negative, which may materially and adversely affect our reputation and results of operations.

Any damage to our reputation, including negative publicity against us or our brand partners, may materially and adversely affect our business operations and prospects.  

We have cultivated a reputation of trustworthiness and excellence among our brand partners and our consumers.  We believe that our reputation is a key reason for consumers to make purchases, and for brand partners who choose us to distribute their products and provide them with market insights and strategies.  As a result, we depend on our reputation for the continued success of our business operations and for generating revenue.  However, we cannot be certain that we will be able to maintain our positive reputation in the future.  Our reputation may be materially and adversely affected by a number of factors, many of which are beyond our control, including:

 

negative developments or events relating to our proprietary products or the products of our brand partners which are sold on our platform, or which we provide to third-party e-commerce platforms, including with respect to their efficacy or side effects;

 

lawsuits and regulatory investigations against us or otherwise relating to products associated with us or our industry in general;

 

improper or illegal conduct by our employees or brand partners that is not authorized by us; and

 

adverse publicity associated with us, our products or our industry, whether founded or unfounded.  

Any damage to our reputation as a result of these or other factors may cause our products to be perceived unfavorably by consumers, existing or potential brand partners or the Chinese health and wellness market in general, which may materially and adversely affect our reputation, results of operations and financial position.  

If our brand partners develop sophisticated knowledge of the Chinese health and wellness market, or increase their in-house e-commerce capabilities, demand for our solutions and services may be materially and adversely affected.  

Our brand partners value our solutions and services because of our ability to assist with marketing their products to the Chinese health and wellness market.  This ability is founded on our extensive experience in, and local knowledge of, the Chinese health and wellness market, and our technical proficiency in connecting our brand partners to end-consumers in China.  If our brand partners significantly develop their local expertise and market knowledge, or choose to sell their products directly through third-party e-commerce platforms, our solutions and services may become less important or attractive to our brand partners, and demand for our solutions and services may decline.  This may cause a decrease in customer retention and revenue, materially and adversely affecting our business, financial condition and results of operations.  

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We may be liable for any false or misleading statements or representations made by the healthcare experts on our platforms.  

We may be held liable for any false or misleading statements or representations made by the healthcare experts on our platforms.  When these healthcare experts publish health management plans, respond to consumer inquiries and make health and wellness recommendations, they may make false or misleading statements or representations in relation to the suitability, effectiveness, use or potential side effects of such plans or products.  These healthcare experts may also be negligent in their observations or fail to specify that their recommendation is general in nature and may not apply to the circumstances of particular consumers.  We may not always have appropriate disclaimers in place on our platforms.  

We may be subject to legal proceedings and claims from time to time where these statements or representations are found to result in harm to our customers.  These claims and legal proceedings may be expensive and time consuming to investigate and defend and may divert resources and management attention from the operation of our business.  Although these claims may be unsuccessful, they may harm our reputation and reduce our ability to attract customers and users.  

Changes in international trade policies and international barriers to trade, or the escalation of trade tensions, may have an adverse effect on our business and expansion plans.  

Recent international trade disputes and the uncertainties created by such disputes may disrupt the transnational flow of goods and significantly undermine the stability of the global and Chinese economy, thereby harming our business.  

Changes to trade policies, treaties and tariffs in the jurisdictions in which we operate, or are contemplating operating, or the perception that these changes could occur, could adversely affect the financial and economic conditions in such jurisdictions, as well as our international and cross-border operations, our financial condition and results of operations.  The U.S. administration has advocated greater restrictions on trade generally, and has imposed and significantly increased tariffs on certain goods imported into the United States, particularly from China.  Such trade developments could materially impact our business as certain of our brand partners are based in the United States, and thus may face increased difficulty in sourcing base ingredients for their products, or cost-effectively developing new products with restricted or more expensive base ingredients.  As a result, we may face an increase in our operating costs as our suppliers raise their prices to absorb their increased costs, or an inability to meet the demands of the consumers who purchase from us, and a resulting decrease in our profits.  

Increases in tariffs and the prolongation of uncertainty surrounding international trade between the United States and China could have an adverse effect on our ability to source products from certain of our United States-based partners, either at an acceptable cost or at all, to sell in China.  If the products of our brand partners become subject to increased tariffs or other trade barriers, the resultant increase in cost or difficulty of importation may force us to find alternative providers of comparable products.  We cannot be certain that these alternative providers would be acceptable to Chinese consumers, given that the level of trust in the brands that we supply is a primary driver of purchasing decisions made by Chinese consumers.  As a result, we may experience a decrease in demand, and a material and adverse effect on our financial condition and results of operations.  

Therefore, any escalation in existing trade tensions or the advent of a trade war, or news and rumors of the escalation of a potential trade war, could affect the supply chains of participants within our ecosystem, increase their and our costs and have a material adverse effect on our business, results of operations and, ultimately, the trading price of our ADSs.  

Exchange rate fluctuations may negatively affect our results of operations.  

We source our products from brand partners globally.  We purchase these products primarily using U.S. dollars, and these products are ultimately sold to the Chinese domestic market, whose participants primarily make their purchases in Renminbi.  There is ordinarily a temporal gap between the point at which we purchase products and the point at which we receive payment for the products sold.  As a result, we are subject to the fluctuations of the currency exchange markets, particularly in the value of RMB to the U.S. dollar.  If the value of Renminbi declines during the temporal gap relative to the U.S. dollar, we may face a lower profit margin, or in some cases a loss, on the products sold.  For example, in 2018 we had an exchange rate loss of USS$306.7 thousand, in 2019 we had an exchange rate loss of US$393.0 thousand and in 2020 we had an exchange rate gain of US$979.1 thousand.

In addition, substantially all of our operating expenses are denominated in Renminbi, while our financial assets are denominated in U.S. dollars and a significant portion of our debt is denominated in U.S. dollars.  We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs.  Any significant revaluation of the Renminbi may materially reduce any dividends payable on our ADSs in U.S. dollars.  To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive.  Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for

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dividends on our Class A 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 we would receive.  As such, currency fluctuations may materially and adversely affect our financial condition and results of operations.  

Any failure to comply with PRC regulations regarding advertising may subject us to civil claims, fines and other legal or administrative sanctions.  

PRC advertising laws and regulations require the content of advertisements to be fair, accurate, not misleading and in full compliance with applicable laws.  Pursuant to the Interim Administrative Measures for the Examination of Advertisements for Drugs, Medical Devices, Health Food and Formula Food for Special Medical Purposes, promulgated by the SAMR on December 24, 2019, the content of healthcare food advertisements must follow the registration certificate or filing certificate approved by the administration for market regulation or the registered or filed specifications.  We have made efforts to ensure our advertisements and related advertising practices are in compliance with applicable regulations.  However, we cannot assure you that we have fully complied with the requirements of PRC regulatory authorities or will be able to fully comply with the requirements of PRC regulatory authorities regarding advertising.  If we are found in violation of applicable advertising laws and regulations, we may face serious penalties, including fines, revocation of our business licenses and discontinuance of our advertising activities.  As a result, we may not be able to publish new advertisements in a timely manner, and our turnover and reputation could be materially affected.  Moreover, governmental actions and civil claims may be filed against us for misleading or inaccurate advertising.  We may have to spend significant resources in defending against such actions, and these actions may damage our reputation, result in reduced turnover and negatively affect our results of operations.  

We may not be able to conduct our marketing activities effectively, properly or at reasonable costs.  

We conduct a variety of marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products.  However, our brand promotion and marketing activities may not be well received and may not result in the levels of sales that we anticipate.  Additionally, marketing approaches and tools in the Chinese health and wellness market are continually evolving, which may further require us to experiment with new marketing methods to keep pace with industry developments.  Failure to refine our existing marketing approaches or to introduce new marketing approaches in a cost-effective manner may materially and adversely affect our financial condition and results of operations.  

We are subject to limitations in promoting our products, which may have an impact on our business operations.  

We are subject to certain limitations in promoting products.  The healthcare experts we work with and other relevant parties in the provision of our health and wellness content may have to comply with rules and regulations that restrict the promotion or dissemination of certain healthcare-related information, such as information on the professional healthcare services and practice provided by licensed medical practitioners.  Such restrictions may affect our ability to further enhance our brand recognition or secure new business opportunities in the future.  

There can be no assurance that our existing practices of monitoring our content dissemination process and publication would continue to be effective and would comply fully with laws and regulations.  Should there be any change in the relevant rules and regulations, or change of interpretation thereof, we, the healthcare experts we work with and other relevant third parties may be regarded as breaching the relevant rules and regulations and may be subject to regulatory penalties or disciplinary actions, which may materially and adversely affect our business and reputation.  

Our own information technology systems and infrastructure could fail or be subject to disruption.  

Our platform depends on the efficient and uninterrupted operation of our computer and communications systems.  Substantially all of our computer hardware and our cloud computing services are currently located in China.  In addition, we retain substantial quantities of data related to transactions, consumer information and other data that enables the operation and management of online stores.  Although we have prepared for contingencies through redundancy measures and disaster recovery plans, such preparation may not be sufficient and we do not carry business interruption insurance.  

Despite any precautions we take, the occurrence of a natural disaster, such as an earthquake, flood or wildfire, or other unanticipated problems at our facilities in China, including power outages, telecommunications delays or failures, break-ins to our systems or computer viruses, could result in delays or interruptions to our website or other portions of our platform, loss of data and significant business interruption.  Any of these events could damage our reputation, significantly disrupt our operations and subject us to liability, which could adversely affect our business, financial condition and results of operations.  

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Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information could adversely affect our business, reputation, financial condition and results of operations.  

Our business generates and processes a large amount of data, and the improper use or disclosure of such data could harm our reputation as well as have a material adverse effect on our business and prospects.  

Our business collects and processes a large quantity of personal, transaction and behavioral data.  We face risks in the handling and securing of these large volumes of data.  In particular, we face a number of challenges relating to data from transactions and other activities on our platform, including:

 

protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior by our employees;

 

addressing concerns related to privacy and sharing, safety, security and other factors; and

 

complying with applicable laws, rules and regulations relating to the collection, use, disclosure or security of personal information, including any requests from regulatory and governmental authorities relating to such data.  

Any systems failure or security breach or lapse that results in the release of user data could harm our reputation and brand and, consequently, our business, in addition to exposing us to potential legal liability.  

As we expand our operations, we may be subject to additional laws in other jurisdictions where our brand partners, consumers and other participants are located.  The laws, rules and regulations of other jurisdictions may impose requirements and penalties that are more stringent than, or conflict with, those under PRC law, compliance with which could require significant resources and costs.  Our privacy policies and practices concerning the collection, use and disclosure of user data are located on our websites.  Any failure, actual or perceived, by us to comply with our posted privacy policies or with any regulatory requirements or privacy protection-related laws, rules and regulations could result in proceedings or actions against us by governmental entities or others.  These proceedings or actions may subject us to significant penalties and negative publicity and require us to change our business practices.  Any such occurrence could increase our costs and materially and adversely affect our reputation, financial condition and results of operations.

If the contents we distribute or the online interaction we offer are deemed by the relevant authorities in the PRC to be in the nature of medical rather than non-medical, we may be subject to additional regulations and incur substantial compliance cost, and our business prospects, results of operations and financial condition may be materially and adversely affected.  

The distribution of medical information and medical advertisements are subject to PRC regulations.  Any website operator that provides medical information services must obtain certain licenses and approvals by relevant authorities before engaging in such businesses in the PRC.  We believe it is improbable for PRC governmental authorities to deem the contents distributed by us to be medical information or medical advertisements, and we have not been subject to any regulatory authority’s inquiries or investigations in connection with the content displayed on our platforms.  However, if certain information displayed on the online stores that we operate or otherwise distributed by us is considered medical information or medical advertisement by relevant authorities, it will subject us to additional regulations.  As a non-medical health and wellness integrated solution provider, we do not possess the required licenses or approvals.  Consequently, if required by relevant authorities, we may need to scale back, rearrange or alter the content or information displayed on our platforms.  

In addition, online medical consultation in the PRC requires medical service providers to be associated with approved physical hospitals and such providers to obtain regulatory approvals and licenses.  We have not yet acquired or established a hospital, and thus are not licensed to provide online medical consultation.  If certain consultation services offered by us are considered online medical consultation by relevant authorities, such services may be suspended until we acquire or establish our own hospital and obtain necessary approvals and licenses.  

Therefore, if the contents we distribute or the online interaction we offer is deemed to be in the nature of medical, our business model may be affected, and substantial compliance costs may be incurred.  As a result, our business prospects, results of operations and financial condition may be adversely affected.  

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Substantial uncertainties exist with respect to the PRC Cyber Security Law and cybersecurity regulations, including any impact they may have on our business operations.  

On November 7, 2016, the PRC enacted its Cyber Security Law, which took effect on June 1, 2017, to establish more stringent requirements applicable to operators of computer networks, especially to operators of networks which involve critical information infrastructure.  Because of its exceptional breadth in scope, ambiguous requirements and broadly defined terminology, we are concerned about the law’s potential impact on our operations in China, particularly in relation to the safeguarding of user information.  The Cyber Security Law contains an overarching framework for regulating Internet security, protection of private and sensitive information, and safeguards for national cyberspace security and provisions for the continued government regulation of the Internet and content available in China.  The Cyber Security Law emphasizes requirements for network products, services, operations and information security, as well as monitoring, early detection, emergency response and reporting.  

Despite the law having taken effect, there remains a high degree of uncertainty in its interpretation and enforcement, especially in terms of protection of personal information.  This uncertainty presents a risk for us due to the large volume of personal data that we collect through our various touchpoints.  As it is not clear what the law will require in a given scenario or how these requirements may be interpreted, we cannot assure you that we would be able to comply with such requirements in a timely manner.  Failure to comply may lead to fines, orders of rectification, confiscation of illegal gains, revocation of the business permit or license and other government actions, which may materially and adversely affect our business, financial condition and results of operations.  

Further, as the legal and regulatory framework for the protection of information in cyberspace in China continues to evolve, we may be required to adjust our business practices or incur additional operating expenses, which may adversely affect our results of operations and financial condition.  

The successful operation of our business depends upon the performance and reliability of the Internet and telecommunications infrastructures in China.  

Our business depends on the reliable performance of the Internet and telecommunications infrastructures in China.  Almost all access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology of China.  In addition, the national networks in China are connected to the Internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the Internet outside China.  We may not have access to equivalent or sufficient alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure.  As this vital infrastructure is state-owned, we are subject to governmental policy which may disrupt supply, and may have fewer avenues of recourse to remedy any losses caused by disruption pursuant to governmental policy.  In addition, the Internet infrastructure in China might not support the demands associated with continued growth in Internet usage.  

The failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our websites.  We have no control over the costs of the services provided by the national telecommunications operators.  If the cost of telecommunications and Internet services rises significantly, or if the telecommunication network in China is disrupted or fails, our gross margins could be adversely affected.  Technical limitations on Internet use could also be developed or implemented.  For example, restrictions could be implemented on personal Internet use in the workplace in general or access to our platform in particular.  This could lead to a reduction of consumer activity or a loss of consumers altogether, which in turn could have an adverse effect on our financial position and results of operations.  In addition, if Internet access fees or other charges to Internet users increase, our user traffic might decrease, which in turn could significantly decrease our revenues and have a material and adverse effect on our financial condition and results of operations.  

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

The global macroeconomic environment is facing challenges, including, amongst other things:

 

uncertainty regarding the impact of the coronavirus epidemic in China and several major economies around the world;

 

ongoing political and economic tensions between the United States and China; and

 

the ongoing uncertainty in the wake of the United Kingdom’s recent exit from the European Union.

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Our business and operations are primarily based in China and substantially all of our revenues are derived directly and indirectly from our operations in China.  Accordingly, our financial results have been, and are expected to continue to be, affected by the economy in general and the health and wellness market in China in particular.  Although the economy in China has grown significantly in the past decades, it is still facing difficulties and has experienced inconsistent growth in recent years.  The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on general economic conditions in China.

Economic conditions in China are sensitive to the global economic conditions described above, the ultimate duration and impact of the COVID-19 pandemic, changes in domestic economic and political circumstances and the expected or perceived overall economic growth rate in China.  Any prolonged slowdown in the global or Chinese economy may have an adverse impact on the levels of disposable income of Chinese consumers, and impede the growth of the rising Chinese middle class.  As a result, demand for our products, which is strongly driven by members of the Chinese middle class, may be negatively affected.  Such a decrease in demand may have a material and adverse impact on our business, results of operations and financial condition.  

We may be the subject of anti-competitive, harassing or other detrimental conduct by third parties, including complaints to regulatory agencies, negative blog postings, and the public dissemination of malicious assessments of our business that could harm our reputation and cause us to lose customers and revenues and materially and adversely affect the price of our ADSs.  

We may be the target of anti-competitive, harassing or other detrimental conduct by third parties.  Such conduct includes complaints, anonymous or otherwise, to regulatory agencies.  We may be subject to government or regulatory investigation as a result of such third-party conduct and may be required to expend 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 in Internet chat rooms or on blogs or websites by anyone, whether or not associated with us, on an anonymous basis.  Consumers value readily available information concerning retailers, manufacturers, and their goods and services and often act on such information without further investigation or authentication and without regard to its accuracy.  The availability of information on social media platforms and devices is virtually immediate, as is its impact.  Social media platforms and devices immediately publish the content their subscribers and participants post, often without filters or checks on the accuracy of the content posted.  Information posted may be inaccurate and adverse to us, and it may harm our financial performance, prospects or business.  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 anonymous allegations or malicious statements about our business, which in turn may cause us to lose market share, customers and revenues and adversely affect the price of our ADSs.  

Our business may be materially and adversely affected by adverse news, scandals or other incidents associated with the general health and wellness industry.  

Incidents that inspire doubt as to the quality or safety of health and wellness products manufactured, distributed or sold by other participants in the general health and wellness industry in China or around the world, particularly those who primarily operate in the e-commerce space, have been, and may continue to be, subject to widespread media attention.  Such incidents may damage the reputation of not only the parties involved, but also the health and wellness industry in general, even if such parties or incidents have no relation to us, our management, our employees, our brand partners, our platform or the third-party e-commerce websites through which we also market products.  There may also be a decrease in consumer demand for healthcare-related products if these negative incidents diminish the trust of consumers in the Chinese health and wellness market.  Such negative publicity, and any resultant decrease in demand for our products and services, may adversely affect our reputation and business operations.  In addition, incidents not related to product quality or safety, or other negative publicity or scandals implicating us or our employees, regardless of merit, may also have an adverse impact on our reputation, financial condition and results of operations.  

We may not be able to protect our intellectual property rights.  

We rely on a combination of trademark, fair trade practice, patent, copyright and trade secret protection laws in the PRC and other jurisdictions in which we hold intellectual property rights, as well as confidentiality procedures and contractual provisions with employees, suppliers and third parties, to protect our intellectual property rights.  

Intellectual property protection may not be sufficient in the PRC or in the other jurisdictions in which we hold intellectual property.  Confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach.  Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in the PRC or elsewhere.  In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming and costly, and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property.  In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources.  We can provide no assurance that we will prevail in such litigation.  In addition, our trade secrets

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may be leaked or otherwise become available to, or be independently discovered by, our competitors.  Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.  

We may be accused of infringing intellectual property rights of third parties and content restrictions of relevant laws.  

Third parties may claim that the technology used in the operation of our platforms infringes upon their intellectual property rights.  Although we have not previously faced material litigation involving direct claims of infringement by us, the possibility of intellectual property claims against us increases as we expand.  Such claims, whether meritorious or not, may result in injunctions against us, payment of damages and expenditure of significant financial and management resources.  If we are found to have infringed the intellectual property rights of third parties in the future, we may need to obtain licenses to continue to operate our platforms and such licenses may not be available on terms acceptable to us or at all.  These risks are amplified by the increase in the number of third parties whose sole or primary business is to assert such claims.  

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

In the course of our ordinary business operations, we may become a party to litigation, legal proceedings, claims, disputes or arbitration proceedings from time to time.  For example, in March 2016, we entered into a cooperation framework agreement to establish a joint venture with Shanghai Heng Shou Tang Health Food Co. Ltd., Shanghai Heng Shou Tang Pharmaceutical Co., Ltd. and Mr. Wei Song, or our joint venture partners.  As part of the agreement, Shanghai Heng Shou Tang Health Food Co. Ltd. and Shanghai Heng Shou Tang Pharmaceutical Co., Ltd. agreed to contribute their ownership in a number of trademarks to the joint venture.  However, only a portion of such trademarks were transferred to us.  In October 2018, we filed a civil claim against the joint venture partners in the Shanghai Xuhui People’s Court to enforce the transfer of the remaining trademarks, claim damages in the amount of RMB7.19 million (US$1.05 million) and request that Shanghai Heng Shou Tang Health Food Co. Ltd. and Shanghai Heng Shou Tang Pharmaceutical Co., Ltd. be enjoined from using the brand name “Heng Shou Tang” in all categories.  In January 2019, the joint venture partners filed a counterclaim to rescind the agreement and allege damages in the amount of RMB3.25 million (US$472.7 thousand).  In July 2019, the Shanghai Xuhui People’s Court ruled that we shall pay damages in the amount of RMB3.25 million (US$472.7 thousand) to the joint venture partners for breaching our contractual obligation to contribute capital to our joint venture, and that the joint venture partners shall continue to perform their contractual obligations by transferring the remaining trademarks to the joint venture and cease to use the brand name “Heng Shou Tang” in all categories.  Both we and our joint venture partners filed appeals with the Shanghai First Intermediate People’s Court.  In November 2019, the Shanghai First Intermediate People’s Court delivered its judgment, which provides, amongst other matters, that we shall not pay damages to our joint venture partners and our joint venture partners shall continue to perform their contractual obligations by transferring the remaining trademarks to our joint venture.

Were any proceedings, claims, disputes or arbitration to arise, these may distract our senior management’s attention and consume our time and other resources.  In addition, even if we ultimately succeed in such proceedings, there may be negative publicity created in the course of or surrounding that proceeding, which may materially and adversely affect our reputation. Any settlement or adverse determination may subject us to significant monetary damages or liabilities or suspend or terminate parts of our operations.  As a result, our business, financial condition, results of operations and prospects may be materially and adversely affected.  

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

We regularly examine a range of corporate opportunities, including acquisitions and divestments, with a view to determining whether such opportunities will enhance our strategic position and financial performance.  We plan to expand our business both geographically and in terms of the products and services that we offer to our customers and brand partners.  In pursuit of this strategy, we may enter into strategic alliances, including joint ventures or equity investments, with various third parties to further our business purpose from time to time.   For example, on July 23, 2020, we entered into an investment agreement with Anze Premium Health and Beauty Pte. Ltd., or Anze, a company involved in the research and development of Chinese herbal medicine-based health and wellness products.  We are committed to paying Anze up to US$30 million, comprising of up to US$15 million for an equity interest in Anze and up to US$15 million for zero coupon notes issued by Anze.  As of December 31, 2020, we made investment of US$5.9 million in Anze, representing 11.7% of its equity interest. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by a third party and increased expenses in establishing new strategic alliances, 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.  

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In addition, when appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business or we may divest certain of our assets.  In addition to possible shareholder approval, any proposed acquisition may also require us to obtain approvals and licenses from relevant governmental authorities and to comply with any applicable PRC laws and regulations, which could result in increased delay and costs, and may derail our business strategy if we fail to do so.  Any international operations that we absorb as part of any acquisitions may give rise to risks and challenges that could adversely affect our business, such as compliance with international legal and regulatory requirements, further management of fluctuations in currency exchange rates or competition from local incumbents with superior local market knowledge and competitive advantages.  Moreover, we cannot be certain that any international expansion efforts can be completed as planned or achieve the intended results, or that any negative results from acquired interests would not affect our business as a whole.  Any separation of a divested asset may be complex and costly, and may include separating relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, customers, regulators, counterparties, suppliers and other business partners.

Furthermore, past and future acquisitions or divestments and the subsequent integration or separation of new assets and businesses require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have a material adverse effect on our business operations.  Acquired assets or businesses may not generate the financial results we expect.  Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business.  Moreover, the costs of identifying and consummating acquisitions may be significant.  Furthermore, our equity investees may generate significant losses, a portion of which will be shared by us in accordance with U.S. GAAP.  Any such negative developments could have a material adverse effect on our business, financial condition and results of operations.  

Increases in labor costs in the PRC may adversely affect our business and results of operations.  

The Chinese economy has been experiencing increases in inflation and labor costs in recent years.  As a result, average wages in China are expected to continue to grow.  In addition, various PRC laws and regulations designed to enhance labor protection require us to pay certain statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees.  The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments could be subject to late payment fees, fines and/or other penalties.  As the interpretation and implementation of these laws and regulations are still evolving, our employment practices may not at all times be deemed to be in compliance with the applicable laws and regulations.  If the relevant authorities determine that we should make supplemental social insurance and housing fund contributions and that we are subject to fines and legal sanctions, our business, financial condition and results of operations could be adversely affected.  Furthermore, the Labor Contract Law has reinforced the protection of employees who, under the Labor Contract Law, have the right, among others, to have written employment contracts, to enter into employment contracts with no fixed term under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts under certain circumstances. The Labor Contract Law sets forth additional restrictions and increases the costs involved with dismissing employees. There can be no assurance that our employment practices will at all times be in full compliance, and we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.  We expect that our labor costs, including wages and employee benefits, will continue to increase.  Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations could be adversely affected.  

In addition, we may face labor unrest if our employees form the view that we do not pay them adequately or provide adequate working conditions.  Such labor unrest may take the form of labor disputes, strike actions or protests against us.  This may have an adverse impact on our reputation and cause a loss of public trust in our company.  If this were to occur, such loss of trust may materially and adversely affect our financial condition and results of operations.  

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

As a result of the initial public offering, we have become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 and the rules and regulations of the Nasdaq Stock Market.  The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting.  Commencing with our fiscal year ending December 31, 2020, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 20-F filing for that year, as required by Section 404 of the Sarbanes-Oxley Act.  In addition, when we cease to be an “emerging growth company” as the term is defined in the Jumpstart Our Business Startups Act, our independent registered

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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.  This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts.  We may experience difficulty in meeting these reporting requirements in a timely manner.  

In the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2017, 2018 and 2019, we and our former independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2019.  In accordance with U.S. GAAP and financial reporting requirements set forth by the SEC, 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, which was first identified in the course of preparing our consolidated financial statements for the year ended December 31, 2018, relates to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize key controls over financial reporting and to prepare consolidated financial statements and related disclosures. To remedy this identified material weakness, we have started to undertake steps to strengthen our internal control over financial reporting, including: (i) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; (ii)  establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with SEC reporting requirements; and (iii) preparing comprehensive accounting policies, manuals and closing procedures to improve the quality and accuracy of our period-end financial closing process.  We also plan to hire more qualified personnel equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function.  However, these measures have not been fully implemented, and we concluded that the material weakness in our internal control over financial reporting had not been fully remediated as of December 31, 2020. We will continue to implement measures to remediate the material weakness.

In the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2020, pursuant to new information technology methodology, we and our independent registered public accounting firm identified one additional material weakness in our internal control over financial reporting as of December 31, 2020 relating to the information technology general control, in the areas of system security, and access and separation of duties.  Following the identification of the material weakness, we plan to take measures to remedy our information technology general control.  For details, see “Item 15. Controls and Procedures—Internal Control Over Financial Reporting.”  However, we cannot assure you that all these measures will be sufficient to remediate our material weakness in time, or at all.  Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting.  Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control weaknesses may have been identified.  

In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.  

An occurrence of a natural disaster, pandemic or other events could have a material adverse effect on our business, financial condition and results of operations.  

Our business could be materially and adversely affected by natural disasters, such as earthquakes, wildfires or floods or other events, such as pandemics, wars, acts of terrorism, states of emergency, environmental accidents, power shortages, labor unrest or communication interruptions.  The occurrence of such an event in China or elsewhere could materially disrupt our business and operations.  Such events could also cause a temporary closure of the facilities we use for our operations, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations.  Our operations could be disrupted if any of our employees were suspected of having any of the epidemic illnesses, since this could require us to quarantine some or all of such employees or disinfect the facilities used for our operations.  In addition, our revenue and profitability could be materially reduced to the extent that a natural disaster or other outbreak harms the global or Chinese economy in general.  Our operations could also be severely disrupted if our users or other participants were affected by such natural disasters, pandemics or other events.  

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For example, the COVID-19 pandemic and the associated business uncertainty and volatility has had an adverse impact on our business, financial condition and results of operations.  See “—Our company’s business, financial position, liquidity and results of operations have been, and are likely to continue to be, materially and adversely affected by the COVID-19 pandemic.”  

We may not have sufficient insurance coverage.  

We have obtained insurance to cover certain potential risks and liabilities, such as property damage.  However, insurance companies in China offer limited business insurance products.  As a result, we may not be able to acquire any insurance for certain types of risks such as business liability or service disruption insurance for our operations in China, and our coverage may not be adequate to compensate for all losses that may occur, particularly with respect to loss of business or operations.  We do not maintain business interruption insurance or product liability insurance, nor do we maintain key-man life insurance.  This could leave us exposed to potential claims and losses.  Any business disruption, litigation, regulatory action, outbreak of epidemic disease or natural disaster could also expose us to substantial costs and diversion of resources.  We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all.  If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.  

Failure to renew our current leases or locate desirable alternatives for our leased properties could materially and adversely affect our business.  

We lease properties for our offices and the warehousing facilities that we operate.  We may not be able to successfully extend or renew such leases upon expiration of the current term on commercially reasonable terms, or at all, and may therefore be forced to relocate our affected operations.  This could disrupt our operations and result in significant relocation expenses, which could adversely affect our business, financial condition and results of operations.  

In addition, we compete with other businesses for premises at certain locations or of desirable sizes.  As a result, even though we could extend or renew our leases, rental payments may significantly increase as a result of the high demand for the leased properties.  Moreover, we may not be able to locate desirable alternative sites for our current leased properties as our business continues to grow and failure in relocating our affected operations could adversely affect our business and operations.  

Certain of our leasehold interests in leased properties have not been registered with the relevant PRC governmental authorities as required by relevant PRC laws and some of our leased properties have title defects.  

We have not registered certain of our lease agreements with the relevant governmental authorities.  Under the relevant PRC laws and regulations, we may be required to register and file with the relevant governmental authority executed leases.  The failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, but the competent housing authorities may order us to register the lease agreements in a prescribed period of time and impose a fine ranging from RMB1,000 (US$153) to RMB10,000 (US$1,533) for each non-registered lease if we fail to complete the registration within the prescribed timeframe.  

In addition, the actual use of some of our leased properties was inconsistent with the planned use on the property ownership certificates.  If relevant governmental authorities require the lessor to correct such inconsistency or request land resumption, we may be unable to continue to lease such properties and as a result we may be forced to relocate the properties and incur additional expenses relating to such relocation.  If we fail to find suitable replacement sites in a timely manner or on terms acceptable to us, our business and results of operations could be materially and adversely affected.  

 

The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.

Under the PRC law, legal documents for corporate transactions, including agreements and contracts are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with relevant PRC market regulation administrative authorities.

In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals.  In any event that the chops and seals are intended to be used, the responsible personnel will submit a formal application, which will be verified and approved by authorized employees in accordance with our internal control procedures and rules.  In addition, in

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order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees.  Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence.  There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries or our affiliated entities or their subsidiaries.  If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could experience disruption to our normal business operations.  We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations, and we may not be able to recover our loss due to such misuse or misappropriation if the third party relies on the apparent authority of such employees and acts in good faith.

Risks Related to Our Corporate Structure

We are a “controlled company” within the meaning of the Nasdaq corporate governance requirements, which may result in public investors having less protection than they would if we were not a controlled company.  

Our co-founders, Ms. Zoe Wang, who serves as our Chairman and Chief Executive Officer, and Mr. Leo Zeng, who serves as our Chief Operating Officer and Acting Chief Financial Officer, collectively hold 90.8% of the total voting rights in our company as of April 15, 2021, and we are, and expect to continue to be, a “controlled company” as defined under the Nasdaq Stock Market Rules.  As a controlled company, we rely on certain exemptions that are available to controlled companies from the Nasdaq corporate governance requirements.  Examples of the requirements from which we are exempt include the requirements that:

 

the majority of our board of directors consists of independent directors;

 

our compensation committee be composed entirely of independent directors; and

 

our corporate governance and nominating committee be composed entirely of independent directors.  

We are not required to and do not voluntarily meet these requirements.  As a result of our use of the “controlled company” exemption, our investors do not have the same protection as they would if we were not a controlled company.  

In addition, Ms. Wang and Mr. Zeng have decisive influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions.  Without the consent of Ms. Wang and Mr. Zeng, we may be prevented from entering into transactions that could be beneficial to us.  The interests of Ms. Wang and Mr. Zeng may differ from the interests of our other shareholders.  

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

Under current PRC laws and regulations, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunications services provider (subject to several exceptions) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record.  

We are a Cayman Islands holding company and our PRC subsidiaries are considered foreign-invested enterprises, directly or indirectly.  Accordingly, none of these PRC subsidiaries is eligible to provide value-added telecommunications services in China.  We do not currently provide value-added telecommunications services because our sales of goods purchased by us does not constitute providing value-added telecommunications services.  Our variable interest entity, Shanghai Yibo, however, holds an ICP license and may develop e-commerce platforms for other trading parties.  

We entered into a series of contractual arrangements with Shanghai Yibo and its shareholders, which enable us to:

 

exercise effective control over Shanghai Yibo;

 

receive substantially all of the economic benefits of Shanghai Yibo; and

 

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

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Because of these contractual arrangements, we are the primary beneficiary of Shanghai Yibo and hence consolidate its financial results as our variable interest entity, or VIE.  

In the opinion of Commerce & Finance Law Offices, our PRC counsel, the ownership structure of our variable interest entity, currently does not result in any violation of the applicable PRC laws or regulations currently in effect; and the agreements under the contractual arrangements among us, our variable interest entity and its shareholders, are governed by PRC laws or regulations, and are currently valid, binding and enforceable in accordance with the applicable PRC laws and regulations currently in effect, and do not result in any violation of the applicable PRC laws or regulations currently in effect.  

However, our PRC counsel, Commerce & Finance Law Offices, advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel.  If the PRC government finds the agreements that establish our Internet-based business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties, including being prohibited from continuing operations.  

If we or our VIE is found to be in violation of any existing or future PRC laws or regulations, or fails to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

 

revoking the business licenses and/or operating licenses of our VIE;

 

shutting down our website, or discontinuing or restricting the conducting of any transactions between certain of our PRC subsidiaries and VIE;

 

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

 

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

 

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

The imposition of any of these penalties would result in a material adverse effect on our ability to conduct our business.  In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our VIE in our consolidated financial statements, if the PR