F-1/A 1 d123092df1a.htm AMENDMENT NO. 1 TO FORM F-1 Amendment No. 1 to Form F-1
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As filed with the Securities and Exchange Commission on June 22, 2021

Registration No. 333-256903

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT No. 1

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Missfresh Limited

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   5990   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

3rd Floor, Block A, Vanke Times Center, No. 9 Wangjing Street, Chaoyang District

Beijing 100016

The People’s Republic of China

+86 10 5266 5273

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

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

+1 800-221-0102

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

 

 

Copies to:

 

Z. Julie Gao, Esq.

Shu Du, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

c/o 42/F, Edinburgh Tower, The Landmark

15 Queen’s Road Central

Hong Kong

+852 3740-4700

 

Li He, Esq.

James C. Lin, Esq.

Davis Polk & Wardwell LLP

c/o 18th Floor

The Hong Kong Club Building

3A Chater Road Central

Hong Kong

+852-2533-3300

 

 

Approximate date of commencement of proposed sale to the public:

as soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities
to be registered
  Amount to be
registered(2)(3)
  Proposed maximum
offering price per
share(3)
  Proposed maximum
aggregate offering
price(2)(3)
 

Amount of

registration fee(4)

Class B ordinary shares, par value US$0.0001 per share(1)

 

72,450,000

  $5.33   US$386,400,000   US$42,156

 

 

(1)

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

(2)

Includes Class B ordinary shares that are issuable upon the exercise of the underwriters’ over-allotment option. Also includes Class B ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These Class B ordinary shares are not being registered for the purpose of sales outside the United States.

(3)

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

(4)

US$10,910.00 previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion) Dated June 22, 2021.

21,000,000 American Depositary Shares

 

LOGO

Missfresh Limited

Representing 63,000,000 Class B Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, of Missfresh Limited.

We are offering 21,000,000 ADSs to be sold in the offering.

Prior to this offering, there has been no public market for our ADSs or Class B ordinary shares. Each ADS represents three of our Class B ordinary shares, par value US$0.0001 per share. It is currently estimated that the initial public offering price will be between US$13.00 and US$16.00 per ADS. Application has been made for quotation on the Nasdaq Stock Market under the symbol “MF.”

Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares, and we will be a “controlled company” as defined under Nasdaq Stock Market Rules because Mr. Zheng Xu, the chairman of our board of directors and our chief executive officer, will beneficially own 73.6% of our total voting power assuming the underwriters do not exercise their over-allotment option, or 73.3% of our total voting power if the underwriters exercise their over-allotment option in full. As a “controlled company,” we are permitted to elect not to comply with certain corporate governance requirements. If we rely on these exemptions, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to twenty votes and is convertible into one Class B ordinary share, and each Class B ordinary share is entitled to one vote. Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances.

Certain investors have indicated their non-binding interest in subscribing for an aggregate of up to US$90 million worth of the ADSs being offered in this offering, including (i) up to US$40 million from Qilu (Xiamen) Equity Investment Partnership (Limited Partnership), our shareholder and an affiliate of China International Capital Corporation, through a qualified PRC domestic institutional investor to the extent permitted by applicable laws, (ii) up to US$20 million from Image Frame Investment (HK) Limited, our shareholder and an affiliate of Tencent Holdings Limited, (iii) up to US$10 million from an existing shareholder and affiliate of Davis Selected Partner Advisors, (iv) up to US$10 million from Genesis Capital I LP or its affiliates, and (v) up to US$10 million from an existing shareholder and affiliate of Vision Plus Capital Limited. If any of these investors are allocated ADSs in this offering, they will subscribe for ADSs at the initial public offering price and on the same terms as the other ADSs being offered in this offering. Assuming an initial public offering price of US$14.50 per ADS, the midpoint of the estimated initial public offering price range, the number of ADSs to be purchased by these investors would be up to 6,206,897 ADSs, representing approximately 30% of the ADSs being offered in this offering. However, because the indications of interest are not binding agreements or commitments to purchase, such investors may determine to purchase more, fewer or no ADSs in this offering, and we and the underwriters are under no obligation to sell ADSs to them. For additional information, see “Underwriting.”

See “Risk Factors” on page 20 to read about factors you should consider before buying the ADSs.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per ADS      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

We have granted the underwriters a 30-day option to purchase up to an additional 3,150,000 ADSs from us at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the ADSs against payment in New York, New York on                    , 2021.

 

 

 

J.P. Morgan    Citigroup    CICC    China Renaissance

 

Haitong International   CMBI

 

ICBC International

  Needham & Company   China Merchants Securities (HK)   GF Securities (Hong Kong) Brokerage Limited   ABCI

 

 

FUTU

   Tiger Brokers   

 

Prospectus dated             , 2021.


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TABLE OF CONTENTS

Prospectus

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     12  

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

     15  

RISK FACTORS

     20  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     73  

USE OF PROCEEDS

     75  

DIVIDEND POLICY

     76  

CAPITALIZATION

     77  

DILUTION

     79  

ENFORCEABILITY OF CIVIL LIABILITIES

     81  

CORPORATE HISTORY AND STRUCTURE

     83  

SELECTED CONSOLIDATED FINANCIAL DATA

     85  

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

     89  

INDUSTRY

     118  

BUSINESS

     130  

REGULATION

     153  

MANAGEMENT

     174  

PRINCIPAL SHAREHOLDERS

     181  

RELATED PARTY TRANSACTIONS

     184  

DESCRIPTION OF SHARE CAPITAL

     185  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     199  

SHARES ELIGIBLE FOR FUTURE SALE

     216  

TAXATION

     218  

UNDERWRITING

     225  

EXPENSES RELATED TO THIS OFFERING

     238  

LEGAL MATTERS

     239  

EXPERTS

     240  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     241  

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

You should rely only on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free writing prospectus. We are offering to sell, and seeking offers to buy the ADSs, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs.

Neither we nor the underwriters have taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus or any filed free writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus or any filed free writing prospectus outside the United States.

 

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” before deciding whether to invest in the ADSs. This prospectus contains information from an industry report commissioned by us and prepared by iResearch Consulting Group, or iResearch, an independent market research firm, to provide information regarding our industry and our market position. We refer to this report as the iResearch Report.

Our Mission

Our mission is to help every family enjoy quality grocery at their fingertips.

Our Vision

Our vision is to become the largest platform to drive digitalization of China’s neighborhood retail industry.

Who We Are

Missfresh is rebuilding neighborhood retail from the ground up in China with our innovative technology and business model. We invented the DMW model by building and operating DMWs in May 2015, before any other player in on-demand DMW retail industry, according to iResearch. Through the convenient locations of our DMWs and technology-enabled DMW management, we operate an online-and-offline integrated on-demand retail business offering fresh produce and fast-moving consumer goods (FMCGs), which share the characteristics of high-frequency purchases with regular and universal demand. We strive to make grocery shopping more delightful, more efficient, more affordable and more trustworthy. To that end, we operated a technology-enabled network of 631 DMWs in 16 cities in China as of March 31, 2021. We have also built up a full stack of proprietary technology to empower participants in the neighborhood retail business such as supermarkets, fresh markets and local retailers with our core capabilities.

Through our “Missfresh” mobile application and Mini Program embedded in third-party social platforms, which feature substantially similar user interface and functions, consumers can easily purchase quality grocery at their fingertips and receive high-quality products delivered by our delivery riders to their doorstep in 39 minutes on average in the first three months of 2021. We appeal to a new generation of consumers who are willing to pay for the high-quality and convenient experience in grocery shopping. We had 5.1 million, 7.2 million, 8.7 million and 7.9 million effective users in 2018, 2019, 2020 and the twelve months ended March 31, 2021, respectively. We accumulated a total of over 31 million transacting users as of March 31, 2021.

According to iResearch, we ranked first in China’s on-demand DMW retail industry in 2018 and 2019, respectively, and ranked second in 2020, in terms of GMV. During 2020, we focused on the growth of our effective users, and continued to invest in technological infrastructure upgrade. During the same period, we generated an average price per order of RMB94.6 for our on-demand DMW retail business, the highest among DMW players, and achieved industry-leading AI adoption level in China’s on-demand DMW retail industry, with higher fulfillment margin than the average of the other three major players in the same industry, according to iResearch. In 2020, our market share of China’s on-demand DMW retail industry in terms of GMV was 28%, ranked first in North China, according to iResearch. We also ranked the highest by satisfaction rate of consumers compared to our competitors, according to a survey conducted by iResearch in February 2021.

To further digitalize the neighborhood retail industry end-to-end, we launched our intelligent fresh market business in the second half of 2020 and started our retail cloud business initiative in 2021, further empowering players in the neighborhood retail industry to embrace the digital transformation with our AI-driven technology platform and other core capabilities.



 

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Our Understanding of Neighborhood Retail

Neighborhood retail is an indispensable part of everyone’s daily life and offers high-frequency grocery products, mainly fresh produce and FMCGs, with convenient availability. The continued urbanization in China and the increase in disposable income of Chinese urbanites are driving higher consumer willingness to pay for quality products and time-saving services.

The neighborhood retail industry in China harbors huge potential with a market size of RMB11.9 trillion in 2020 in terms of retail value and remains highly fragmented with variety of sales channels. The supermarket is the single largest channel with 35.6% sales contribution in 2020, with the top 10 players accounting for 6.1% of total supermarket revenue, significantly lower than 55.6% and 78.7% in the U.S. and the UK. The neighborhood retail industry in China is also stratified by city tiers in terms of market size and consumer behavior in choosing sales channels. In 2020, neighborhood retail market size in first- and second-tier cities was RMB5.8 trillion in terms of retail value, compared to RMB2.9 trillion and RMB3.1 trillion in third-and lower-tier cities in terms of retail value, respectively. In first- and second-tier cities, structured retail channels such as hypermarkets and supermarkets accounted for approximately 36% of total retail value.

In recent years, consumer demand for real-time quality grocery products consumption has continued to grow. Traditional supermarket chains have also accelerated their online transformation and started to offer home delivery services to complement the traditional in-store model. To better meet the significant demand and to address the industry pain points such as non-standardized operations, inconsistent quality and inefficiency, new business models such as on-demand DMW retail emerged. The on-demand DMW retail market is one of the fastest growing segments in the neighborhood retail market, and it refers to self-operated platforms that offer home delivery of fresh produce and FMCGs from DMWs within two hours.

The size of China’s neighborhood retail market reached RMB11.9 trillion in 2020 in terms of retail value, which consists of RMB5.0 trillion from fresh produce and RMB6.9 trillion from FMCGs, and is expected to further expand to RMB15.7 trillion by 2025. According to iResearch, the neighborhood retail market is expected to go through three evolutionary stages as follows:

 

   

Stage I (2016—2020), Business Model Innovation—Innovative business models emerged to satisfy consumers’ needs. Market players mainly competed for consumers and GMV growth;

 

   

Stage II (2020—2023), Quality Scale Expansion—Multiple business models co-exist and leading players start to optimize operations and expand; and

 

   

Stage III (2023 and beyond), Platformization Powered by Technology Innovation—Mature technology system and industry knowhow accumulated by the leading players will be used to empower fresh markets and other offline retailers to expedite the digital transformation of neighborhood retail. Leading players gradually evolve from vertical players to industry enablers with key capabilities in platformization and large-scale digitalization.

Our Innovative Business Model

With over six years dedicated to the neighborhood retail market, we have accurately predicted and captured consumers’ demand for fresh produce and FMCGs in first- and second-tier cities, and have transformed this industry through our extensive market know-how and pioneering technological innovations. We have also launched differentiated business models to drive digitalization of traditional neighborhood retail market segments in different cities. Our innovative business model comprises of our on-demand DMW retail business, intelligent fresh markets business and retail cloud business initiative.

We invented the DMW model in May 2015 with the focus on first- and second-tier cities in China, bringing fresh produce and FMCGs closer to consumers before any other DMW player, according to iResearch. We



 

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operated 631 DMWs across 16 cities as of March 31, 2021. Through our “Missfresh” mobile application and Mini Program, our users can place orders for over 4,300 SKUs of quality grocery products to be delivered from our DMWs. Our DMWs are strategically located in local neighborhoods, undertaking the functions of cold-chain enabled warehousing and last mile logistics. DMWs are replenished quickly leveraging our smart supply chain. The convenient locations of the DMWs and our technology-enabled DMW management allow us to deliver an order to a consumer in 39 minutes on average. Therefore, unlike the traditional, time- consuming in-store grocery shopping experience, our on-demand DMW retail business is particularly capable of meeting urban consumers’ demand for fast grocery delivery. As we continued to address the strong user needs for quality grocery and fast delivery in high-density local neighborhoods, we achieved a growth of net revenues from RMB3.5 billion in 2018 to RMB6.1 billion in 2020, and a gross margin of 19.4% in 2020.

We have pioneered the intelligent fresh market business model, as fresh markets remain the go-to place for fresh produce shopping. Fresh markets in China offer a vibrant venue full of human touch, as they serve not only as a place where families purchase daily necessities, but also as a place for social gathering, interaction and pastime. For this reason, fresh markets have maintained a steady market share even amid the trend towards online shopping over the past several years, and they still have a solid user base within residential communities.

Leveraging the core capabilities developed through our self-operated on-demand DMW retail business, we launched our intelligent fresh market business in the second half of 2020. Through this business model, we standardize and transform fresh markets into smart fresh malls by (i) reconfiguring the market floor plan, optimizing the merchants mix and introducing new service offerings; (ii) providing merchants with a SaaS-based service package including electronic payment, online marketing, CRM tools and business planning, and (iii) through our value-added services, enabling merchants at our intelligent fresh markets to convert and manage offline private traffic to our platforms and to realize additional monetization. We have entered into contracts to operate 54 fresh markets in 14 cities in China and have started to operate 33 of them in 10 cities in China. According to iResearch, we are the industry leader in terms of enabling traditional fresh markets to accelerate digital transformation.

We are committed to transforming the operation of the neighborhood retail industry. To achieve this goal, we take a four-step approach: standardization, digitalization, intelligentization and platformization. We have reshaped the neighborhood retail value chain end-to-end, from managing the supply chain operation in an intelligent way to digitalizing the business operation process. At the same time, we have gained significant data insights that help us optimize our algorithms. As a result, we have developed an end-to-end intelligent system, namely, the Retail AI Network (RAIN), which includes smart supply chain, smart logistics and smart marketing, among others. Our RAIN significantly enhances the automation level and efficiency of the entire operation process by using data analytics and AI to replace human decisions in areas such as inventory replenishment, procurement and turnover management. Our RAIN benefits us on multiple fronts including consumer satisfaction, operational efficiency and business expansion. Such technology capabilities have allowed us to establish a high barrier to entry in an industry characterized by high transaction frequency, high inventory loss rate and need for convenient delivery.

We have also started to platformize our pioneering business model and RAIN technology platform through our retail cloud business initiative. This initiative is designed to empower a wide range of participants in the neighborhood retail business, such as supermarkets, fresh markets and local retailers to jumpstart and effectively operate their business in a digital way via smart omni-channel marketing, smart supply chain management and store-to-home delivery capabilities. According to iResearch, we have become the only company in China’s neighborhood retail industry that deeply empowers both supermarkets and fresh markets retail through AI technology and retail cloud services.



 

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Our Financial Performance

Since our inception in 2014, we have achieved significant growth. Our total net revenues increased from RMB3,546.7 million in 2018 to RMB6,001.4 million in 2019 and RMB6,130.4 million (US$935.7 million) in 2020, and our total net revenues was RMB1,689.8 million and RMB1,530.2 million (US$233.6 million) in the three months ended March 31, 2020 and 2021, respectively. Our gross profit, calculated as total net revenues minus cost of revenues, increased by 71.3% from RMB304.0 million in 2018 to RMB 520.9 million in 2019, and further increased by 128.5% to RMB 1,190.4 million in 2020, and our gross profit was RMB510.8 million and RMB189.0 million (US$28.8 million) in the three months ended March 31, 2020 and 2021, respectively. Our gross margin improved significantly from 8.6% in 2018 and 8.7% in 2019 to 19.4% in 2020, and our gross margin was 30.2% and 12.3% in the three months ended March 31, 2020 and 2021, respectively. As of December 31, 2020 and March 31, 2021, we had short-term borrowings of RMB830.0 million (US$126.7 million) and RMB568.0 million (US$86.7 million), respectively, and convertible note and loan of RMB248.9 million (US$38.0 million) and RMB253.4 million (US$38.7 million), respectively. We incurred a net loss of RMB2,231.6 million, RMB2,909.4 million and RMB1,649.2 million (US$251.7 million) in 2018, 2019 and 2020, respectively, and a net loss of RMB194.7 million and RMB610.3 million (US$93.2 million) in the three months ended March 31, 2020 and 2021, respectively. Our adjusted net loss, a non-GAAP measure, was RMB2,215.9 million, RMB2,777.0 million and RMB1,589.7 million (US$242.6 million) in 2018, 2019 and 2020, respectively, and RMB175.8 million and RMB598.4 million (US$91.3 million) in the three months ended March 31, 2020 and 2021, respectively. See “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measure” for a reconciliation of adjusted net loss to net loss.

Our Strengths

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

 

   

an innovator and leader in China’s neighborhood retail industry;

 

   

our proprietary Retail AI Network (RAIN) driving superior user experience and operational efficiency;

 

   

direct sourcing from origin creating win-win for ourselves and suppliers;

 

   

effective social network-based online marketing;

 

   

extensive operational and technology expertise laying solid foundation for future business opportunities; and

 

   

innovative and experienced management team with a firm belief in technology.

Our Strategies

We will further grow our business by pursuing the following strategies:

 

   

continue to grow our on-demand DMW retail business;

 

   

expand our pathbreaking intelligent fresh market business;

 

   

platformize our Retail AI Network (RAIN) via our retail cloud business initiative;

 

   

foster the Missfresh ecosystem with the incubation of new products, brands and technologies; and

 

   

selectively explore opportunities of strategic alliance, investments and acquisitions.

Summary of Risk Factors

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



 

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Risks Related to Our Business and Industry

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

 

   

If we are unable to manage growth or execute our strategies effectively, our business and prospects or investors’ perceptions of our business and prospects may be materially and adversely affected, and the market price of our Class B ordinary shares and/or ADSs may decline.

 

   

As the pioneer of DMW model, we continue to innovate our business and invest heavily in R&D. Failure to continue to innovate our technology or develop new technologies and offerings to adapt to changing user needs could harm our growth.

 

   

We have a history of net losses and negative cash flows, which may continue in the future.

 

   

As we continue to revolutionize the neighborhood retail industry with our intelligent fresh market business and recently launched retail cloud business initiative, we may not be able to achieve our expected returns from such new business lines or sustain our historical overall growth rates.

 

   

If we are unable to provide superior consumer experience through timely delivery and high-quality grocery, our business may be materially and adversely affected.

 

   

Any failure in our service efficiency and product and service quality could damage our brand image and substantially harm our business.

 

   

If we are unable to offer products and services that attract new and existing consumers, our business, financial condition and results of operations may be materially and adversely affected.

 

   

Any material interruptions in the operation of our smart supply chain, quality control centers and DMWs may have an adverse impact on our business.

 

   

We face intense competition and we may lose market share and consumers if we fail to compete effectively.

 

   

Strategic alliances, investments or acquisitions may have a material and adverse effect on our business, reputation, results of operations and financial condition.

 

   

Our limited operating history makes it difficult to evaluate our business and prospects. We cannot guarantee that we will grow as rapidly as before, or at all.

 

   

Uncertainties relating to the growth and profitability of the neighborhood retail industry in China in general, and the on-demand DMW retail industry in particular, could adversely affect our revenues and business prospects.

 

   

Failure to maintain the quality and safety of our products could adversely impact our reputation, results of operations and financial performance.

 

   

Our expansion into new product categories and substantial increase in the number of SKUs may not meet consumer demand and may expose us to new challenges and more risks.

 

   

The COVID-19 pandemic has had and could continue to have an adverse impact on our business, operations and financial condition.

 

   

If our expansion into new geographical areas is not successful, our business and prospects may be materially and adversely affected.

 

   

If we fail to manage and expand our relationships with our suppliers, or otherwise fail to procure products on favorable terms, our business and growth prospects may suffer.



 

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Risks Related to Doing Business in China

Risks and uncertainties relating to doing business in China include, but are not limited to, the following:

 

   

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

 

   

Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us.

 

   

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws.

 

   

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

 

   

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

Risks Related to Our ADSs and This Offering

Risks and uncertainties relating to our ADSs and this offering include, but are not limited to, the following:

 

   

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

 

   

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

 

   

The dual-class structure of our ordinary shares may adversely affect the trading market for 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, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

Corporate History and Structure

We were founded in October 2014. From our inception to June 2017, we operated our on-demand DMW retail business through Beijing Missfresh E-commerce Co., Ltd., or Beijing Missfresh, and its subsidiaries, and we used Beijing Missfresh as our holding company to raise early-stage equity financings.

In April 2015, Missfresh Limited was incorporated in the Cayman Islands, and Missfresh HK Limited was then established by Missfresh Limited as a wholly owned subsidiary in Hong Kong. In July 2015, Qingdao Missfresh E-commerce Co., Ltd., or Qingdao Missfresh, was established by Missfresh HK Limited as a wholly foreign-owned enterprise in the PRC to expand our business in the neighborhood retail industry.

To facilitate financing and offshore listing, we decided to use Missfresh Limited as our offshore holding company and completed a restructuring in June 2017. As part of this restructuring, in June 2017, Missfresh Limited gained control over Beijing Missfresh through Qingdao Missfresh by entering into a series of contractual arrangements with Beijing Missfresh and its shareholders. In December 2018, we terminated the contractual



 

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arrangements with Beijing Missfresh and its shareholders as the businesses operated by Beijing Missfresh were no longer prohibited or restricted for foreign ownership under PRC laws and regulations, and then Missfresh HK Limited acquired 100% of the equity interests in Beijing Missfresh. Qingdao Missfresh was dissolved in July 2019 as it no longer engaged in any substantial business activities.

To expand our business in the neighborhood retail industry, we established Beijing Missfresh Bianligou E-Commerce Co., Ltd., or Beijing Bianligou, in August 2017, and further entered into a series of contractual arrangements with Beijing Bianligou and its shareholders in February 2018, through which Jinan Missfresh Bianligou Network Technology Co., Ltd., or Jinan Bianligou, a wholly foreign-owned enterprise in the PRC established by Mrfresh HK Limited through Mrfresh Limited, our wholly owned subsidiary in Hong Kong, in January 2018, effectively controlled Beijing Bianligou. In May 2019, Missfresh HK Limited acquired 100% of the equity interests in Jinan Bianligou as a result of our business and equity restructuring. In December 2020, we terminated the contractual arrangements with Beijing Bianligou and its shareholders as the businesses operated by Beijing Bianligou were no longer prohibited or restricted for foreign ownership under PRC laws and regulations, and Missfresh HK Limited acquired 100% of the equity interests in Beijing Bianligou.

To further expand our business in the neighborhood retail industry, Changshu Missfresh E-Commerce Co., Ltd., or Changshu Missfresh, was established in January 2020 and a new Qingdao Missfresh E-Commerce Co., Ltd. was established in January 2021 by Missfresh HK Limited as wholly foreign-owned enterprises in the PRC.

To launch our intelligent fresh market business operations, Changshu Daily Technology Co., Ltd. was established in August 2020 and Qingdao Daily Market Technology Co., Ltd. was established in November 2020, both of which are currently Missfresh HK Limited’s wholly foreign-owned enterprises in the PRC.

The following diagram illustrates our corporate structure, including our principal subsidiaries, as of the date of this prospectus:

 

LOGO

Implication of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act.



 

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An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. Pursuant to the JOBS Act, we have elected to take advantage of the benefits of this extended transition period for complying with new or revised accounting standards. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Implication of Being a Foreign Private Issuer

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq Stock Market. We have elected to rely on the exemption available to foreign private issuers for the requirement that an audit committee be comprised of at least three members. See “Risk Factors—Risks Related to the ADSs and This Offering—As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq Stock Market’s corporate governance requirements; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq Stock Market’s corporate governance requirements.”

Implication of Being a Controlled Company

Upon the completion of this offering, Mr. Zheng Xu, the chairman of our board of directors and our chief executive officer, will beneficially own 73.6% of our total voting power, assuming that the underwriters do not exercise their option to purchase additional ADSs, or 73.3% of our total voting power, assuming that the option to purchase additional ADSs is exercised by the underwriters in full. As a result, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Zheng Xu, the chairman of our board of directors and our chief executive officer, will hold more than 50% of the voting power for the election of directors. As a “controlled company,” we are permitted to elect not to comply with certain corporate governance requirements, and we intend to rely on these exemptions. As a result, we will not have a majority of independent directors, and our compensation committee and nominating and corporate governance committee will not consist entirely of independent directors. See “Risk Factors—Risks Related to the ADSs and This Offering—We will be a “controlled company” as defined under the Nasdaq Stock Market Rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.”



 

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Implication of Our Dual-class Voting Structure

Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares, and we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Zheng Xu, the chairman of our board of directors and our chief executive officer, will beneficially own 73.6% of our total voting power assuming the underwriters do not exercise their over-allotment option, or 73.3% of our total voting power if the underwriters exercise their over-allotment option in full. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to twenty votes and is convertible into one Class B ordinary share, and each Class B ordinary share is entitled to one vote. Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances.

Corporate Information

Our principal executive offices are located at 3rd Floor, Block A, Vanke Times Center, No. 9 Wangjing Street, Chaoyang District, Beijing 100016, the People’s Republic of China. Our telephone number at this address is +86 10 5266 5273. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.missfresh.cn. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires, references in this prospectus to:

 

   

“ADRs” are to the American depositary receipts which may evidence the ADSs;

 

   

“ADSs” are to the American depositary shares, each of which represents three Class B ordinary shares;

 

   

“annual spending per effective user” are to the quotient of GMV contributed by all effective users in any given year divided by the number of effective users in the same period;

 

   

“annual spending per core user” are to the quotient of GMV contributed by all core users in any given year divided by the number of core users in the same period;

 

   

“average price per order” are to the quotient of GMV divided by total number of orders fulfilled during that period;

 

   

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

 

   

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

 

   

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

 

   

“core users” are to users that placed four or more orders within any month in a given period;

 

   

“direct procurement”, “directly procured”, “direct sourcing” and “directly sourced” are to sourcing vegetable and fruit products from the origin or exclusive agents of producers, sourcing meat and dairy products from processing plants or their designated channels, and sourcing FMCGs from the authorized brand channels;



 

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“DMW” is to distributed mini warehouse;

 

   

“effective users” for a given period are to transacting users whose payment for products, net of coupons and incentives offered to them, exceeds our procurement cost to purchase the products that are sold to such transacting users, in the given period;

 

   

“first-tier cities” are to Beijing, Shanghai, Guangzhou and Shenzhen;

 

   

“FMCGs” are to fast-moving consumer goods;

 

   

“fulfillment margin” are the quotient of GMV excluding the sum of cost of products sold, write-downs on inventory loss and fulfillment expense divided by GMV;

 

   

“gross merchandise volume” or “GMV” are to the total value of all orders, for products and services placed on the “Missfresh” mobile application, Mini Programs or through third-party platforms, excluding the orders that were canceled and those generated from offline channels. The calculation of GMV includes coupons and incentives offered to users and value-added taxes we paid, both of which are excluded from our net revenues. We believe that GMV provides a measure of the overall volume of transactions in a given period and is only useful for the purposes of industry and peer comparisons, even though the definitions of GMV adopted by other market players may be different from ours; therefore, it should not be used as a financial metric. As used by iResearch in the calculation of market share, the calculation of GMV includes discounts, coupons and incentives offered to users and value-added taxes.

 

   

“inventory loss rate” is to the quotient of the amount of write-down of inventories during a specific period divided by the amount of net revenues in the same period;

 

   

“items per order” are to the quotient of the total number of items sold during a specific period divided by the number of total orders fulfilled in the same period;

 

   

“major players” are to companies in the on-demand DMW retail industry with annual GMV exceeding RMB1 billion; different companies may measure GMV differently and their measures may not be directly comparable to ours;

 

   

“Mini Program” or “Mini Programs” are to services run on third-party platforms, such as Weixin, that provide functions similar to those of standalone mobile applications;

 

   

“Missfresh,” “we,” “us,” “our company” and “our” are to Missfresh Limited, our Cayman Islands holding company and its subsidiaries;

 

   

“monthly spending per core user” are to the quotient of GMV contributed by all core users in any given month divided by the number of core users in the same period;

 

   

“neighborhood retail” are to the retail business that offers high-frequency consumption products needed by community residents with convenient availability, mainly consists of fresh produce such as fruits, vegetables, dairy products, meat, eggs, and seafood, as well as FMCGs including packaged food, beverages, cosmetics and personal care products;

 

   

“North China” are to Beijing and Tianjin, Hebei, Shanxi and Inner Mongolia;

 

   

“on-demand” are to allowing customers to purchase products immediately when a need surfaces, anywhere and anytime;

 

   

“our platforms” are to our mobile application “Missfresh” and “Missfresh” Mini Program embedded in third-party social platforms such as Weixin;

 

   

“orders per effective user” are to the quotient of the number of total orders placed by all effective users and fulfilled during a specific period divided by the total number of effective users in the same period;

 

   

“orders we fulfilled” or “orders fulfilled” are to the total number of orders fulfilled, including the orders for products sold in our on-demand DMW retail business, net of orders cancelled;

 

   

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

 

   

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



 

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“second-tier cities” are to Hangzhou, Chengdu, Chongqing, Wuhan, Xi’an, Tianjin, Suzhou, Nanjing, Zhengzhou, Changsha, Dongguan, Shenyang, Qingdao, Hefei, Foshan, Ningbo, Kunming, Fuzhou, Wuxi, Xiamen, Jinan, Dalian, Harbin, Wenzhou, Shijiazhuang, Quanzhou, Nanning, Changchun, Nanchang, Guiyang, Jinhua, Changzhou, Huizhou, Jiaxing, Nantong, Xuzhou, Taiyuan, Zhuhai, Zhongshan, Baoding, Lanzhou, Taizhou, Shaoxing, Yantai and Langfang;

 

   

“smart fresh malls” are to standardized and digitalized fresh markets that are empowered by us with technology;

 

   

“third-tier cities” are to Weifang, Yangzhou, Haikou, Shantou, Luoyang, Urumqi, Linyi, Tangshan, Zhenjiang, Yancheng, Huzhou, Ganzhou, Jining, Hohhot, Xianyang, Zhangzhou, Jieyang, Jiangmen, Guilin, Handan, Wuhu, Sanya, Fuyang, Huaian, Zunyi, Yinchuan, Hengyang, Shangrao, Liuzhou, Zibo, Putian, Mianyang, Zhanjiang, Shangqiu, Yichang, Cangzhou, Lianyungang, Nanyang, Jiujiang, Xinxiang, Xinyang, Xiangyang, Yueyang, Bengbu, Zhumadian, Chuzhou, Weihai, Suqian, Zhuzhou, Ningde, Xingtai, Chaozhou, Qinhuangdao, Zhaoqing, Jingzhou, Zhoukou, Ma’anshan, Qingyuan, Suzhou, Anshan, Anqing, Heze, Yichun, Huanggang, Tai’an, Nanchong, Lu’an, Daqing and Zhoushan;

 

   

“transacting user” in a given period are to user accounts that placed one or more orders on the Missfresh mobile app and Mini Program, excluding the orders that were canceled; and

 

   

“US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus are made at a rate of RMB6.5518 to US$1.00, the exchange rate in effect as of March 31, 2021 as set forth in the H.10 statistical release of The Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all.



 

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THE OFFERING

 

Offering price

We expect that the initial public offering price will be between US$13.00 and US$16.00 per ADS.

 

ADSs offered by us

21,000,000 ADSs (or 24,150,000 ADSs if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

21,000,000 ADSs (or 24,150,000 ADSs if the underwriters exercise their over-allotment option in full).

 

Ordinary shares issued and outstanding immediately after this offering

86,383,174 Class A ordinary shares and 619,971,303 Class B ordinary shares (or 629,421,303 Class B ordinary shares if the underwriters exercise their option to purchase additional ADSs in full).

 

The ADSs

Each ADS represents three Class B ordinary shares, par value US$0.0001 per share.

 

  The depositary will hold Class B ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

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

 

  You may surrender your ADSs to the depositary in exchange for Class B ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.


 

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Over-allotment option

We have granted the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of additional ADSs.

 

Indications of Interest

Certain investors have indicated their non-binding interest in subscribing for an aggregate of up to US$90 million worth of the ADSs being offered in this offering, including (i) up to US$40 million from Qilu (Xiamen) Equity Investment Partnership (Limited Partnership), our shareholder and an affiliate of China International Capital Corporation, through a qualified PRC domestic institutional investor to the extent permitted by applicable laws, (ii) up to US$20 million from Image Frame Investment (HK) Limited, our shareholder and an affiliate of Tencent Holdings Limited, (iii) up to US$10 million from an existing shareholder and affiliate of Davis Selected Partner Advisors, (iv) up to US$10 million from Genesis Capital I LP or its affiliates, and (v) up to US$10 million from an existing shareholder and affiliate of Vision Plus Capital Limited. If any of these investors are allocated ADSs in this offering, they will subscribe for ADSs at the initial public offering price and on the same terms as the other ADSs being offered in this offering. Assuming an initial public offering price of US$14.50 per ADS, the midpoint of the estimated initial public offering price range, the number of ADSs to be purchased by these investors would be up to 6,206,897 ADSs, representing approximately 30% of the ADSs being offered in this offering. However, because the indications of interest are not binding agreements or commitments to purchase, such investors may determine to purchase more, fewer or no ADSs in this offering, and we and the underwriters are under no obligation to sell ADSs to them. For additional information, see “Underwriting.”

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$279.2 million from this offering or approximately US$321.7 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of US$14.50 per ADS, which is the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering (i) for our on-demand DMW retail business, including sales and marketing, upgrade of technology infrastructure and supply chain, and expansion and upgrade of network of quality control centers and DMWs; (ii) for our further expansion of our intelligent fresh market business and development of technology platform; (iii) for our development of the retail cloud business, including research and development, product development and sales and marketing; and (iv) for general corporate purposes, and the development of strategic initiatives, potential strategic investments and acquisitions to strengthen our ecosystem, although we have not identified any specific investments or acquisition opportunities at this time. See “Use of Proceeds” for more information.


 

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Lock-up

We, our directors, executive officers, and all of our existing shareholders have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ADSs, Class B ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Listing

We intend to apply to have the ADSs listed on the Nasdaq Stock Market under the symbol “MF.” The ADSs and our Class B ordinary shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on                    , 2021.

 

Depositary

JPMorgan Chase Bank, N.A.

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

 

   

is based upon 643,354,477 ordinary shares outstanding as of the date of this prospectus, assuming all issued and outstanding preferred shares have been converted into Class B ordinary shares immediately upon the completion of this offering, and without taking into account any shares that may be issued upon any conversion of the outstanding convertible promissory note we issued to ICBC International Investment Management Limited as described in “Description of Share Capital—History of Securities Issuances” in this prospectus;

 

   

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

 

   

excludes 27,743,125 Class B ordinary shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of US$0.1 per share, and the vesting of 3,113,456 restricted share units outstanding as of the date of this prospectus; and

 

   

excludes 33,304,427 Class B ordinary shares reserved for future issuances under our 2017 Plan.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of operations and comprehensive loss data for the years ended December 31, 2018, 2019 and 2020, summary consolidated balance sheets data as of December 31, 2018, 2019 and 2020, and summary consolidated statements of cash flow data for the years ended December 31, 2018, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of operations data for the three months ended March 31, 2020 and 2021, summary consolidated balance sheets data as of March 31, 2021, and summary consolidated statements of cash flow data for the three months ended March 31, 2020 and 2021 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.



 

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The following table presents our summary consolidated statements of operations and comprehensive loss data for the periods indicated:

 

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

Summary Consolidated Statements of Operations and Comprehensive Loss Data:

             

Net revenues

             

Sales of products through online platforms

    3,202,738       5,777,413       5,999,675       915,730       1,668,295       1,492,780       227,843  

Other revenues

    343,961       223,983       130,762       19,958       21,520       37,447       5,716  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    3,546,699       6,001,396       6,130,437       935,688       1,689,815       1,530,227       233,559  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

    (3,242,677     (5,480,499     (4,940,016     (753,994     (1,179,007     (1,341,249     (204,715

Fulfillment expenses

    (1,239,275     (1,832,978     (1,576,944     (240,689     (415,175     (440,224     (67,191

Sales and marketing expenses

    (795,478     (740,033     (589,192     (89,928     (98,656     (167,615     (25,583

General and administrative expenses (1)

    (287,438     (377,451     (298,775     (45,602     (81,833     (86,853     (13,256

Technology and content (1)

    (230,865     (469,655     (369,432     (56,386     (102,161     (94,794     (14,468
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

    (5,795,733     (8,900,616     (7,774,359     (1,186,599     (1,876,832     (2,130,735     (325,213
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (2,249,034     (2,899,220     (1,643,922     (250,911     (187,017     (600,508     (91,654
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income/(expense), net

    3,455       (2,574     23,431       3,576       (5,595     (2,772     (423

Interest income/(expense), net

    15,593       28,374       (33,119     (5,055     (1,858     (17,158     (2,619

Changes in fair value of options and embedded conversion feature

    —         —         5,216       796       —         10,292       1,571  

Share of results of equity investees

    (1,573     (36,023     (780     (119     (195     (201     (31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expenses

    (2,231,559     (2,909,443     (1,649,174     (251,713     (194,665     (610,347     (93,156

Income tax expenses

    —         —         —         —         —         (2     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (2,231,559     (2,909,443     (1,649,174     (251,713     (194,665     (610,349     (93,156
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of convertible redeemable preferred shares to redemption value

    (187,937     (378,731     (508,321     (77,585     (121,308     (151,213     (23,080

Accretion of convertible redeemable non-controlling preferred shares to redemption value

    (66,848     (37,219     (6,750     (1,030     —         (2,572     (393

Deemed dividends to convertible redeemable non-controlling preferred shareholders

    —         (148,919     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders of Missfresh Limited

    (2,486,344     (3,474,312     (2,164,245     (330,328     (315,973     (764,201 )       (116,639
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (2,231,559     (2,909,443     (1,649,174     (251,713     (194,665     (610,349     (93,156

Other comprehensive loss, net of tax

             

Foreign currency translation adjustment, net of nil tax

    22,134       40,333       (47,448     (7,242     6,254       21,867       3,338  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss, net of tax

    (2,209,425     (2,869,110     (1,696,622     (258,955     (188,411     (588,482     (89,818

Accretion of convertible redeemable preferred shares to redemption value

    (187,937     (378,731     (508,321     (77,585     (121,308     (151,213     (23,080

Accretion of convertible redeemable non-controlling preferred shares to redemption value

    (66,848     (37,219     (6,750     (1,030     —         (2,572     (393

Deemed dividends to convertible redeemable non-controlling preferred shareholders

    —         (148,919     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to ordinary shareholders of Missfresh Limited

    (2,464,210     (3,433,979     (2,211,693     (337,570     (309,719     (742,334     (113,301
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders of Missfresh Limited

             

Net loss per share — Basic and diluted

    (30.78     (39.82     (21.94     (3.35     (3.35     (7.34     (1.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing net loss per share

             

Basic and diluted

    80,775,998       87,258,997       98,647,803       98,647,803       94,352,113       104,132,597       104,132,597  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Measure:

             

Adjusted net loss (2)

    (2,215,906     (2,777,021     (1,589,698     (242,635     (175,757)       (598,406)       (91,333)  


 

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Notes:

(1)

Share-based compensation expenses were allocated as follows:

 

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

General and administrative expenses

     5,880        36,185        15,939        2,433        5,685        3,060        467  

Technology and content

     9,773        96,237        43,537        6,645        13,223        8,883        1,356  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15,653        132,422        59,476        9,078        18,908        11,943        1,823  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

See ‘‘— Non-GAAP Financial Measure.’’

The following table presents our summary consolidated balance sheets data as of the dates indicated:

 

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

Summary Consolidated Balance Sheets Data:

            

Cash and cash equivalents

     2,611,345       553,140       866,113       132,195       1,844,220       281,483  

Restricted cash

     1,471       7,958       56,269       8,588       116,500       17,781  

Accounts receivable, net

     9,261       55,226       41,403       6,319       34,247       5,227  

Inventories, net

     133,991       169,292       173,688       26,510       182,804       27,901  

Prepayments and other current assets

     248,563       318,331       192,824       29,431       168,997       25,794  

Total current assets

     3,173,785       1,103,947       1,449,423       221,225       2,405,290       367,118  

Operating lease right-of-use assets, net

     362,686       677,496       469,644       71,682       548,492       83,716  

Property and equipment, net

     120,434       223,767       143,864       21,958       155,363       23,713  

Total assets

     3,754,096       2,101,506       2,162,762       330,102       3,230,847       493,122  

Short-term borrowings

     20,000       204,998       830,000       126,683       568,000       86,694  

Accounts payable

     739,438       1,419,339       1,088,431       166,127       1,079,287       164,731  

Deferred Revenue

     87,273       110,398       119,214       18,196       117,307       17,905  

Accrued expenses and other current liabilities

     684,133       389,439       347,468       53,033       309,811       47,286  

Operating lease liabilities, current

     172,064       294,598       252,740       38,576       280,070       42,747  

Convertible note and loan

     —         —         248,878       37,986       253,433       38,681  

Total current liabilities

     1,702,908       2,418,772       2,897,848       442,298       2,713,171       414,110  

Total liabilities

     1,861,368       2,741,988       3,069,281       468,464       2,931,597       447,448  

Total mezzanine equity

     5,874,619       6,642,966       8,529,146       1,301,802       10,465,239       1,597,307  

Total shareholders’ deficit

     (3,981,891     (7,283,448     (9,435,665     (1,440,164     (10,165,989     (1,551,633

Total liabilities, mezzanine equity and shareholders’ deficit

     3,754,096       2,101,506       2,162,762       330,102       3,230,847       493,122  


 

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The following table presents our summary consolidated statements of cash flow data for the periods indicated:

 

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

Summary Consolidated Statements of Cash Flow Data:

              

Net cash used in operating activities

     (1,723,783     (1,966,946     (1,611,788     (246,007     (226,629     (589,547     (89,982

Net cash provided by/(used in) investing activities

     (342,134     (36,032     (235,009     (35,868     (127,304     12,350       1,885  

Net cash provided by/(used in) financing activities

     3,973,275       (81,901     2,274,980       347,230       510,950       1,589,757       242,644  

Effects of exchange rate changes on cash and cash equivalents and restricted cash

     22,249       33,161       (66,899     (10,212     6,254       25,778       3,934  

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

     1,929,607       (2,051,718     361,284       55,143       163,271       1,038,338       158,481  

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

     683,209       2,612,816       561,098       85,640       561,098       922,382       140,783  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     2,612,816       561,098       922,382       140,783       724,369       1,960,720       299,264  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Measure

In evaluating our business, we consider and use adjusted net loss, a non-GAAP financial measure, as a supplemental measure to review and assess our operating performance. The presentation of the non-GAAP financial measure is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. We define adjusted net loss as net loss excluding share-based compensation expenses.

We present the non-GAAP financial measure because it is used by our management to evaluate our operating performance and formulate business plans. Adjusted net loss enables our management to assess our operating results without considering the impact of share-based compensation expenses.

The exclusion of share-based compensation expenses in calculating this non-GAAP financial measure facilitates operating performance comparisons on a period-to-period basis and excludes an item that we do not consider to be indicative of our core operating performance. Such adjustments have no tax impact. Accordingly, we believe that the use of this non-GAAP financial measure provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.



 

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The non-GAAP financial measure is not defined under U.S. GAAP and is not presented in accordance with U.S. GAAP. The non-GAAP financial measure has limitations as analytical tools. One of the key limitations of using adjusted net loss is that it does not reflect all items of income and expense that affect our operations. Further, the non-GAAP financial measure may differ from the non-GAAP financial information used by other companies, including peer companies, and therefore their comparability may be limited.

The non-GAAP financial measure should not be considered in isolation or construed as an alternative 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 measure in light of the most directly comparable GAAP measure, as shown below. The non-GAAP financial measure presented here may not be comparable to similarly titled measure presented by other companies. Other companies may calculate similarly titled measures differently, limiting the usefulness of such measures when analyzing our data comparatively. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

The following table reconciles our adjusted net loss to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net loss, for the periods presented:

 

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

Reconciliation of Net Loss to Adjusted Net Loss:

                    

Net loss

     (2,231,559      (2,909,443      (1,649,174      (251,713      (194,665      (610,349)        (93,156)  

Add:

                    

Share-based compensation expenses

     15,653        132,422        59,476        9,078        18,908        11,943        1,823  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net loss

     (2,215,906      (2,777,021      (1,589,698      (242,635      (175,757      (598,406)        (91,333)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Key Operating Data

We regularly review a number of key operating data to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. The following table presents certain of our key operating data for the periods indicated or as of the dates indicated:

 

     For the Year Ended December 31,      For the Twelve Months
Ended
March 31,
 
     2018      2019      2020      2021  

Annual effective user (in thousands)

     5,082.6        7,172.2        8,676.1        7,892.4  

Annual spending per effective user (RMB)

     558.0        690.4        712.8        705.8  

Number of items purchased by effective users (in thousands)

     245,271        450,435        554,934        514,384  

Total orders placed by effective users (in thousands)

     32,480        59,098        65,062        62,168  


 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment. In particular, as we are a China-based company incorporated in the Cayman Islands, you should pay special attention to the subsection headed “Risks Relating to Doing Business in China” below.

Risks Related to Our Business and Industry

If we are unable to manage growth or execute our strategies effectively, our business and prospects or investors’ perceptions of our business and prospects may be materially and adversely affected, and the market price of our Class B ordinary shares and/or ADSs may decline.

We have experienced rapid growth since we commenced our business in 2014. However, there is no assurance that we will be able to maintain our historical growth rates in future periods. Our business, results of operations and financial condition depend in part on our ability to effectively manage our growth or implement our growth strategies. As part of our business strategies, we plan to further improve our fulfillment infrastructure and technology platform and continue to optimize our product offerings. We also intend to continue to invest significant resources in training, managing and motivating our workforce. In addition, as we optimize our product offerings, we will need to work with new suppliers efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers. We may have limited or no experience for certain new product offerings, and our expansion into these new product offerings may not achieve broad user acceptance. In addition, these offerings may present new and difficult technological or operational challenges, and we may be subject to claims if our users are not satisfied with the quality of the products or do not have satisfactory experiences in general. To effectively manage the expected growth of our operations and personnel, we will need to continue to improve our transaction processing, technological, operational and financial systems, policies, procedures and controls. All these endeavors involve risks and will require significant managerial, financial and human resources. We cannot assure you that we will be able to effectively manage our growth or to implement all these systems, procedures and control measures successfully or that our new business initiatives will be successful. If we are not able to manage our growth or execute our strategies effectively, our expansion may not be successful and our business and prospects may be materially and adversely affected.

Our revenue growth may slow or our revenues may decline for any number of possible reasons, such as decreased consumer spending, increased competition, slowdown in the growth or contraction of the retail or neighborhood retail industry in China, supply chain bottlenecks, emergence of alternative business models, changes in government policies or general economic conditions, and natural disasters or virus outbreaks. If our growth rate declines, investors’ perceptions of our business and business prospects may be adversely affected and the market price of our Class B ordinary shares and/or ADSs could decline.

As the pioneer of DMW model, we continue to innovate our business and invest heavily in research and development. Failure to continue to innovate our technology or develop new technologies and offerings to adapt to changing user needs could harm our growth.

To remain competitive, we must continue to enhance and improve the functionality of our technology systems and to develop new features to adapt to changing market trends and user preferences. The neighborhood retail industry is characterized by rapid technological evolution, including frequent introductions of new products and services embodying new technologies. Any technology development in the neighborhood retail industry may pressure both incumbent and new market players to implement cost-effective technologies even more rapidly. Our business operations and growth prospects depend, in part, on our ability to identify, develop, acquire or license advanced technologies and respond to technological innovations and emerging industry practices in a cost-effective and timely way.

 

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In addition, we must regularly improve and upgrade our technology systems to keep pace with increased consumer demands on our platforms to ensure more efficient management. However, while we have continuously enhanced our proprietary technology systems, we may fail to execute technology improvements corresponding to our business expansion or developing new technologies to adapt to changing user needs and industry breakthrough and the failure to do so could harm our reputation and business and may also impede our growth.

We have invested in the development of new technologies and business initiatives and obtained or applied for registered patent rights supporting various aspects of our operations. However, the development of websites, mobile apps, technology platforms, software solutions and other proprietary technologies entails significant technical and business risks. We cannot assure you that we will be able to successfully innovate or effectively use new technologies to meet customer needs or emerging industry standards and any failure to do so may render our services less competitive or attractive, and our growth, business and prospects may be materially and adversely affected.

We have a history of net losses and negative cash flows, which may continue in the future.

We have incurred net losses and negative cash flows from operating activities each year since our inception and we may not be able to achieve or maintain profitability or positive cash flow in the future. We incurred a net loss of RMB2,231.6 million, RMB2,909.4 million and RMB1,649.2 million (US$251.7 million) in 2018, 2019 and 2020, respectively, and a net loss of RMB194.7 million and RMB610.3 million (US$93.2 million) in the three months ended March 31, 2020 and 2021, respectively. Net cash used in our operating activities was RMB1,723.8 million, RMB1,966.9 million and RMB1,611.8 million (US$246.0 million) in 2018, 2019 and 2020, respectively, and RMB226.6 million and RMB589.5 million (US$90.0 million) in the three months ended March 31, 2020 and 2021, respectively. We recorded total current liabilities of RMB1,702.9 million, RMB2,418.8 million, RMB2,897.8 million (US$442.3 million) and RMB2,713.2 million (US$414.1 million) as of December 31, 2018, 2019, 2020 and March 31, 2021, respectively.

Our costs and expenses will likely increase in the future as we expect to enhance our on-demand retail and fulfillment capabilities, develop and launch new service offerings and solutions, retain and expand customer base in existing market and penetrate into new markets, and continue to invest and innovate in our technology infrastructure. Any of these efforts may lead to significant capital investment and recurring costs, different revenue and cost structures, and take us a long period of time to achieve profitability, if at all. In addition, these efforts may be more costly than we expect and may not result in increased revenue or growth in our business.

Our ability to achieve profitability depends on our ability to improve our market position and profile, expand our online platforms, maintain competitive pricing, increase our operational efficiency and obtain financing, which may be affected by numerous factors beyond our control. If we are unable to generate adequate revenue growth and manage our costs and expenses, we may not be able to achieve profitability or positive cash flow on a consistent basis, which may impact our business growth and adversely affect our financial condition and results of operations.

As we continue to revolutionize the neighborhood retail industry with our intelligent fresh market business and recently launched retail cloud business initiative, we may not be able to achieve our expected returns from such new business lines or sustain our historical overall growth rates.

We launched our intelligent fresh market business in the second half of 2020 and just started the retail cloud business initiative for fresh markets and retailers to revolutionize the neighborhood retail business. Our expansion of new business lines and services may result in unseen risks, challenges and uncertainties. We may incur additional capital expenditure to support the expansion of our intelligent fresh market and retail cloud business initiatives. In addition, due to the limited operating history of these new business lines, there is no guarantee that we may increase our revenues generated from such new businesses. Also, our failure to manage costs and expenses and evaluate consumer demands with respect to such new businesses could materially and adversely affect the prospects of us achieving overall profitability of and recouping our investments in these new business lines. Moreover, these new business lines may require significant managerial, financial, operational and

 

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other resources, as well as the smooth cooperation and performance by the third-party fresh market in accordance with the cooperative agreements between us and the third-party fresh market. We may also face higher regulatory, legal and counterparty risks from entering into contracts with third-party fresh markets or retail businesses. If we fail to manage the development of these new business lines successfully, our growth potential, business and results of operations may be materially and adversely affected.

If we are unable to provide superior consumer experience through timely delivery and high-quality grocery, our business may be materially and adversely affected.

The success of our business hinges on our ability to provide a superior consumer experience, which in turn depends on a variety of factors, including our ability to continue to offer high-quality products at competitive prices, directly source products to respond to consumer demands, maintain the quality of our products and services, and provide timely and reliable delivery, flexible payment options and superior customer service.

We rely primarily on our own smart supply chain infrastructure to deliver our retail products. Interruptions or failures in our supply chain or delivery services could prevent the timely delivery of our products. These interruptions may be due to unforeseen events that are beyond our control, such as inclement weather, natural disasters, virus outbreaks, transportation disruptions or labor unrest. If our products are not delivered on time or are delivered in a damaged state, consumers may refuse to accept our products and have less confidence in our services. Furthermore, our own delivery personnel act on our behalf and, in most instances, interact with our consumers personally. We have in the past received consumer complaints from time to time regarding our delivery services. Any failure to provide high-quality retail services to our consumers may negatively impact the user experience of our consumers, damage our reputation and cause us to lose consumers.

Any failure in our service efficiency and product and service quality could damage our brand image and substantially harm our business.

We believe that the recognition and reputation of our brand among our customers and suppliers have contributed significantly to the growth and success of our business. Maintaining and enhancing the recognition and reputation of our brand are critical to our business and competitiveness. Many factors are important to maintaining and enhancing our brand. These factors include our ability to:

 

   

provide a compelling shopping experience to consumers;

 

   

maintain the relevance, diversity, quality and authenticity of the products we offer;

 

   

maintain the efficiency, reliability and quality of our products and services;

 

   

maintain or improve consumers’ satisfaction with our after-sale services;

 

   

increase brand awareness through marketing and brand promotion activities; and

 

   

preserve our reputation and goodwill in the event of any negative publicity, including those on customer service, consumer and supplier relationships, internet security, product quality, price or authenticity, or other issues affecting us or other neighborhood retail businesses in China.

If we are unable to provide our services in a timely, reliable, safe and affordable manner, our reputation, consumer loyalty, and business could be negatively affected. If products and items are not delivered on time or are delivered in a damaged condition, our consumers may lose confidence on us. Our reputation and brand may be adversely damaged and we may lose consumers.

A public perception that low-quality or overpriced products are sold on our mobile app, even if factually incorrect or based on isolated incidents, could damage our reputation, diminish the value of our brand, undermine the trust and credibility we have established and have a negative impact on our ability to attract new consumers or retain our current consumers. If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our application, products and services, it may be difficult to maintain and grow our consumer base, and our business and growth prospects may be materially and adversely affected.

 

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Any actual or alleged illegal activities by our employees (including our senior management) and delivery riders could subject us to liability or negative publicity. These activities may also affect our employees’ ability or willingness to continue to serve our company or dedicate their full time and efforts to our company and negatively affect our brand and reputation, resulting in an adverse effect on our business, operating results and financial condition.

If we are unable to offer products and services that attract new and existing consumers, our business, financial condition and results of operations may be materially and adversely affected.

Our future growth depends on our ability to continue to attract purchases from new consumers and existing consumers. Constantly changing consumer preferences have affected and will continue to affect the retail industry, in particular the neighborhood retail industry. If consumers cannot find their desired products on our mobile app or Mini Programs at attractive prices, they may lose interest in us and visit our mobile app or Mini Programs less frequently or even stop visiting our mobile app or Mini Programs altogether, which in turn may materially and adversely affect our business, financial condition and results of operations.

Any material interruptions in the operation of our smart supply chain, quality control centers and DMWs may have an adverse impact on our business.

Our ability to process and fulfill orders accurately and provide high-quality customer service depends on the smooth operation of our smart supply chain, quality control centers, and DMWs. Our fulfillment infrastructure may be vulnerable to damages caused by fire, flood, power outage, telecommunications failure, break-ins, earthquake, human error and other events. If any of our quality control centers or DMWs were to operate at a lower capacity or rendered incapable of operations, then we may be unable to fulfill any orders in a timely manner or at all in the region served by the main warehouse or DMW. For example, business operations at our quality control centers or DMWs had been temporarily disrupted in various ways during the COVID-19 outbreak in 2020 in China. In addition, those events that could damage our smart supply chain infrastructure, such as fire and flood, may also result in damages to our inventory stored in or delivered through our DMWs, and in such event, we would incur losses as a result.

We face intense competition and we may lose market share and consumers if we fail to compete effectively.

The neighborhood retail industry in China is intensely competitive. We compete for consumers, orders and products. Our current or potential competitors include major e-commerce companies in China that offer a wide range of product categories, major traditional retailers in China that are moving online, and other online and offline retailers and e-commerce companies focused on grocery product category. See “Business—Competition.” In addition, new and enhanced technologies may increase the competition in the neighborhood retail industry. New competitive business models may appear, for example based on new forms of social media or social commerce.

Increased competition may reduce our margins and market share and impact brand recognition, or result in significant losses. When we set prices, we have to consider how competitors have set prices for the same or similar products. When they cut prices or offer additional benefits or rebates to compete with us, we may have to lower our own prices or offer additional benefits or risk losing market share, either of which could harm our financial condition and results of operations.

Some of our current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger consumer bases, higher penetration in certain regions or greater financial, technical or marketing resources than we do. Those smaller companies or new entrants may be acquired by, receive investment from or enter into strategic relationships with well-established and well-financed companies or investors which would help 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,

 

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adopt more aggressive pricing or inventory policies and devote substantially more resources to their websites, mobile apps and systems development than us. We cannot assure you that we will be able to compete successfully against current or future competitors, and competitive pressures may have a material and adverse effect on our business, financial condition and results of operations.

Strategic alliances, investments or acquisitions may have a material and adverse effect on our business, reputation, results of operations and financial condition.

Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the third party, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have little ability to control or monitor their actions. To the extent the third parties suffer negative publicity or harm to their reputations from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.

We have in the past invested in or acquired additional assets, technologies or businesses that are complementary to our existing business, such as Beijing Meiriyitao Share Science Technology Co., Ltd. If we are presented with appropriate opportunities, we may continue to invest in or acquire additional assets, technologies or businesses that are complementary to our existing business. Future investments or acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. The costs of identifying and consummating investments and acquisitions may be significant. We may also incur significant expenses in obtaining necessary approvals from relevant government authorities in China and elsewhere in the world. Acquired assets or businesses may not generate the financial results we expect. In addition, investments and 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. The cost and duration of integrating newly acquired businesses could also materially exceed our expectations. Any such negative developments could have a material adverse effect on our business, financial condition and results of operations.

Our limited operating history makes it difficult to evaluate our business and prospects. We cannot guarantee that we will grow as rapidly as before, or at all.

We commenced operations in 2014, and have a limited operating history. Our historical performance may not be indicative of our future growth or financial results. We cannot assure you that we will be able to grow at the same rate as we did in the past, or avoid any decline in the future. Our growth may slow down or become negative, and revenues may decline for a number of possible reasons, some of which are beyond our control, including decreasing consumer spending, increasing competition, declining growth of our overall market or industry, the emergence of alternative business models, changes in rules, regulations, government policies or general economic conditions. It is difficult to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in rapidly evolving markets may be exposed. If our growth rate declines, investors’ perceptions of our business and prospects may be materially and adversely affected and the market price of the ADSs could decline. You should consider our prospects in light of the risks and uncertainties that companies with a limited operating history may encounter.

Uncertainties relating to the growth and profitability of the neighborhood retail industry in China in general, and the on-demand DMW retail industry in particular, could adversely affect our revenues and business prospects.

We generated a majority of our revenues from our on-demand DMW retail business historically. The long-term viability and prospects of various online neighborhood retail business models in China remain relatively

 

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untested. Our future results of operations will depend on numerous factors affecting the development of the online neighborhood retail industry in China, which may be beyond our control. These factors include:

 

   

the growth of internet, broadband, personal computer and mobile penetration and usage in China, and the rate of any such growth;

 

   

the trust and confidence level of consumers, as well as changes in consumer demographics and consumer tastes and preferences;

 

   

the selection, price and popularity of products that we and our competitors offer online;

 

   

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

 

   

the development of fulfillment, logistics, payment and other ancillary services associated with grocery shopping.

A decline in the popularity of online shopping in general, or any failure by us to adapt our online platforms and improve the online shopping experience of our consumers in response to trends and consumer requirements, may adversely affect our net revenues and business prospects.

In addition, the Chinese government has also recently stepped up the regulation of online platforms, with respect to antitrust, data privacy, content monitoring and other compliance matters. Future governmental regulations could adversely affect our net revenues and business prospects.

Furthermore, the neighborhood retail industry is very sensitive to macroeconomic changes, and retail purchases tend to decline during recessionary periods. Many factors outside of our control, including inflation and deflation, volatility of stock and property markets, interest rates, tax rates and other government policies and unemployment rates can adversely affect consumer confidence and spending, which could in turn materially and adversely affect our growth and profitability. Unfavorable developments in domestic and international politics, including military conflicts, political turmoil and social instability, may also adversely affect consumer confidence and reduce spending, which could in turn materially and adversely affect our growth and profitability.

Failure to maintain the quality and safety of our products could adversely impact our reputation, results of operations and financial performance.

We believe that high quality standards differentiate us from our competitors and enable us to expand user base and maintain a broad base of loyal consumers and have contributed significantly to the growth and success of our business. Maintaining and enhancing such consumer confidence is critical to our business and competitiveness, which in turn depends on a number of factors, including but not limited to the design of our quality control system, employee training to ensure that our employees adhere to and implement our quality control policies and procedures and the effectiveness of monitoring any potential violation of our quality control policies and procedures. There can be no assurance that our quality control system will always prove to be effective. For example, in the past certain of our food products failed to meet the compulsory food safety requirements and standards and we were required to stop selling those substandard or defective food products and take rectifying or remedial measures.

In addition, the quality of the products or services provided by our suppliers or service providers is subject to factors beyond our control, including the effectiveness and the efficiency of their quality control system, among others. There can be no assurance that our suppliers or service providers may always be able to adopt appropriate quality control systems and meet our stringent quality control requirements in respect of the products or services they provide. Any failure of our suppliers or service providers to provide satisfactory products or services could harm our reputation and adversely impact our operations.

The PRC Regulation for the Implementation of the Food Safety Law, or the Regulation of Food Safety Law was amended on December 1, 2019. The Regulation of Food Safety Law outlines detailed rules for monitoring

 

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and assessment of food safety risk, food safety standards, food production and food business, food inspection, food import and export and other matters. Pursuant to the Regulation of Food Safety Law, certain violations of the food safety law may result in severe administrative and criminal penalties imposed on the Company, as well as its legal representatives, senior management in charge, directly accountable person-in-charge and other directly accountable employees. Penalties imposed on our company could negatively affect our business operations and have a material adverse impact on the Company’s reputation.

Concerns regarding the quality or safety of our food products or our food supply chain, even if factually incorrect or based on isolated incidents, could cause consumers to avoid purchasing certain products from us, or to seek alternative food sources. Any report linking Missfresh to food contamination, food tampering, mislabeling, or other food safety issues could adversely impact sales and our business and growth prospects may be materially and adversely affected.

Our expansion into new product categories and substantial increase in the number of SKUs may not meet consumer demand and may expose us to new challenges and more risks.

In recent years, we have expanded our product offerings of grocery to include fruits, vegetables, meat and seafood, dairy and prepared foods and FMCG products. Expansion into diverse new product categories and substantially increased number of products and SKUs involves new risks and challenges. Our lack of familiarity with new products and lack of relevant consumer data relating to such products may make it more difficult for us to anticipate consumer demand and preferences. We may misjudge consumer demand, resulting in inventory buildup and possible inventory write-down. It may also make it more difficult for us to inspect and control quality and ensure proper handling, storage and delivery. We may experience higher return rates on new products, receive more customer complaints about them and face costly product liability claims as a result of selling them, which would harm our brand and reputation as well as our financial performance. Furthermore, we may not have much purchasing power in new categories of products and we may not be able to negotiate favorable terms with suppliers. We may need to price aggressively to gain market share or remain competitive in new categories. It may be difficult for us to achieve profitability in the new product categories and our profit margin, if any, may be lower than we anticipate, which would adversely affect our overall profitability and results of operations. We cannot assure you that we will be able to recoup our investments in introducing these new product categories. In addition, we import certain products. Under the applicable import and export regime and regulations of the relevant jurisdictions, we may be required to obtain certain licenses, approvals, permits, registrations and/or filings for the import and export of certain types of our products to offer on our platforms. Due to the complexity of the import and export regime and regulations and the wide variety of our products, we cannot assure you that we have complied with and will be able to comply with all applicable regulations in full. If we are found to be in violation of any such regulation, we may be subject to fines and other penalties.

The COVID-19 pandemic has had and could continue to have an adverse impact on our business, operations and financial condition.

In early 2020, in response to intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals infected with or suspected of having COVID-19, prohibiting residents from free travel, encouraging employees of enterprises to work remotely from home and cancelling public activities, among others. More consumers have adopted online grocery shopping as a result of COVID-19 lockdown policies in China. Pandemic-induced online shopping may not be sustained, and in future periods our revenue may decline. The increasing demand during the pandemic, coupled with travel and transportation restrictions in China, also put a strain on our supply chain and delivery services. As a result, our operations were impacted by delays in business activities, commercial transactions and general uncertainties surrounding the government’s business and travel restrictions. In the first half of 2020, travel restrictions resulted in the short-term shortage of migrant workers in large cities, which had temporarily adversely affected our delivery capacity. Our acquisition of new consumers through ground promotion was also impacted due to governmental restrictions on social gathering. Moreover, we

 

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took a series of measures in response to the pandemic to protect our employees, including, among others, temporary closure of our offices and warehouses, remote working arrangements for our employees and travel restrictions or suspension. These measures reduced the capacity and efficiency of our operations. We have also provided our delivery riders with masks, hand sanitizers and other protective equipment immediately after the outbreak, which had increased and may continue to increase our operating expenses. In addition, our business operations could be disrupted if any of our employees is suspected of contracting the COVID-19 or any other epidemic disease, since our employees could be quarantined and/or our offices be shut down for disinfection. Finally, due to the strict COVID-19 inspection policies and public health controls in China, if our products were detected with COVID-19 virus, we may need to incur significant time and resources in response to governmental enforcement actions and other publicity-related issues.

The extent to which the COVID-19 pandemic impacts our long-term results remains uncertain, and we are closely monitoring its impact on us. As the COVID-19 pandemic has been gradually contained in China, user engagement and their spending on our online platforms could be adversely affected. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our business, results of operations, financial conditions and prospects could be adversely affected directly, as well as indirectly to the extent that COVID-19 or any other pandemic or natural disaster harms the Chinese economy in general. To the extent COVID-19 adversely affects our business, financial condition and results of operations, it may also heighten some of the other risks described in this “Risk Factors” section.

If our expansion into new geographical areas is not successful, our business and prospects may be materially and adversely affected.

We have a track record of successfully expanding into new geographical areas, where we commenced the operation of our on-demand DMW retail business from covering top-tier cities in China and have continued to expand our geographical reach to smaller and lower-tier cities. Our expansion into new geographical areas involves new risks and challenges associated with such new markets, such as our business model may not be acceptable to residents in third- and lower-tier cities in China, the order density in those smaller, less developed areas may not be sufficient to allow us to operate in a cost-efficient manner, and we may need to adjust our pricing methodologies to adapt to local economic condition. Similarly, the expansion of our intelligent fresh market business may present operating, marketing and compliance challenges that differ from those that we currently encounter. We cannot assure that we will be able to execute on our business strategy or that our service offerings will be successful in such markets.

In addition, our lack of understanding of consumers or familiarity with suppliers, merchants and market dynamic of these areas may make it more difficult for us to keep pace with local demands and preferences. Further, there may be one or more existing market leaders in any geographical area where we operate or decide to expand. Such companies may be able to compete more effectively than us by leveraging their experience in doing business in that market as well as their deeper data insight and greater brand recognition locally. Any failure in our expansion into new geographical areas could materially and adversely affect our business and prospects.

In the PRC, if a company operates business outside its registered address, the company may be required to register those premises for business operation as branch offices with the relevant local authorities at the place where the premises are located and obtain business licenses for them as branch offices. As of the date of this prospectus, our business in certain local markets is being carried out without completing such registration with the local regulators. We may not be able to register the main premises for business operations as branch offices in a timely manner or at all due to complex procedural requirements and relocation of branch offices from time to time. If we become subject to penalties or other administrative proceedings for failure to complete such required registrations, our reputation, business, and results of operations could be materially and adversely affected.

 

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If we fail to manage and expand our relationships with our suppliers, or otherwise fail to procure products on favorable terms, our business and growth prospects may suffer.

We source products directly from product origin for our neighborhood retail business. We worked with over 2,300 suppliers in 2020. Our suppliers include domestic and cross-border manufacturers, distributors and resellers. Maintaining strong relationships with these suppliers is important to the growth of our business. In particular, we depend significantly on our ability to directly procure products from suppliers on favorable pricing terms. We typically enter into one-year framework agreements with suppliers and renew them on an annual basis, and these framework agreements do not ensure the availability of products or the continuation of particular pricing practices or payment terms beyond the end of the contractual term. In addition, our agreements with suppliers typically do not restrict the suppliers from selling products to other buyers. We cannot assure you that our current suppliers will continue to sell products to us on commercially acceptable terms, or at all, after the term of the current agreement expires. Even if we maintain good relationships with our suppliers, their ability to supply products to us in sufficient quantity and at competitive prices may be adversely affected by economic conditions, labor actions, regulatory or legal decisions, customs and import restrictions, natural disasters or other causes. In the event that we are not able to purchase merchandise at favorable prices, our sales of products through online platforms and cost of revenues may be materially and adversely affected. In the event any distributor or reseller does not have authority from the relevant manufacturer to sell certain products to us, such distributor or reseller may cease selling such products to us at any time. In addition, our accounts payable turnover days from our on-demand DMW retail business were 40 days in 2018, 55 days in 2019, 72 days in 2020 and 56 days in the three months ended March 31, 2021. If our suppliers cease to provide us with favorable payment terms, our requirements for working capital may increase and our operations may be materially and adversely affected. We will also need to establish new supplier relationships to ensure that we have access to a steady supply of products on favorable commercial terms. If we are unable to develop and maintain good relationships with suppliers that would allow us to obtain a sufficient amount and variety of authentic and quality merchandise on acceptable commercial terms, it may inhibit our ability to offer sufficient products sought by our consumers, or to offer these products at competitive prices. In addition, there can be no assurance that our suppliers will comply with the policies and procedures. Any adverse developments in our relationships with suppliers could materially and adversely affect our business and growth prospects. Any disputes with suppliers could adversely affect our reputation and subject us to damages and negative publicity. Finally, if we fail to retain important existing suppliers or attract new suppliers to sell their products to us due to any reason, our business and growth prospects may be materially and adversely affected.

We may not have effective control over the merchants in our intelligent fresh markets, and we may be subject to significant costs and reputational harm in the event these merchants violate any laws or regulations applicable to our operations.

Merchants in our intelligent fresh markets are not our employees and do not enter into any employment contracts with us. Accordingly, we are not in a position to provide the same level of control over and oversight of suppliers for our neighborhood retail business or merchants in our intelligent fresh markets as we would if they were our employees. Consumers may associate merchants in our intelligent fresh markets with us and hold us accountable for any misconduct by the merchants. We may be subject to lawsuits or reputational harm if, for example, a supplier or merchant conducts any wrongdoings or otherwise violates applicable laws. While we have implemented policies and procedures designed to govern conducts of our market merchants to comply with the regulatory regime in China and protect our goodwill, there can be no assurance that suppliers or merchants will comply with the policies and procedures. Violations by market merchants of applicable law or of the policies and procedures could reflect negatively on our products and operations and harm our business reputation. While we have not experienced any significant problems affecting our products, operations or business reputation caused by violations by suppliers or merchants of the policies and procedures, we cannot assure you that we will not face such problems in the future.

 

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We may not be able to exert adequate management, supervision and control over our delivery riders.

We rely on our delivery riders to provide local on-demand delivery to fulfill customer orders. We engage third-party service providers who deploy their employees, as well as engage independent contractors, to provide delivery services for products offered on our platforms. These delivery riders, who are not our employees, have a significant amount of direct interactions with our consumers, and their service quality has a direct impact on our brand. However, since these delivery riders are not our employees, our management, supervision and control over them is relatively limited as compared to our own employees. Although we have implemented mandatory trainings to all of our delivery riders, established service standards across our network, and provided incentives based on periodic evaluations, we may not be able to exert adequate management, supervision and control over their service quality. If any delivery riders fail to perform in accordance with our instructions, policies and business guidelines, our merchants and consumers for item pick-up and delivery, our reputation, business and results of operations could be materially and adversely affected.

If the delivery riders violate any relevant requirements under the applicable laws and regulations or their agreements with us, users may file claims or complaints against us, as the delivery riders provide delivery services through our platforms. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, be harmful to our reputation, require significant management attention and divert significant resources, and therefore harm our business. In addition, we constantly have a vast number of delivery riders in transportation, performing local on-demand delivery services on our Missfresh platform. Therefore, we are subject to isolated complaints and negative publicity regarding the services and behaviors of these delivery riders due to their mass even if we could exert adequate management, supervision and control over them, as such risks are inherently associated with companies operating in labor intensive industries.

Finally, our agreements with the outsourced delivery agencies, delivery service providers or other third-party platforms typically provide that we are not liable to the delivery riders if the outsourced delivery agencies, delivery service providers or other third-party platforms fail to fulfill their contractual duties to these delivery riders. However, if the outsourced delivery agencies, delivery service providers or other third-party platforms violate any relevant PRC laws and regulations, including labor, employee benefits, housing provident funds and social security insurance, or their employment agreements with the delivery riders, or if any delivery riders employed by them suffered from any personal injuries or death, claims or complaints may be filed against us. As a result, we may incur legal liability, and our reputation, business, financial conditions and results of operations could be materially and adversely affected.

Further, a PRC regulatory determination that reclassifies a delivery rider as an employee of us could cause us to incur significant additional expenses resulting from the potential application of labor and employment laws to compensate delivery riders, including employee benefits, social security contributions and housing provident funds, as well as the application of relevant taxes and governmental penalties or other legal sanctions. Further, any such reclassification would require us to fundamentally change our pricing methodologies and business model, and consequently have an adverse effect on our business, financial condition and results of operations.

Any change, disruption or discontinuity in the features and functions of major social networks in China could severely limit our ability to effectively conduct marketing activities and continue to grow our user base, and our business may be materially and adversely affected.

We have incurred significant expenses on a variety of different marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of products and provision of services. Our brand promotion and marketing activities may not be well received by consumers and may not result in the levels of sales of product that we anticipate. Our sales and marketing expenses was RMB795.5 million, RMB740.0 million and RMB589.2 million (US$89.9 million) in 2018, 2019 and 2020, respectively, and RMB98.7 million and RMB167.6 million (US$25.6 million) in the three months ended March 31, 2020 and 2021, respectively. Marketing approaches and tools in the neighborhood retail industry in China are evolving. This further requires

 

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us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and consumer preferences. Failure to refine our existing marketing approaches or to introduce new marketing approaches in a cost-effective manner could reduce our market share, cause our net revenues to decline and negatively impact our profitability.

Our success depends on our ability to expand user base and retain new consumers through online marketing. We leverage social networks in China as a tool for member and user acquisition and engagement. For example, we leverage social media to enable consumers to share product information and their experiences with products on our platforms to their friends, family and other social contacts, who can purchase such products directly via the links shared by the consumers through social networks. To the extent that we are banned from using some or all functions of such social networks, or fail to leverage such social networks, our ability to expand user base and retain consumers and other users, and maintain an active community may be severely harmed. If our social media channels change their functions or support, such as charging fees for functions or support that is currently provided for free, or stops offering its functions or support to us or discontinues its functions or support in general, we may not be able to locate alternative platforms of similar scale to provide similar functions or support in a timely manner, or at all. Furthermore, we may fail to establish or maintain relationships with additional social network operators to support the growth of our business on economically viable terms, or at all. Any interruption to or discontinuation of our relationships with major social network operators may severely and negatively impact our ability to continue growing our user base, and any occurrence of the circumstances mentioned above may have a material adverse effect on our business, financial condition and results of operations.

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

Our business requires us to manage a large volume of inventory effectively. We depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our inventory. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not order products in the quantities that we expect. It may be difficult to accurately forecast demand, and determine appropriate product or component.

In addition, we source our products from a variety of local, regional, national and international suppliers, and we rely on them to meet our quality standards and supply products in a timely and efficient manner. There is, however, no assurance that high-quality and safe food and beverage products will be available to meet our needs. Competition has increased for high-quality and safe food products. As other competitors significantly increase comparable product offerings, if new laws require the reformulation of certain products to meet tougher standards, or if natural disasters or other catastrophic events occur, the supply of these products may be constrained.

If we fail to manage our inventory effectively or negotiate favorable credit terms with suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers in order to secure the right to return products to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our results of operations and financial condition.

 

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We plan to further expand our quality control centers and DMWs. If we are unable to maintain our current fulfillment infrastructure and expand successfully, our business prospects and results of operations may be materially and adversely affected.

We believe that our own fulfillment infrastructure, consisted of strategically located quality control centers and DMWs, is essential to our success. As of March 31, 2021, we operated 11 quality control centers and 631 DMWs in 16 cities. We are building additional quality control centers and DMWs to increase our fulfillment capacity and to improve our fulfillment workflow and processes. As we continue to expand our fulfillment and DMW network and capacity, our fulfillment network is becoming increasingly complex and challenging to manage and operate. We cannot assure you that we will be able to acquire land use rights and set up warehouses, or lease suitable facilities for the delivery stations, on commercially acceptable terms or at all. We may not be able to recruit a sufficient number of qualified employees in connection with the expansion of our fulfillment infrastructure. In addition, the expansion of our fulfillment infrastructure may require significant managerial, financial, operational and other resources. If we fail to renew leases on existing quality control centers or DMWs or fail to manage new sites successfully, our growth potential, business and results of operations may be materially and adversely affected. Even if we manage the expansion of our fulfillment infrastructure successfully, it may not give us the competitive advantage that we expect if our competitors dominate the markets we expand into.

We may not be able to recoup the investments we make to expand and upgrade our smart supply chain, quality control centers and DMWs, automation and intellengtization and other technology capabilities.

We have invested and may continue to invest significant sums in expanding our upgrading our technology platform, our RAIN. We may continue to invest heavily in our technology platform and smart supply chain capabilities for a number of years. We may also continue to add personnel and other resources to our technology platform and smart supply chain as we focus on expanding our product selection and offering new services. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. We may not be able to recover our capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect our financial condition and results of operation.

Some of our DMWs are managed by third-party partner managers, and we may be subject to significant costs and reputational harm in the event that partner managers fail to meet our operating standards.

Some of our DMWs are managed by third-party partner managers. We enter into service agreements with third-party service providers who enter into sub-contractor agreements with the partner managers who are not our employees. These third-party partner managers are required to operate DMWs in accordance with the standards we provide in our agreements. While we may oversee the performance of partner managers and replace partner managers that do not meet our standards, management of partner managers may not be as timely and effective as they were our employees. If we are unable to enter into new agreements or extend existing agreements with these partner managers on terms and conditions acceptable to us, we may not be able to find alternative partner managers to provide similar services in a timely and reliable manner, or at all. Any termination of our arrangements with partner managers could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations are subject to seasonal fluctuations.

We experience seasonality in our business, reflecting a combination of e-commerce seasonality patterns and new patterns associated with neighborhood retail in particular. For example, we may experience flucturations in user traffic and purchase orders during weekends, national holidays, promotional seasons such as November 11th.

 

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Overall, the historical seasonality of our business has been relatively mild due to the rapid growth we have experienced and may increase further in the future. Our financial condition and results of operations for future periods may continue to fluctuate. As a result, the trading price of our shares may fluctuate from time to time due to seasonality.

Our success depends on the continuing and collaborative efforts of our management team, and our business may be severely disrupted if we lose their services.

Our success heavily depends upon the continued services of our management. In particular, we rely on the expertise and experience of Mr. Zheng Xu, our founder, chairman and chief executive officer, and other executive officers. If one or more of our senior management were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all, and our business, financial condition and results of operations may be materially and adversely affected. If any of our senior management joins a competitor or forms a competing business, we may lose consumers, suppliers, know-how and key professionals and staff members. Our senior management has entered into employment agreements and confidentiality and non-competition agreements with us. However, if any dispute arises between our officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all. In addition, we do not have key-man insurance for any of our executive officers or other key personnel. Events or activities attributed to our executive officers or other key personnel, and related publicity, whether or not justified, may affect their ability or willingness to continue to serve our company or dedicate their full time and efforts to our company and negatively affect our brand and reputation, resulting in an adverse effect on our business, operating results and financial condition. In addition, our senior management team has limited experience in running public companies, which will require us to expend additional resources in hiring additional support staff and incur additional costs and expenses.

If we are unable to recruit, train and retain qualified personnel or sufficient workforce while controlling our labor costs, our business may be materially and adversely affected.

We intend to hire additional qualified employees to support our business operations, research and development, and planned expansion. Our future success depends, to a significant extent, on our ability to recruit, train and retain qualified personnel, particularly technical, research and development, marketing and other personnel with experience in the neighborhood retail industry. Research and development personnel are essential to our long-term success, as we are a company that competes with innovative service and business models like our intelligent fresh market and retail cloud services. Our experienced mid-level managers are instrumental in implementing our business strategies, executing our business plans and supporting our business operations and growth. The effective operation of our managerial and operating systems, our RAIN, customer service team and other operational functions also depends on the hard work and quality performance of our management and employees. Since our industry is characterized by high demand and intense competition for talent and labor, we can provide no assurance that we will be able to attract or retain qualified staff or other highly skilled employees that we will need to achieve our strategic objectives. Our smart supply chain also requires a significant number of blue-collar workers, and these positions tend to have higher than average turnover. Labor costs in China have increased with China’s economic development, particularly in the large cities where we operate our quality control centers and DMWs. Rising inflation in China, which has had a disproportionate impact on everyday essentials such as food, is also putting pressure on wages. In addition, as we are still a young company, our ability to train and integrate new employees into our operations may also be limited and may not meet the demand for our business growth on a timely fashion, or at all. If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.

We face risks associated with the misconduct or illegal activities of our employees, suppliers and their employees, and other related personnel.

We rely on our employees to maintain and operate our business and have implemented a series of code of conduct to guide the activities of our employees. However, we do not have control over the actions of our

 

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employees, and any misbehavior of our employees could materially and adversely affect our reputation and business. For example, certain of our ex-employees had been found to have engaged in misconduct involving embezzlements and other fraudulent activities in their roles as operation-level personnel in the past. Although such incidents did not result in any material losses to our company and we have further enhanced our internal compliance programs afterwards, we cannot guarantee that our policies and procedures will be effective in preventing similar fraudulent or illegal activities from occurring in the future. In the event we are subject to misconduct and misuse of our platforms for inappropriate or illegal purposes by any of our employees, suppliers and their employees, claims may be brought against us and we may incur material financial losses or reputational harms. In response to allegations of illegal or inappropriate activities conducted through our platforms or as part of business operations, relevant governmental authorities may intervene and hold us liable for non-compliance with applicable laws and regulations and subject us to administrative penalties or other sanctions. In addition, our customers may suffer or allege to have suffered physical, financial or emotional harm caused by such misconducts or illegal activities, and our business and public perception of our brand may be materially and adversely affected as a result.

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

The satisfactory performance, reliability and availability of our technology platform are critical to our success and our ability to expand user base and retain consumers and provide quality customer service. All of our sales of products are made online through our mobile app. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or reduced fulfillment performance could reduce the volume of products sold and the attractiveness of product offerings on our website. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to system interruptions, website slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability to accept and fulfill consumer orders. Security breaches, computer viruses and hacking attacks have become more prevalent in our industry. Because of our brand recognition in the neighborhood retail industry in China, we believe we are a particularly attractive target for such attacks. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems from any third-party intrusions, viruses or hacker attacks, information or data theft or other similar activities. Any such future occurrences could reduce user satisfaction, damage our reputation and result in a material decrease in our revenue.

Additionally, we must continue to upgrade and improve our technology platform to support our business growth, and failure to do so could impede our growth. However, we cannot assure you that we will be successful in executing these system upgrades and improvement strategies. In particular, our systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. In addition, we experience surges in online traffic and orders associated with promotional activities and holiday seasons, weekends and pandemic lockdowns, which can put additional demands on our technology platform at specific times. If our existing or future technology platform does not function properly, it could cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect our business, financial condition and results of operations.

Any deficiencies in China’s internet infrastructure or our third-party technology service providers could impair our ability to sell products over our mobile app, which could cause us to lose consumers and harm our operating results.

Almost all of our sales of products are made online through our mobile app. Our business depends on the performance and reliability of the internet infrastructure in China and our third-party technology service providers. The availability of our mobile app depends on telecommunications carriers and other third-party

 

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providers for communications and storage capacity, including bandwidth and server storage, among other things. If we are unable to enter into and renew agreements with these providers on acceptable terms, or if any of our existing agreements with such providers are terminated as a result of our breach or otherwise, our ability to provide our services to our consumers could be adversely affected. Almost all access to the internet in China is maintained through state-owned telecommunication carriers under administrative control, and we obtain access to end-user networks operated by such telecommunications carriers and internet service providers to give consumers access to our mobile app. We have experienced service interruptions in the past, which were typically caused by service interruptions at the underlying external telecommunications service providers, such as the internet data centers and broadband carriers from which we receive services. Service interruptions prevent consumers from accessing our mobile app and placing orders, and frequent interruptions could frustrate consumers and discourage them from attempting to place orders, which could cause us to lose consumers and harm our operating results.

If we fail to adopt new technologies or adapt our mobile app, Mini Programs and systems to changing consumer requirements or emerging industry standards, or if our efforts to invest in the development of new technologies are unsuccessful or ineffective, our business may be materially and adversely affected.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our mobile application. The industries we operate in are characterized by rapid technological evolution, changes in consumer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices, such as mobile internet, in a cost-effective and timely way. In recent years, we invested in the development of many new technologies and business initiatives, such as AI, big data and cloud services. The development of websites, mobile apps and other proprietary technologies entails significant technical and business risks. We cannot assure you that we will be able to successfully develop or effectively use new technologies, recoup the costs of developing new technologies or adapt our websites, mobile application, proprietary technologies and systems to meet consumer requirements or emerging industry standards. If we are unable to develop technologies successfully or adapt in a cost-effective and timely manner in response to changing market conditions or consumer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

Consumer growth and activity on mobile devices depends upon effective use of mobile operating systems, networks and standards that we do not control.

Purchases using mobile devices by consumers generally, and by our direct sales consumers specifically, have increased significantly, and we expect this trend to continue. To optimize the mobile shopping experience, we are somewhat dependent on our consumers downloading our specific mobile app for their particular devices as opposed to accessing our sites from an internet browser on their mobile device. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for these alternative devices and platforms, and we may need to devote significant resources to the development, support and maintenance of such applications. In addition, our future growth and our results of operations could suffer if we experience difficulties in the future in integrating our mobile application into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile application download stores, if our application receives unfavorable treatment compared to competing applications on the download stores, or if we face increased costs to distribute or have consumers use our mobile application. We are further dependent on the interoperability of our sites with popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the functionality of our sites or give preferential treatment to competitive products could adversely affect the usage of our sites on mobile devices. In the event that it is more difficult for our consumers to access and use our sites on their mobile devices, or if our

 

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consumers choose not to access or to use our sites on their mobile devices or to use mobile products that do not offer access to our sites, our consumer growth could be harmed and our business, financial condition and operating results may be adversely affected.

Failure to protect confidential information of our users and network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.

A significant challenge to the neighborhood retail industry is the secure storage of confidential information and its secure transmission over public networks. Almost all of the orders and some of the payments for products we offer are made through our websites and our mobile app. In addition, some online payments for our products are settled through third-party online payment services. We also share certain personal information about our consumers with contracted third-party couriers, such as their names, addresses, phone numbers and transaction records. In addition, with the rapid development of our AI, big data and cloud technologies and services, we have accumulated a large volume of data, which covers consumer’s browsing and consumption behavior information, product manufacturing and sales information, warehousing and distribution information, customer service information, among others. We also formed strategic partnerships with some leading mobile internet companies to leverage their powerful big data resources, massive user bases and AI-driven technologies. Maintaining complete security for the storage and transmission of confidential information on our technology platform is essential to maintaining our operating efficiency and consumer confidence as well as complying with the applicable laws and standards.

We have adopted security policies and measures, including encryption technology, to protect our proprietary data and consumer information. However, advances in technology, the expertise of hackers, improper use or sharing of data, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold as a result of our consumers’ visits to our websites and use of our mobile app. Such individuals or entities obtaining our consumers’ confidential or private information may further engage in various other illegal activities using such information. In addition, we have limited control or influence over the security policies or measures adopted by business partners including strategic partners or third-party providers of online payment services through which some of our consumers may choose to make payment for purchases. The contracted third-party delivery riders we use to fill in peak demands may also violate their confidentiality obligations and disclose or use information about our consumers illegally. Any negative publicity on our websites’ or mobile applications’ safety or privacy protection mechanisms and policies, and any claims asserted against us or fines imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and results of operations. If we give third parties greater access to our technology platform in the future as part of providing more technology services to third parties and others, it may become more challenging for us to ensure the security of our systems. Any compromise of our information security or the information security measures of our contracted third-party couriers or third-party online payment service providers or other business partners could have a material and adverse effect on our reputation, business, prospects, financial condition and results of operations. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms are under increased public scrutiny.

As neighborhood retail industry and AI technology continue to evolve, we believe that increased regulation by the PRC government of data privacy on the internet is likely. We may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we store, process and share data with our customers, suppliers and third-party service subscribers. For example, the PRC Cyber Security Law provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of critical information infrastructure. The PRC Cyber Security Law reaffirms the basic principles

 

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and requirements set forth in other existing laws and regulations on personal information protections and strengthens the obligations and requirements of internet service providers, which include but are not limited to: (i) keeping all user information collected strictly confidential and setting up a comprehensive user information protection system; (ii) abiding by the principles of legality, rationality and necessity in the collection and use of user information and disclosure of the rules, purposes, methods and scopes of collection and use of user information; and (iii) protecting users’ personal information from being leaked, tampered with, destroyed or provided to third parties. Any violation of the provisions and requirements under the PRC Cyber Security Law and other related regulations and rules may result in administrative liabilities such as warnings, fines, confiscation of illegal gains, revocation of licenses, suspension of business, and shutting down of websites, or, in severe cases, criminal liabilities. In addition, the State Administration for Market Regulation and the Standardization Administration jointly issued the new Standard of Information Security Technology—Personal Information Security Specification (GB/T 35273-2020) in March 2020, which replaced the previous standard GB/T 35273-2017 and took effect in October 2020. Pursuant to these standards, the personal data controller refers to entities or persons who are authorized to determine the purposes and methods for using and processing personal information. The personal data controller should collect information in accordance with the principles of legality, minimization and voluntariness and should also obtain a consent from the information provider. Moreover, the SAMR has issued the Measures for the Supervision and Administration of Online Transactions, or the Measures for Online Transaction on March 15, 2021, which took effect on May 1, 2021. Measures for Online Transaction reinforces the principles of legality, rationality and necessity in the collection and use of the users’ information and disclosure of the rules, purposes, methods and scopes of collection and use of user information specified in the PRC Cyber Security Law. It also provides that the business operator through online platform shall not force consumers to agree with the collection and use of their personal information that is not directly related to such operator’s business activities by means of general authorization, default authorization, bundling with other authorization, termination of installation and use. In addition, different regulatory bodies in China, including the Ministry of Industry and Information Technology, or the MIIT, the Cyberspace Administration of China, or CAC, and the SAMR, have enforced data privacy and protections laws and regulations with various standards and applications. The various standards in enforcement of data privacy and protection laws have caused us difficulties in ensuring full compliance and increase our operating cost, as we need to spend time and resources to deal with various inspections for compliance. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. While we have adopted a rigorous and comprehensive policy for the collection, processing, sharing, disclosure authorization and other aspects of data use and privacy and taken necessary measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of these policies and measures undertaken by us, or by the agents, stores or other business partners on our platforms. Any failure or perceived failure to comply with all applicable data privacy and protection laws and regulations, or any failure or perceived failure of our business partners to do so, or any failure or perceived failure of our employees to comply with our internal control measures, may result in negative publicity and legal proceedings or regulatory actions against us, and could result in fines, revocation of licenses, suspension of relevant operations or other legal or administrative penalties, which may in turn damage our reputation, discourage current and potential customers and subject us to fines and damages, which could have a material adverse effect on our business and results of operations.

In addition, we may need to comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S., Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation, or the GDPR, which became effective on May 25, 2018. The GDPR imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR) and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks.

 

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We generally comply with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions on the conduct of our business and the manner in which we interact with our consumers. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us, and misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against us by governmental authorities or other authorities, damage to our reputation and credibility and could have a negative impact on revenues and profits.

Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other consumer data, could cause our consumers to lose trust in us and could expose us to legal claims. Any perception by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of neighborhood retail and other online services generally, which may reduce the number of orders we receive.

The wide variety of payment methods that we accept subjects us to third-party payment processing-related risks.

We accept payments using a variety of methods, including bank transfers, online payments with credit cards and debit cards issued by major banks in China, and payment through third-party online payment platforms. For certain payment methods, we pay various service fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we accept. We are also subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our consumers, process electronic funds transfers or facilitate other types of online payments, and our business, financial condition and results of operations could be materially and adversely affected.

Our product delivery, return and exchange policies may materially and adversely affect our results of operations.

We have adopted delivery policies that do not necessarily pass the full cost of delivery onto our customers. We also have adopted return and exchange policies that make it convenient and easy for customers to change their minds after completing purchases. We may also be required by law to adopt new or amend existing return and exchange policies from time to time. For example, pursuant to the amended PRC Consumer Protection Law, which became effective in March 2014, except for certain types of products, such as custom-made goods, fresh and perishable goods, digital products such as audio-visual products, computer software, downloaded online or unpacked by the consumer, newspapers and periodicals, consumers are generally entitled to return the products purchased within seven days upon receipt without giving any reasons when they purchase the products from business operators on the internet. See “Regulations—Regulation Related to Consumer Protection and Product Quality.” These policies are intended to improve customers’ shopping experience and promote customer loyalty, which in turn help us acquire and retain customers. However, they also subject us to additional costs and expenses which we may not recoup through increased revenue. Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We may be required to make significant expenditures or modify our business practices to comply with existing or future laws and regulations, which may increase our costs and materially limit our ability to operate our business. Our ability to handle a large volume of returns is unproven. If our return

 

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and exchange policy is misused by a significant number of customers, our costs may increase significantly and our results of operations may be materially and adversely affected. If we revise these policies to reduce our costs and expenses, our customers may be dissatisfied, which may result in loss of existing customers or failure to acquire new customers at a desirable pace, which may materially and adversely affect our results of operation.

Our use of some leased properties could be challenged by third parties or government authorities due to title defects and non-compliance issues, which may cause interruptions to our business operations.

As of March 31, 2021, we had 670 leased properties for our offices, quality control centers, DMWs and fresh markets. We may need to relocate for a number of reasons. For example, we may not be able to successfully renew leases upon expiration of the current term, and may decide to move to more premium locations or have to relocate our operations as required by relevant PRC laws and regulations. The lessors of a small number of our leased properties, including our two quality control centers in Beijing, have not provided us with proper ownership certificates for the properties we lease or prove their rights to sublease the properties to us or do not hold legal certificates to legally lease properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the relevant government authorities to lease such properties to us for our commercial uses, our leases could be challenged by third parties or invalidated by applicable governmental authorities. We may have to renegotiate the leases with the owners or the parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. In addition, our leasehold interests in most of our leased properties have not been registered with relevant PRC government authorities as required by PRC law, which may expose us to potential maximum penalty of RMB10,000 per unit leasehold.

In addition, although PRC laws and rules provide various requirements with respect to fire safety in China, detailed measures and requirements vary materially among different regions and are still evolving, local regulatory guidelines may not be published timely, and the application of such measures are subject to significant uncertainties in various Chinese cities. For example, in certain cities where we operate our warehouses and quality control centers (such as Beijing, Nanjing, Dongguan, Shijiazhuang, Qingdao and Shenzhen), applicable laws and regulations exempt a “construction project” with a construction area of less than 300 square meters (or other criteria as otherwise determined by the local governmental authorities) from the fire protection design and fire safety filing requirements. In contrast, in certain other cities where we operate, such as Tianjin and Suzhou, all construction projects and decoration projects are required to conduct fire safety filing regardless of sizes or investment amounts. Further, a “special construction project” as stipulated in the relevant laws and regulations is subject to (i) fire protection design review before such project commences construction and (ii) fire protection inspection before such project commences operations. In contrast, other construction projects other than a “special construction project” are subject to fire protection inspection filing and routine fire protection inspection and audits from time to time.

Although our quality control centers and DMWs generally do not constitute “special construction projects” as defined under such laws and regulations, some of our DMWs’ building spaces have been redesigned, reconstructed or decorated by us to fit our needs to store fresh products, and some of such redesigned, reconstructed or decorated DMWs have a construction area that is more than 300 square meters. For all of such redesigned, reconstructed or decorated DMWs having a construction area more than 300 square meters, we have not yet completed the required fire safety filings with the relevant governmental authorities. While we have not received any government order or penalty resulting from such non-compliance, we cannot assure you that we will not be subject to penalties, fines, orders to rectify or other administrative proceedings. We are currently in the process of taking necessary measures to comply with the relevant fire safety laws and regulations with respect to these properties, however, we cannot assure you that we will complete all required fire safety filings and fulfill all applicable fire safety inspections in a timely manner as required by local regulatory authorities. As a result, our use of such properties may be adversely affected. In the event our use of such warehouses is deemed to be in violation of such laws, regulations or requirements, we may be subject to penalties, fines, or forced to relocate from the affected operations.

 

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We have been, and from time to time in the future may be, subject to legal proceedings and claims relating to our leasehold interests in or use of such properties, or involved in disputes with the property owners or third parties who otherwise have rights to or interests in our leased properties. We cannot assure you that our use of such leased properties will not be successfully challenged. In the event that our use of properties is successfully challenged, we may be subject to fines and forced to relocate the affected operations. In addition, we can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties’ challenges on our use of such properties. As a result, our business, financial condition and results of operations may be materially and adversely affected.

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

We lease properties for our offices, warehouse facilities, quality control centers and fresh markets 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. In addition, 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.

Any lack of requisite approvals, licenses or permits applicable to our business or any failure to comply with applicable laws or regulations may have a material and adverse impact on our business, financial condition and results of operations.

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce), or SAMR, the National Development and Reform Commission, or NDRC, the Ministry of Commerce, the Ministry of Industry and Information Technology, or MIIT, the Cyberspace Administration of China, the Ministry of Transport and the People’s Bank of China, among others. Together, these government authorities promulgate and enforce regulations that cover many aspects of the operation of the neighborhood retail, courier and road freight transportation industries, including entry into these industries, the scope of permissible business activities, pricing, consumer protection, food safety, product quality, licenses and permits for various business activities, and foreign investment.

Certain of our subsidiaries or local branches in China were established without obtaining the prior approval from the relevant government authorities that supervise the relevant industries, and some obtain the relevant permits from the government authority at a level lower than as required. We have not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities with respect to these defects. However, we cannot assure you that the relevant governmental authorities would not require us to obtain additional approvals or permits from proper level of government authorities to cure any historical defects. If the relevant government authorities require us to cure such defects, we cannot assure you that we will be able to obtain the approvals, or the permits from proper level of government authorities, in a timely manner or at all.

Although most of our PRC subsidiaries, local branches, quality control centers and DMWs which engage in the food operations have already obtained their Food Operation Permits or completed the required filing of their respective addresses in the Food Operation Permits in accordance with applicable laws and requirements, as we expand into new geographical areas rapidly, a small number of our DMWs and vending machines used have not completed the required filing of their addresses in relevant Food Operation Permits with local administrations in

 

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a timely manner. While we have not received any government order or penalty resulting from such failure, we cannot assure you that we will not be subject to penalties, fines, orders to rectify or other administrative proceedings. If we become subject to these penalties, our reputation, business, and results of operations could be materially and adversely affected.

Furthermore, the e-commerce industry is highly regulated by the PRC government. For example, the Pricing Law of the People’s Republic of China prohibits a business operator from committing specified unlawful pricing activities, such as dumping products at price below cost for the purpose of driving out rivals or monopolizing the market, using false or misleading prices to deceive consumers to transact, colluding with others to manipulate the market price, or conducting price discrimination against other business operators. We are required to obtain various licenses and permits from different regulatory authorities in order to distribute certain categories of products on our mobile app. We have made great efforts to obtain all the applicable licenses and permits, but due to the large and expanding number of products sold on our mobile platforms, we may not always be able to do so. As we increase our product selection, we may also become subject to new or existing laws and regulations that did not affect us before.

As online retail is evolving rapidly in China, new laws and regulations may be adopted from time to time to require us to obtain additional licenses and permits or to comply with new regulatory requirements. The PRC government authorities may continue to promulgate new laws, regulations and rules governing the e-commerce retail industry, tighten enforcement of existing laws, rules and regulations, and impose additional requirements and other obligations on our business. For example:

 

   

In August 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective on January 1, 2019. The E-Commerce Law imposes a number of new requirements and obligations on e-commerce platform operators. As no detailed interpretation and implementation rules have been promulgated, it remains uncertain how the newly adopted E-Commerce Law will be interpreted and implemented. We have adopted a series of measures to comply with such requires under the E-Commerce Law. We cannot assure you, however, that our current business operations meet the requirements under the E-Commerce Law in all respects. If the PRC governmental authorities determine that we are not in compliance with all the requirements under the E-Commerce Law and other applicable laws and rules, we may be subject to fines and/or other sanctions. Substantial uncertainties exist regarding the interpretation and implementation of PRC laws and regulations applicable to online retail businesses.

 

   

In February 2021, the Anti-monopoly Committee of the State Council published the Anti-monopoly Guidelines for the Platform Economy Sector, aiming at enhancing anti-monopoly administration of businesses that operate under the platform model and the overall platform economy. According to these guidelines, business practices such as deploying big data analytics to set discriminatory terms for merchandise price or other transaction terms, coercive exclusivity arrangements with transaction counterparties, blocking of competitor interface through technological means and unlawful collection of user data without consent, are prohibited. As the guidelines were newly promulgated, it is still uncertain as to the specific impact on our business or results of operations and prospects. The governmental authorities conducted an investigation on the prices we set for certain promotional merchandise in the past, and there is no guarantee that we would not be subject to any fines and other penalties due to any non-compliance found by the governmental authorities. According to the Provisions on Administrative Penalties for Illegal Pricing Activities of the People’s Republic of China, amended in December 2010, a business operator which uses false or misleading prices to entice consumers into transactions, may be ordered to take remedial action, and be confiscated its illegal gains and imposed with a penalty of less than five times of its illegal gains; or where there is no illegal gain, be imposed with a penalty of more than RMB50,000 and less than RMB500,000; where the circumstance is serious, it shall be ordered to cease operation for reorganization or be canceled of its business license by the competent administrative authority. We cannot assure you that we would not be involved in any additional regulatory investigations in the future.

 

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In April 2021, SAMR, together with the Office of the Central Cyberspace Affairs Commission and the State Tax Bureau of China, held a meeting with more than 30 major platform operators, including us. All platform operators that participated in the meeting were required to conduct a self-inspection within one month to identify and correct possible violations of anti-monopoly, anti-unfair competition, tax and other related laws and regulations and submit their compliance commitments for public supervision. As of the date of this prospectus, we have completed the self-inspection and submitted relevant report to competent authority, and the relevant governmental authorities are in the process of conducting onsite inspections on us. We cannot assure you that the regulatory authorities would be satisfied with our self-inspection results or we would not be subject to any penalty after the regulatory authorities’ onsite inspections with respect to any violations of anti-monopoly, anti-unfair competition, pricing, advertisement, privacy protection, food safety, product quality, tax and other related laws and regulations. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward. As a result, we may incur additional costs and expenses, devote more management’s attention and allocate additional resources in the compliance with relevant laws and regulations. If we are required to take any rectifying or remedial measures or are subject to any penalty, our reputation and business operations may be materially and adversely affected.

Due to the uncertainties associated with the evolving legislative activities and varied local implementation practices of consumer protection, anti-monopoly and competition laws and regulations in the PRC, compliance with these laws, regulations, rules, guidelines and implementations may be costly, and any incompliance or associated inquiries, investigations and other governmental actions may divert significant management time and attention and our financial resources, bring negative publicity, subject us to liabilities or administrative penalties, and may materially and adversely affect our financial conditions, operations and business prospects.

In conclusion, if we are unable to maintain and renew one or more of our licenses and certificates when their current term expires, or obtain such renewals on commercially reasonable terms, our operations could be disrupted. If the PRC government requires additional licenses or permits or provides more strict supervision requirements in the future in order for us to conduct our businesses, there is no guarantee that we would be able to obtain such licenses or permits or meet all the supervision requirements in a timely manner, or at all. In addition, if we enter into new service categories and businesses, or any of our current businesses or services are determined to be subject to new licensing requirements in the future, especially due to the evolving application or interpretation of relevant laws and regulations, we may be required to obtain licenses or permits that we do not currently have or to upgrade the licenses or permits we currently have. We will strive to obtain and upgrade the relevant licenses and permits, but we cannot assure you that we will be able to obtain or upgrade such licenses and permits in a timely manner, or at all. For example, we may enter into new service categories, such as Platform as a Service which is subject to the license of internet data center service and restricted by PRC laws and regulations for foreign ownership of PRC companies to engage in. As a result we may have to conduct such business through a series of contractual arrangements over certain variable interest entities or other alternative arrangements, instead of our wholly owned PRC subsidiaries, which may incur additional costs, expenses and uncertainties of such new businesses. Under applicable PRC laws, rules and regulations, the failure to obtain and/or maintain the licenses and permits required to conduct our business may subject us to various penalties, including confiscation of revenues, imposition of fines and/or restrictions on their business operations, or the discontinuation of their operations. Any such disruption in the business operations of our PRC subsidiaries or consolidated variable interest entities could materially and adversely affect our business, financial condition and results of operations.

We may be subject to product liability claims.

The products sold by us through our neighborhood retail business may be defective. As a result, sales of such products could expose us to product liability claims relating to personal injury or property damage and may require product recalls or other actions. Third parties subject to such injury or damage may bring claims or legal proceedings against us as the retailer of the product. Although we would have legal recourse against the manufacturer of such products under PRC law, attempting to enforce our rights against the manufacturer may be

 

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expensive, time-consuming and ultimately futile. In addition, we do not currently maintain any third-party liability insurance or product liability insurance in relation to products we sell. As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could have a negative impact on our reputation.

We have limited insurance coverage, which could expose us to significant costs and business disruption.

We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased all risk property insurance covering our inventory and fixed assets such as equipment, furniture and office facilities. We maintain public liability insurance for our business activities at all locations of our DMWs within China. We also provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance, maternity insurance and medical insurance for our employees. Additionally, we provide group accident insurance for all employees and supplementary medical insurance for all management and technology and other professional personnel. However, insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance or product liability insurance, nor do we maintain key-man life insurance. 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.

We may need additional capital, and financing may not be available on terms acceptable to us, or at all.

In 2018, 2019 and 2020, our net cash used in operating activities was RMB1,723.8 million, RMB1,966.9 million and RMB1,611.8 million (US$246.0 million), respectively, and in the three months ended March 31, 2020 and 2021, our net cash used in operating activities was RMB226.6 million and RMB589.5 million (US$90.0 million), respectively. It is possible that we will continue to have negative cash flow in the future. We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures. We may, however, require additional cash resources due to changed business conditions or other future developments, including any changes in our account payable policy, marketing initiatives or investments we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

Failure to comply with the terms of our indebtedness or enforcement of our obligations under any guarantee or other similar arrangement could have an adverse effect on our cash flow and liquidity.

As of December 31, 2018, 2019, 2020 and March 31, 2021, we had short-term borrowings of RMB20.0 million, RMB205.0 million, RMB830.0 million (US$126.7 million) and RMB568.0 million (US$86.7 million), respectively, and convertible note and loan of nil, nil. RMB248.9 million (US$38.0 million) and RMB253.4 million (US$38.7 million), respectively. Under our current debt financing arrangement and any debt financing arrangement that we may enter into in the future, we may be subject to covenants that could, among other things, restrict our business and operations. If we breach any of these covenants, our lenders under our credit facilities and holders of our unsecured senior notes will be entitled to accelerate our debt obligations. Any default under our credit facilities or unsecured senior notes could require that we repay these debts prior to maturity as well as limit our ability to obtain additional financing, which in turn may have a material adverse effect on our cash flow and liquidity. In addition, enforcement against us under any guarantee and other similar arrangements we may enter into in the future could materially and adversely affect our cash flow and liquidity.

 

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Disruptions in the financial markets and economic conditions could affect our ability to raise capital.

Global economies could suffer dramatic downturns as the result of a deterioration in the credit markets and related financial crisis as well as a variety of other factors including, extreme volatility in security prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. For example, the current COVID-19 pandemic has caused significant volatility in financial markets across the world. In the past, governments have taken unprecedented actions in an attempt to address and rectify these extreme market and economic conditions by providing liquidity and stability to the financial markets. If these actions are not successful, the return of adverse economic conditions may cause a significant impact on our ability to raise capital, if needed, on a timely basis and on acceptable terms or at all.

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

We regard our trademarks, copyrights, patents, domain names, know-how, proprietary technologies, and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others, to protect our proprietary rights. Although we are not aware of any copycat mobile apps that attempt to cause confusion or diversion of traffic from us at the moment, we may become an attractive target to such attacks in the future because of our brand recognition in the neighborhood retail industry in China. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, there can be no assurance that (i) our application for registration of trademarks, patents, and other intellectual property rights will be approved, (ii) any intellectual property rights will be adequately protected, or (iii) such intellectual property rights will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable. Furthermore, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms.

It is often difficult to register, maintain and enforce intellectual property rights in China. Confidentiality, invention assignment and non-compete 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 China. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the infringement or 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, and could put our intellectual property at risk of being invalidated or narrowed in scope. We can provide no assurance that we will prevail in such litigation, and even if we do prevail, we may not obtain a meaningful recovery. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in maintaining, 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 subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate patents, copyrights or other intellectual property rights held by third parties. We have been, and from time to time in the future may be, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be other third-party intellectual property that is infringed by our products, services or other aspects of our business. There could also be existing patents of which we are not aware that our products may inadvertently infringe. We cannot assure you that holders of patents purportedly relating to some aspect of our technology platform or business, if any such holders exist, would not seek to enforce such patents against us in China, the United States or any other jurisdictions.

 

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In addition, we strive to closely monitor the products offered on our platforms, and also require suppliers to indemnify us for any losses we suffer or any costs that we incur in relation to the products we source from such suppliers on our platforms. However, we cannot be certain that these measures would be effective in completely preventing the infringement of trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. Further, the application and interpretation of China’s patent laws and the procedures and standards for granting patents in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question. Finally, we use open-source software in connection with our products and services. Companies that incorporate open-source software into their products and services have, from time to time, faced claims challenging the ownership of open-source software and compliance with open-source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open-source software or noncompliance with open-source licensing terms. Some open-source software licenses require users who distribute open-source software as part of their software to publicly disclose all or part of the source code to such software and make available any derivative works of the open-source code on unfavorable terms or at no cost. Any requirement to disclose our source code or pay damages for breach of contract could be harmful to our business, results of operations and financial condition.

We have granted and may continue to grant restricted share units and other types of awards under our Share Incentive Plan, which may result in increased share-based compensation expenses.

We have adopted a share incentive plan to provide additional incentives to employees, directors and consultants. As of the date of this prospectus, the awards that have been granted to our directors, officers, employees, consultants and other personnel and remain outstanding included (i) options to purchase an aggregate of 27,743,125 Class B ordinary shares, and (ii) restricted share units to receive an aggregate of 3,113,456 Class B ordinary shares. We recorded the share-based compensation expenses of RMB15.7 million, RMB132.4 million and RMB59.5 million (US$9.1 million) for the years ended December 31, 2018, 2019 and 2020, respectively, and RMB18.9 million and RMB11.9 million (US$1.8 million) for the three months ended March 31, 2020 and 2021, respectively. We believe the granting of share-based awards is of significant importance to our ability to expand user base and retain key personnel and employees, and we will continue to grant share-based awards to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations. A number of the share-based awards will become vested upon the completion of this offering, and we will then record share-based compensation expenses of RMB587.1 million (US$89.6 million) upon the completion of this offering.

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 market share, consumers and revenues 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. Our brand name and our business may be harmed by aggressive marketing and communications strategies of our competitors. 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

 

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websites by anyone, whether or not related to 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, consumers and revenues and adversely affect the price of our Class B ordinary shares and/or ADSs.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

In addition to the impact of COVID-19, our business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of other widespread health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola, Zika or other events, such as wars, acts of terrorism, environmental accidents, power shortage or communication interruptions. The occurrence of such a disaster or prolonged outbreak of an epidemic illness or other adverse public health developments in the PRC or elsewhere could materially disrupt our business and operations. Such events could also significantly affect our industry and 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, health epidemic or other outbreak harms the global or Chinese economy in general. Our operations could also be severely disrupted if our consumers, suppliers or other participants were affected by such natural disasters, health epidemics or other outbreaks.

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

COVID-19 had a severe and negative impact on the Chinese and the global economy in 2020. Whether this will lead to a prolonged downturn in the economy is still unknown. If this outbreak persists, commercial activities throughout the world could be curtailed with decreased consumer spending, business disruptions, interrupted supply chains and difficulties in travel. Our business had been adversely affected by the outbreak of COVID-19 in China due to negative impacts to our supply chain and fulfillment operations. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted.

Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2020. Unrest, terrorist threats and the potential for war may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

 

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We may be subject to legal and regulatory proceedings and may continue to be subject to these proceedings from time to time in the ordinary course of our business.

We are subject to claims, lawsuits, arbitration proceedings, government investigations and other legal and regulatory proceedings in the ordinary course of business, including those involving personal injury, property damage, labor and employment, commercial disputes, user complaints, food quality and safety, intellectual property disputes, promotional activities, pricing activities, consumer protection, data and privacy protection, compliance with regulatory requirements and other matters. We may become subject to additional types of claims, lawsuits, government investigations and legal or regulatory proceedings as our business grows and as we deploy new business offerings. We are also regularly subject to claims, lawsuits, arbitration proceedings, government investigations and other legal and regulatory proceedings seeking to hold us liable for the actions of retailers, merchants and delivery riders on our platforms. The results of any such claims, lawsuits, arbitration proceedings, government investigations or other legal or regulatory proceedings cannot be predicted with certainty. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, be harmful to our reputation, require significant management attention and divert significant resources. It is possible that a resolution of one or more such proceedings could result in substantial damages, settlement costs, fines and penalties that could adversely affect our reputation and brand, business, financial condition and results of operations. In addition, a determination in, or settlement of, any legal proceeding, whether we are party to such legal proceeding or not, that involves our industry, could also harm our business, financial condition and results of operations.

As our digital economy expands, including across jurisdictions and through the addition of new businesses, we may encounter a variety of these claims, including those brought against us pursuant to anti-monopoly or unfair competitions laws or involving higher amounts of alleged damages. Laws, rules and regulations may vary in their scope and overseas laws and regulations may impose requirements that are more stringent than, or which conflict with, those in China. We have acquired and may acquire companies that may become subject to litigation, as well as regulatory proceedings. In addition, in connection with litigation or regulatory proceedings we may be subject to in various jurisdictions, we may be prohibited by laws, regulations or government authorities in one jurisdiction from complying with subpoenas, orders or other requests from courts or regulators of other jurisdictions, including those relating to data held in or with respect to persons in these jurisdictions. Our failure or inability to comply with the subpoenas, orders or requests could subject us to fines, penalties or other legal liability, which could have a material adverse effect on our reputation, business, results of operations.

In addition, if we were to be involved in anti-monopoly and competition laws and regulations related scrutiny or action, governmental agencies and regulators may, among other things, prohibit future acquisitions, divestitures, or combinations we plan to make, impose significant fines or penalties, require divestiture of certain of our assets, or impose other restrictions that limit or require us to modify our operations. Due to the uncertainty of legislation and local implementation of anti-monopoly and competition laws and regulations in the PRC, we cannot assure you that we will not be subject to any investigations, claims or complaints of alleged violations of these laws and regulations.

The existence of litigation, claims, investigations and proceedings may harm our reputation, limit our ability to conduct our business in the affected areas and adversely affect the trading price of our ADSs. The outcome of any claims, investigations and proceedings is inherently uncertain, and in any event defending against these claims could be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. An adverse determination in any litigation, investigation or proceeding could cause us to pay damages, incur legal and other costs, limit our ability to conduct business or require us to change the manner in which we operate.

 

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If we fail to remediate our material weakness and implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.

For the fiscal year ended December 31, 2020, we are not required to provide a report of management on our internal control over financial reporting and our independent registered public accounting firm is not required to conduct an audit of our internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2018, 2019 and 2020, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness that has been identified relate to our lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of U.S. GAAP to design and implement formal period-end financial reporting policies and procedures to address complex U.S. GAAP technical accounting issue; and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. The material weakness, if not remediated timely, may lead to material misstatements in our consolidated financial statements in the future. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weakness and other control deficiencies 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 deficiencies may have been identified.

Following the identification of the material weakness, we have taken measures and plan to continue to take measures to remediate these deficiencies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, the implementation of these measures may not fully address these deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remediated. Our failure to correct these deficiencies or our failure to discover and address any other deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

We are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2022. In addition, beginning at the same time, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue an adverse report if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over

 

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financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements for prior periods.

Risks Related to Doing Business in China

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

Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The PRC economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.

The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the PRC economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing since 2010, and the impact of COVID-19 on the Chinese economy in 2020 was severe. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations.

Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us.

We conduct our business primarily through our PRC subsidiaries. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are subject to laws and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. In addition, any new or changes in PRC laws and regulations related to foreign investment in China could affect the business environment and our ability to operate our business in China.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion

 

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of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to continue our operations.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws.

We are an exempted company with limited liability incorporated under the laws of the Cayman Islands, and substantially all of our assets and operations are located in China. In addition, substantially all our officers and directors reside within China and substantially all of them are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors as none of them currently resides in the United States or has substantial assets located in the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

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

Shareholder claims or regulatory investigations that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the PRC. While detailed interpretation of or implementation rules under Article 177 of the PRC Securities Law have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigations or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. See also “—Risks Related to Our ADSs and This Offering—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law” for risks associated with investing in us as a Cayman Islands company.

 

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Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the Ministry of Commerce, or MOFCOM, be notified in advance of any change of control transaction in which a foreign investor acquires control of a PRC domestic enterprise and involves any of the following circumstances: (i) any important industry is concerned; (ii) such transaction involves factors that impact or may impact national economic security; or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. We do not expect that this offering will trigger MOFCOM pre-notification under each of the above-mentioned circumstances or any review by other PRC government authorities, except as disclosed below in “Risks Related to Doing Business in China—The approval of the China Securities Regulatory Commission may be required in connection with this offering, and, if required, we cannot predict whether we will be able to obtain such approval.” Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of National People’s Congress which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by State Administration for Market Regulation, or the SAMR, the successive authority of MOFCOM, before they can be completed. In addition, the security review rules issued by MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may pursue potential strategic acquisitions that are complementary to our business and operations, including the expansion of our intelligent fresh market business and retail cloud business, which may be subject to SAMR merger review. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to change their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.

In July 2014, the State Administration of Foreign Exchange, or SAFE, promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities and also requires the foreign-invested enterprise that is established through round-trip investment to truthfully disclose its controller(s). SAFE Circular 37 further requires amendment to the SAFE registrations in the event of any changes with respect to the basic information of the offshore special purpose vehicle, such as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore special purpose vehicle, such as increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders or beneficial owners who are PRC residents and may be applicable to any offshore acquisitions that we make in the future. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective since June 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, should be filed with qualified banks instead of SAFE. The qualified banks examine the applications and accept registrations under the supervision of SAFE.

 

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Any failure or inability of the relevant shareholders or beneficial owners who are PRC residents to comply with the registration procedures set forth in these regulations, or any failure to disclose or misrepresentation of the controller(s) of the foreign-invested enterprise that is established through round-trip investment, may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities, on the ability of our PRC subsidiaries to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions.

On December 26, 2017, the NDRC issued the Measures for the Administration of Overseas Investment of Enterprises, or NDRC Order No.11, which became effective from March 1, 2018. NDRC Order No.11 states that PRC residents must obtain approval from the NDRC or file with the NDRC their offshore investments made through controlled offshore special purpose vehicles. Pursuant to the Measures for the Administration of Outbound Investment published by the MOFCOM in August 2014, and the Administrative Measures for Outbound Investment of Enterprises published by the NDRC in December 2017, any outbound investment of PRC enterprises must be approved by or filed with MOFCOM, NDRC or their local branches.

We have been notified that our founders who are PRC residents have completed the initial registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. However, we may not at all times be fully informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request to make or obtain any applicable registrations or continuously comply with all requirements under SAFE Circular 37, or NDRC Order No. 11, or other outbound investment related regulations or other related rules. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations, approvals or filings required by, SAFE regulations or other outbound investment related regulations. Failure by our shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected. If any of our beneficial owners who are PRC residents fails to comply with NDRC Order No. 11 or other outbound investment related regulations, the investments of such beneficial owners in us could be subject to suspension or termination, while our beneficial owners could be subject to warnings or applicable criminal liabilities. Any of the foregoing could materially adversely affect our operations, acquisition opportunities and financing alternatives.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in China for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas-listed company upon the completion of this offering. Failure to complete SAFE registrations may subject them to fines of up to RMB300,000 for entities and up to RMB50,000 for individuals,

 

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and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Regulation Related to Stock Incentive Plan.”

In addition, the State Administration of Taxation, or SAT, has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities. See “Regulation—Regulation Related to Stock Incentive Plan.”

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiaries. We may make loans to our PRC subsidiaries subject to the approval from governmental authorities and limitation of amount, or we may make additional capital contributions to our PRC subsidiaries.

Any loans to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE, and medium or long-term loans by us to our PRC subsidiaries must be recorded and registered with the National Development and Reform Committee, or the NDRC. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity

 

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investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China. In addition, SAFE promulgated the Circular Regarding Further Promotion of the Facilitation of Cross-Border Trade and Investment on October 23, 2019, or SAFE Circular 28, pursuant to which all foreign-invested enterprises can make equity investments in the PRC with their capital funds in accordance with the applicable laws. As SAFE Circular 28 is new and the relevant government authorities have broad discretion in interpreting the regulation, it is unclear whether SAFE will permit such capital funds to be used for equity investments in the PRC in actual practice.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans or future capital contributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In addition, our PRC subsidiaries may also be required to withhold a value-added tax of 6% and an income tax of 10% (or 7% if paid to a resident of Hong Kong who qualifies for the benefits of the tax treaty between China and Hong Kong) and other tax as applicable on interest paid under any cross-border shareholder loan. Prior to the payment or any interest on any such shareholder loan, our PRC subsidiaries must present evidence of registration with SAFE regarding any such shareholder loan and may be required to provide evidence of payment of withholding tax on the interest payable on that loan.

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within China is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the SAT, issued the Circular of the State Administration of Taxation on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance with the De Facto Standards of Organizational Management, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval

 

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by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in China; and (iv) at least 50% of voting board members or senior executives habitually reside in China.

We believe that we are not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body”. If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we could be subject to PRC tax at a rate of 25% on our worldwide income, which could materially reduce our net income, and we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to 10% PRC tax on gains realized on the sale or other disposition of ADSs or Class B ordinary shares, if such income is treated as sourced from within China. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or Class B ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which in the case of dividends may be withheld at source). It is unclear whether non-PRC shareholders of our company would be able to obtain the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or Class B ordinary shares.

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

In February 2015, the SAT issued the Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only indirect transfers but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides certain criteria on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owns the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a tax rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. However, according to the aforesaid safe harbor rule, the PRC tax would not be applicable to the transfer by any non-resident enterprise of ADSs of the Company acquired and sold on public securities markets.

On October 17, 2017, the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Public Notice 37, which came into effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident enterprise fails to declare its tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay its tax due within required time limits, and the non-resident enterprise shall declare and pay its tax payable within such time limits specified by the tax authority. If the non-resident enterprise voluntarily declares and pays its tax payable before the tax authority orders it to do so, it shall be deemed that such enterprise has paid its tax payable in time.

 

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We face uncertainties on the reporting and consequences of future private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed under SAT Public Notice 7 and SAT Public Notice 37, and may be required to expend valuable resources to comply with them or to establish that we and our non-resident enterprises should not be taxed under these regulations, which may have a material adverse effect on our financial condition and results of operations.

Discontinuation of any of the preferential tax treatments and government subsidies or imposition of any additional taxes and surcharges could adversely affect our financial condition and results of operations.

Under the PRC Enterprise Income Tax Law and its implementation rules, the statutory enterprise income tax rate is 25%, and the income tax of an enterprise that has been determined to be a technologically advanced service enterprise can be reduced to a preferential rate of 15%. Any increase in the enterprise income tax rate applicable to our PRC subsidiary, or any discontinuation or retroactive or future reduction of any of the preferential tax treatments currently enjoyed by our PRC subsidiary, could adversely affect our business, financial condition and results of operations.

Further, in the ordinary course of our business, we are subject to complex income tax and other tax regulations, and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.

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

The M&A Rules, adopted by six PRC regulatory agencies, requires an overseas special purpose vehicles that are controlled by PRC companies or individuals formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies using shares of such special purpose vehicles or held by its shareholders as considerations to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the application of the M&A Rules remains unclear. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

Our PRC counsel has advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval may not be required for the listing and trading of our ADSs on the Nasdaq Stock Market in the context of this offering.

However, our PRC counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These sanctions may include fines and penalties on our operations in China, limitations on our operating privileges in China, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our

 

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subsidiaries in China, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver.

We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.

We are a Cayman Islands holding company and principally rely on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated after-tax profits upon satisfaction of relevant statutory conditions and procedures, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. Additionally, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends or make other distributions to us.

Our PRC subsidiaries generate primarily all of their revenue in Renminbi, which is not freely convertible into other currencies. As result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to use their Renminbi revenues to pay dividends to us.

The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

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

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

Substantially all of our income and expenses are denominated in Renminbi and our reporting currency is Renminbi. Significant revaluation of the Renminbi may have a material and adverse effect on your investment.

 

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For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would reduce the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of paying dividends or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amount available to us.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to hedge our exposure adequately or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

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

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive our revenues primarily in Renminbi. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE, by complying with certain procedural requirements. Specifically, under the existing foreign exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and its subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

In light of the flood of capital outflows from China, the PRC government may from time to time impose more restrictive foreign exchange policies and step up scrutiny of major outbound capital movement. More restrictions and substantial vetting process may be required by SAFE or other government authorities to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Litigation and negative publicity surrounding China-based companies listed in the U.S. may result in increased regulatory scrutiny of us and negatively impact the trading price of the ADSs and could have a material adverse effect upon our business, including our results of operations, financial condition, cash flows and prospects.

We believe that litigation and negative publicity surrounding companies with operations in China that are listed in the U.S. have negatively impacted stock prices for such companies. Various equity-based research organizations have published reports on China-based companies after examining, among other things, their corporate governance practices, related party transactions, sales practices and financial statements that have led to special investigations and stock suspensions on national exchanges. Any similar scrutiny of us, regardless of its lack of merit, could result in a diversion of management resources and energy, potential costs to defend ourselves against rumors, decreases and volatility in the ADS trading price, and increased directors and officers insurance premiums and could have a material adverse effect upon our business, including our results of operations, financial condition, cash flows and prospects.

 

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Enforcement of stricter labor laws and regulations and increases in labor costs in the PRC may materially and adversely affect our business and our profitability.

China’s overall economy and the average wage have increased in recent years and are expected to continue to grow. The average wage level for our employees has also increased in recent years. 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 consumers who pay for our services, our profitability and results of operations may be materially and adversely affected. Further, pursuant to the PRC Labor Contract Law, as amended, or the Labor Contract Law, and its implementation rules, employers are subject to various requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to affect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.

We deploy personnel supplied by third-party staffing service providers, who may be classified as our employee or “dispatched workers” by courts, arbitration tribunals or government agencies. In December 2012, the Labor Contract Law was amended and in January 2014, the Interim Provisions on Labor Dispatch were promulgated, to impose more stringent requirements on the use of employees of temp agencies, who are known in China as “dispatched workers.” For example, the number of dispatched workers may not exceed 10% of its total number of employees and the dispatched workers can only engage in temporary, auxiliary or substitutable work. However, since the application and interpretation of the PRC Labor Contract Law and the Interim Provisions on Labor Dispatch are limited and uncertain, we cannot assure you our business operation will be deemed to be in full compliance with them. If we are found to be in violation of any requirements under the Labor Contract Law, the Interim Provisions on Labor Dispatch or their related rules and regulations, we may be ordered by the labor authority to rectify the non-compliance or be subject to regulatory penalty, other sanction or liability or be subject to labor disputes.

In addition, under the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds, and employers are required, together with their employees or separately, to pay the contributions to social insurance and housing funds for their employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. Certain of our PRC subsidiaries have failed to make social insurance and housing fund contributions in full for their employees as required by the applicable law. We have recorded accruals for the estimated underpaid amounts for the current employees in our financial statements. In addition, certain of our PRC subsidiaries engaged third-party human resources agencies to make social insurance and housing fund contributions for some of their employees, and there is no assurance that such third-party agencies made such contributions in full in a timely manner, or at all. If the relevant PRC authorities determine that we shall make up for social insurance and housing fund contributions or that we are subject to fines and legal sanctions in relation to our failure to make social insurance and housing fund contributions in full for our employees, our business, financial condition and results of operations may be adversely affected.

We cannot assure you that our employment practices will be deemed to be in full compliance with labor-related laws and regulations in China due to interpretation and implementation uncertainties related to the evolving labor laws and regulations, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

 

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

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

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

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

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

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCA Act. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.

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

 

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

Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102 (e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

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

 

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Risks Related to Our ADSs and This Offering

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our shares or ADSs. We will apply to list our ADSs on the Nasdaq Stock Market. Our shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

Negotiations with the underwriters will determine the initial public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

If the indication-of-interest investors are allocated all or a portion of the ADSs in which they have indicated interest in, the allocation and subscription may reduce the available public float for the ADSs, which may consequently reduce the liquidity of the ADSs relative to what it would have been had these ADSs been subscribed by the public.

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

The trading price of our ADSs can be volatile and fluctuate widely in response to a variety of factors, many of which are beyond our control. Such factors include:

 

   

regulatory developments affecting us or our industry, consumers or supply chain partners;

 

   

announcements of studies and reports relating to the quality of our products and services or those of our competitors;

 

   

changes in the economic performance or market valuations of our competitors;

 

   

actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

   

changes in financial estimates by securities research analysts;

 

   

conditions in our industry;

 

   

announcements by us or our competitors of acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;

 

   

additions to or departures of our senior management;

 

   

fluctuations of exchange rates between the RMB and the U.S. dollar;

 

   

release or expiry of lock-up or other transfer restrictions on our issued and outstanding shares or ADSs;

 

   

sales or perceived potential sales of additional Class B ordinary shares or ADSs; and

 

   

proceedings instituted recently by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm.

In addition, the stock market in general, and the market prices for internet-related companies and companies with operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings in recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies

 

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listed in the United States in general, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the COVID-19 pandemic, the ensuing economic recessions and deterioration in the credit market in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our ADSs. Volatility or a lack of positive performance in our ADS price may also adversely affect our ability to retain key employees with equity incentives.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$12.85 per ADS, representing the difference between the assumed initial public offering price of US$14.50 per ADS, the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus and our pro forma as adjusted net tangible book value per ADS of US$1.65 as of March 31, 2021, after giving effect to the issuance of Series F preferred shares in May and June 2021, the termination of the unexercised option to purchase additional Series F preferred shares, and our sale of the ADSs offered in this offering. In addition, you may experience further dilution to the extent that our Class B ordinary shares are issued upon the exercise of share options. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

The concentration of our share ownership among executive officers, directors, and principal shareholders and their affiliated entities will likely limit your ability to influence corporate matters and could discourage others from pursuing any change of control transaction that holders of our Class B ordinary shares and ADSs may view as beneficial.

Our executive officers, directors, principal shareholders and their affiliated entities together beneficially own over 50% of our outstanding ordinary shares on an as-converted basis prior to this offering. Upon the completion of this offering, our executive officers, directors, principal shareholders and their affiliated entities together will beneficially own approximately 54.1% of our total outstanding ordinary shares, assuming the underwriters do not exercise their over-allotment option, or 53.4% of our total outstanding ordinary shares if the underwriters exercise their over-allotment option in full, without taking into account the ADSs that the existing shareholders or their affiliates may purchase in this offering. As a result of the concentration of ownership, these shareholders will have considerable influence over matters such as decisions regarding mergers and consolidations, amendments to our constitutional documents, election of directors and other significant corporate actions. Such shareholders may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could

 

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have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of our ordinary shares and ADSs may view as beneficial.

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

Our authorized share capital will be divided into Class A ordinary shares and Class B ordinary shares effective immediately prior to the completion of this offering (with certain shares remaining undesignated, with power for our directors to designate and issue such classes of shares as they think fit). Holders of Class B ordinary shares will be entitled to one vote per share, while holders of Class A ordinary shares will be entitled to twenty votes per share. We will issue Class B ordinary shares represented by our ADSs in this offering. Each Class A ordinary share is convertible into one Class B ordinary share at any time by the holder thereof, while Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances. After this offering, the holder of Class A ordinary shares will have the ability to control matters requiring shareholders’ approval, including any amendment of our memorandum and articles of association. Any future issuances of Class A ordinary shares may be dilutive to the voting power of holders of Class B ordinary shares. Any conversions of Class A ordinary shares into Class B ordinary shares may dilute the percentage ownership of the existing holders of Class B ordinary shares within their class of ordinary shares. Such conversions may increase the aggregate voting power of the existing holders of Class B ordinary shares. In the event that we have multiple holders of Class A ordinary shares in the future and certain of them convert their Class A ordinary shares into Class B ordinary shares, the remaining holders who retain their Class A ordinary shares may experience increases in their relative voting power.

Upon the completion of this offering, Mr. Zheng Xu, our founder, chairman and chief executive officer, and Mr. Bin Zeng, our co-founder, will beneficially own all of our issued Class A ordinary shares. On June 7, 2021, Mr. Bin Zeng and Tigerteeth Entity Limited signed an irrevocable proxy and power of attorney, pursuant to which the voting rights of all Class A ordinary shares beneficially owned by Mr. Bin Zeng through Tigerteeth Entity Limited have been irrevocably and fully delegated to Mr. Zheng Xu. These Class A ordinary shares will constitute 12.2% of our total issued and outstanding share capital immediately after the completion of this offering and 73.6% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering due to the disparate voting powers associated with our dual-class share structure, assuming the underwriters do not exercise their option to purchase additional ADSs. As a result of the dual-class share structure and the concentration of ownership, holders of Class A ordinary shares will have considerable influence over matters such as decisions regarding mergers and consolidations, election of directors and other significant corporate actions. Such holders may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class B ordinary shares and ADSs may view as beneficial.

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

Certain shareholder advisory firms have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the

 

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inclusion of our ADSs representing Class B ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.

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

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

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

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

Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 706,354,477 ordinary shares issued and outstanding, including 63,000,000 Class B ordinary shares represented by ADSs, assuming the underwriters do not exercise their over-allotment option. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the United States Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares issued and outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters of this offering. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.

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

 

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

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

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise the same rights as our shareholders.

Holders of ADSs do not have the same rights as our shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. As an ADS holder, you will only be able to exercise the voting rights carried by the underlying Class B ordinary shares which are represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the Class B ordinary shares underlying your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class B ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class B ordinary shares unless you withdraw the shares, and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class B ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We agree to give the depositary notice of shareholder meetings sufficiently in advance of such meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class B ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will

 

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not be able to call a shareholders’ meeting. Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote the Class B ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote the Class B ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

   

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

 

   

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

 

   

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

 

   

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

The effect of this discretionary proxy is that you cannot prevent the Class B ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for ADS holders to influence the management of our company. Holders of our Class B ordinary shares are not subject to this discretionary proxy.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

You may not receive cash dividends if the depositary decides it is impractical to make them available to you.

The depositary will pay cash dividends on the ADSs only to the extent that we decide to distribute dividends on our ordinary shares or other deposited securities, and we do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. To the extent that there is a distribution, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class B ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of

 

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ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.

Under the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted in a state or federal court in New York, New York, and you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding. The depositary may, in its sole discretion, require that any dispute or difference arising from the relationship created by the deposit agreement be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreement, which may include claims arising under the federal securities laws, although the arbitration provisions of the deposit agreement do not preclude you from pursuing claims under the U.S. federal securities laws in federal courts. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder. The state and federal courts sitting in New York generally respect the contractual decision of the parties to submit their disputes to arbitration and such arbitration provisions are generally enforceable under federal law and the laws of the State of New York, subject to certain exceptions, such as corruption, fraud or undue means. Therefore, we believe that the arbitration provision in the deposit agreement is enforceable under federal law and the laws of the State of New York. See “Description of American Depositary Shares—Jurisdiction and Arbitration” for more information

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Class B ordinary shares provides that, subject to the depositary’s right to require a claim to be submitted to arbitration, the federal or state courts in the City of New York have exclusive jurisdiction to hear and determine claims arising under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with applicable U.S. state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary, lead to increased costs to bring a claim, limited access to information and other imbalances of resources between you as ADS holders and us, or limit your ability to bring a claim in a judicial forum you find favorable. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge

 

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or justice of the applicable trial court, in which the trial would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action. Also, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

If we or the depositary were to oppose a jury trial demand based on such waiver, the court would determine whether the waiver was enforceable in the facts and circumstances of that case in accordance with applicable state and federal law, including whether a party knowingly, intelligently and voluntarily waived the right to a jury trial.

Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

We may amend the deposit agreement without consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or withdrawing the underlying Class B ordinary shares.

We may agree with the depositary to amend the deposit agreement without consent from holders of ADSs. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices will be limited to selling the ADSs or withdrawing the underlying Class B ordinary shares. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances. See “Description of American Depositary Shares” for more information.

Our liability and the liability of the depositary under the deposit agreement is limited.

The deposit agreement expressly limits our obligations and the obligations of the depositary. The depositary is only obligated to take the actions specifically set forth in the deposit agreement without gross negligence or willful misconduct. The deposit agreement also limits our liability and the liability of the depositary. The depositary and any of its agents also disclaim any liability under various circumstances. See “Description of American Depositary Shares” for more information.

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

We are an exempted company incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act (2021 Revision) of the Cayman Islands, which we refer to as the Companies Act, and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than copies of our memorandum and articles of association and register of

 

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mortgages and charges, and any special resolutions passed by our shareholders) or to obtain copies of lists of shareholders of these companies. Under Cayman Islands law, the names of our current directors can be obtained from a search conducted at the Registrar of Companies. Our directors have discretion under our post-offering articles of association that will become effective immediately prior to completion of this offering to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

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

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

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, many of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons may be located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities”.

Forum selection provisions in our post-offering memorandum and articles of association and our deposit agreement with the depositary bank could limit the ability of holders of our Class B ordinary shares, ADSs, or other securities to obtain a favorable judicial forum for disputes with us, our directors and officers, the depositary bank, and potentially others.

Our post-offering memorandum and articles of association provide that the federal district courts of the United States are the exclusive forum within the United States (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than us. Our deposit agreement with the depositary bank also provides that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) will have jurisdiction to hear and determine any suit, action, or proceeding and to settle any dispute between the depositary bank and us that does not involve any other person or party that may arise out of or relate in any way to the deposit agreement, including claims under the Securities Act or the Exchange Act. Holders and beneficial owners of our ADSs, by holding an ADS or an interest therein, understand and irrevocably agree that any legal suit, action, or proceeding against or involving us or the depositary bank arising out of or related in any way to the deposit agreement, ADSs, or the transactions contemplated thereby or by virtue of ownership thereof, including without limitation claims under the Securities Act or the Exchange Act, may only be instituted in the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks jurisdiction or such designation of the exclusive forum is, or becomes, invalid, illegal, or unenforceable, in the state courts of New York County, New York). However, the enforceability of similar federal court choice of forum provisions has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such lawsuits. If a court were to find the federal choice of forum provision contained in our post-offering memorandum and articles of association or our deposit agreement with the depositary bank to be inapplicable or

 

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unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection clause in our post-offering memorandum and articles of association, as well as the forum selection provisions in the deposit agreement, may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary bank, and potentially others in his or her preferred judicial forum, and this limitation may discourage such lawsuits. In addition, the Securities Act provides that both federal and state courts have jurisdiction over suits brought to enforce any duty or liability under the Securities Act or the rules and regulations thereunder. Accepting or consent to this forum selection provision does not constitute a waiver by you of compliance with federal securities laws and the rules and regulations thereunder. You may not waive compliance with federal securities laws and the rules and regulations thereunder. The exclusive forum provision in our post-offering memorandum and articles of association will not operate so as to deprive the courts of the Cayman Islands from having jurisdiction over matters relating to our internal affairs.

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

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

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

As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq Stock Market’s corporate governance requirements; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq Stock Market’s corporate governance requirements.

As a Cayman Islands company listed on the Nasdaq Stock Market, we are subject to the Nasdaq Stock Market’s corporate governance listing standards. However, the Nasdaq Stock Market’s rules permit a foreign

 

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private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq Stock Market corporate governance listing standards. For example, under Cayman Islands law, we are not required to (i) have a majority of independent directors in our board of directors, (ii) have a minimum of three members in our audit committee, (iii) have a compensation committee composed entirely of independent directors, (iv) hold annual shareholders meetings, or (v) obtain shareholders’ approval for issuance of new shares or adoption of share incentive plans. We have elected to rely on the exemption available to foreign private issuers for the requirement that an audit committee be comprised of at least three members. We may choose to follow home country practices in the future. As a result, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq Stock Market’s corporate governance listing standards applicable to U.S. domestic issuers.

We will be a “controlled company” as defined under the Nasdaq Stock Market Rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon the completion of this offering, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Zheng Xu, the chairman of our board of directors and our chief executive officer, will hold more than 50% of our total voting power. As a “controlled company,” we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including:

 

   

an exemption from the rule that a majority of our board of directors must be independent directors;

 

   

an exemption from the rule that our compensation committee must consist entirely of independent directors; and

 

   

an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.

We intend to utilize the foregoing exemptions from the applicable corporate governance requirements. As a result, we will not have a majority of independent directors, and our compensation committee and nominating and corporate governance committee will not consist entirely of independent. See “Management.” Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the applicable corporate governance requirements

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

A non-U.S. corporation, such as our company, will be classified as a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year consists of certain types of “passive” income (the “income test”); or (2) at least 50% of the value of its assets (generally determined on the basis of a quarterly average) during such year is attributable to assets that produce passive income or are held for the production of passive income (the “asset test”). Based on the current and anticipated value of our assets and composition of our income and assets (taking into account the expected cash proceeds from, and our anticipated market capitalization following, this offering), we do not presently expect to be a PFIC for the current taxable year or the foreseeable future.

However, while we do not expect to be or become a PFIC, no assurance can be given in this regard because the determination of whether we are or will become a PFIC for any taxable year is a fact-intensive inquiry made annually that depends, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to be or become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test, including the value of our goodwill and other unbooked intangibles, may be determined by reference to the market price of our ADSs from time to time (which may be volatile). The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering.

If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) holds our ADSs or ordinary shares, certain

 

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adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

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

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

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We do not plan to “opt out” of such exemptions afforded to an emerging growth company. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We may incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company”.

Upon the completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in net revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company”, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

   

our mission, goals and strategies;

 

   

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

 

   

the expected growth of the neighborhood retail market, intelligent fresh market and retail cloud services market;

 

   

our expectations regarding demand for of our products and services;

 

   

our expectations regarding our relationships with our consumers, suppliers and other business partners;

 

   

competition in our industry;

 

   

our proposed use of proceeds; and

 

   

relevant government policies and regulations relating to our business.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary—Summary of Risk Factors,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The neighborhood retail market, intelligent fresh market and retail cloud services market in the PRC may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of the ADSs. In addition, the rapidly evolving nature of this industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

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You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$279.2 million, or approximately US$321.7 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$14.50 per ADS, which is the midpoint of the price range shown on the front page of this prospectus. A US$1.00 increase (decrease) in the assumed initial public offering price of US$14.50 per ADS would increase (decrease) the net proceeds to us from this offering by US$19.5 million assuming the number of ADSs offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

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

 

   

approximately 50% for our on-demand DMW retail business, including sales and marketing, upgrade of technology infrastructure and supply chain, and expansion and upgrade of network of quality control centers and DMWs;

 

   

approximately 20% for our further expansion of our intelligent fresh market business and development of technology platform;

 

   

approximately 20% for our development of the retail cloud business, including research and development, product development and sales and marketing; and

 

   

the balance for general corporate purposes, and the development of strategic initiatives, potential strategic investments and acquisitions to strengthen our ecosystem, although we have not identified any specific investments or acquisition opportunities at this time.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—Risks Related to the ADSs and This Offering—We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.”

Pending any use described above, we plan to invest the net proceeds in short-term, interest-bearing, debt instruments or demand deposits.

 

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DIVIDEND POLICY

Our board of directors has discretion on whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation—Regulation Related to Foreign Exchange and Dividend Distribution—Regulation on Dividend Distribution.”

If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the ordinary shares underlying the ADSs to the depositary, as the registered holder of such ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

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

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (i) our issuance of 16,657,120 Series F preferred shares in May and June 2021, (ii) the termination of the unexercised option to purchase additional Series F preferred shares, (iii) the automatic conversion of all of our issued and outstanding preferred shares into 502,367,778 Class B ordinary shares on a one-for-one basis upon the completion of this offering, (iv) the re-designation of 21,668,178 Class B ordinary shares beneficially owned by Mr. Zheng Xu into 21,668,178 Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, and (v) the re-designation of 10,840,524 Class A ordinary shares beneficially owned by Mr. Bin Zeng into 10,840,524 Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect (i) our issuance of 16,657,120 Series F preferred shares in May and June 2021, (ii) the termination of the unexercised option to purchase additional Series F preferred shares, (iii) the automatic conversion of all of our issued and outstanding preferred shares into 502,367,778 Class B ordinary shares on a one-for-one basis upon the completion of this offering, (iv) the re-designation of 21,668,178 Class B ordinary shares beneficially owned by Mr. Zheng Xu into 21,668,178 Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (v) the re-designation of 10,840,524 Class A ordinary shares beneficially owned by Mr. Bin Zeng into 10,840,524 Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, and (vi) the sale of 63,000,000 Class B ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$14.50 per ADS, which is the midpoint of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the over-allotment option.

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

 

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

Convertible note and loan

    253,433       38,681       253,433       38,681       253,433       38,681  

MEZZANINE EQUITY:

         

Series A1 convertible redeemable preferred shares (US$0.0001 par value, 18,888,880 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    90,933       13,879       —         —         —         —    

Series A2 convertible redeemable preferred shares (US$0.0001 par value, 11,111,120 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    64,046       9,775       —         —         —         —    

Series A3 convertible redeemable preferred shares (US$0.0001 par value, 22,214,240 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    101,834       15,543       —         —         —         —    

Series B1 convertible redeemable preferred shares (US$0.0001 par value, 15,719,200 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    108,154       16,508       —         —         —         —    

Series B2 convertible redeemable preferred shares (US$0.0001 par value, 39,113,280 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    217,966       33,268       —         —         —         —    

 

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

Series C convertible redeemable preferred shares (US$0.0001 par value, 138,743,200 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    1,704,006       260,082       —         —         —         —    

Series D1 convertible redeemable preferred shares (US$0.0001 par value, 23,770,041 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    513,218       78,332       —         —         —         —    

Series E convertible redeemable preferred shares (US$0.0001 par value, 99,860,054 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    3,421,283       522,190       —         —         —         —    

Series E1 convertible redeemable preferred shares (US$0.0001 par value, 25,195,606 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    834,361       127,348       —         —         —         —    

Series F convertible redeemable preferred shares (US$0.0001 par value, 91,095,037 shares authorized, issued and outstanding; none issued and outstanding on a pro-forma or pro-forma as adjusted basis)

    3,192,289       487,238       —         —         —         —    

Convertible redeemable non-controlling interests

    244,322       37,291       —         —         —         —    

Receivable from holders of Series E convertible redeemable preferred shares

    (27,173     (4,147     —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity

    10,465,239       1,597,307       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY/(DEFICIT):

           

Class A ordinary shares (US$0.0001 par value, 75,555,520 shares authorized, issued and outstanding; 86,383,174 issued and outstanding on a pro-forma basis; 86,383,174 issued and outstanding on a pro-forma as adjusted basis)

    52       8       59       9       59       9  

Class B ordinary shares (US$0.0001 par value, 1,361,202,455 shares authorized and 65,431,179 shares issued and outstanding; 556,971,303 issued and outstanding on a pro-forma basis; 619,971,303 issued and outstanding on a pro-forma as adjusted basis)

    18       3       350       53       391       60  

Additional paid-in capital (2)

    —         —         10,834,521       1,653,671       12,636,508       1,928,707  

Accumulated deficit

    (10,139,798     (1,547,635     (10,070,827)       (1,537,108)       (10,070,827)       (1,537,108)  

Accumulated other comprehensive loss

    (26,328     (4,019     (26,328)       (4,019)       (26,328)       (4,019)  

Non-controlling interest

    67       10       67       10       67       10  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity/(deficit) (2)

    (10,165,989     (1,551,633     737,842       112,616       2,539,870       387,659  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization(2) (3)

    552,683       84,355       991,275       151,297       2,793,303       426,340  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)

The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total shareholders’ deficit and capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

(2)

A US$1.00 increase/(decrease) in the assumed initial public offering price of US$14.50 per ADS, the mid-point of the estimated range of the initial public offering price shown on the cover page of this prospectus, would increase/(decrease) each of additional paid-in capital, total shareholders’ deficit and total capitalization by US$19.5 million.

(3)

Total capitalization is the sum of convertible note and loan, total mezzanine equity and total shareholders’ equity/(deficit).

 

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DILUTION

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

Our net tangible book value as of March 31, 2021 was US$44.7 million, representing US$0.32 per ordinary share and US$0.96 per ADS as of that date, or US$0.18 per ordinary share and US$0.54 per ADS on a pro forma basis. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting pro forma as adjusted net tangible book value per ordinary share, after giving effect to (i) our issuance of 16,657,120 Series F preferred shares in May and June 2021, (ii) the termination of the unexercised option to purchase additional Series F preferred shares, (iii) the automatic conversion of all of our issued and outstanding preferred shares into 502,367,778 Class B ordinary shares on a one-for-one basis upon the completion of this offering, and (iv) the additional proceeds we will receive from this offering, from the assumed initial public offering price of US$4.83 per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after March 31, 2021, other than to give effect to (i) our issuance of 16,657,120 Series F preferred shares in May and June 2021, (ii) the termination of the unexercised option to purchase additional Series F preferred shares, (iii) the automatic conversion of all of our issued and outstanding preferred shares into 502,367,778 Class B ordinary shares on a one-for-one basis upon the completion of this offering, and (iv) to our sale of the ADSs offered in this offering at the assumed initial public offering price of US$14.50 per ADS, which is the midpoint of the estimated initial public offering price range, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been US$391.8 million, or US$0.55 per ordinary share and US$1.65 per ADS. This represents an immediate increase in net tangible book value of US$0.23 per ordinary share and US$0.69 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$4.28 per ordinary share and US$12.85 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share    Per ADS

Assumed initial public offering price

   US$4.83    US$14.50

Net tangible book value as of March 31, 2021

   US$0.32    US$0.96

Pro forma net tangible book value after giving effect to the conversion of (i) the issuance of Series F preferred shares in May and June 2021, (ii) the termination of the unexercised option to purchase additional Series F preferred shares, and (iii) the automatic conversion of all of our issued and outstanding preferred shares into Class B ordinary shares

   US$0.18    US$0.54

Pro forma as adjusted net tangible book value after giving effect to (i) the issuance of Series F preferred shares in May and June 2021, (ii) the termination of the unexercised option to purchase additional Series F preferred shares, (iii) the automatic conversion of all of our issued and outstanding preferred shares into Class B ordinary shares, and (iv) the completion of this offering

   US$0.55    US$1.65

Amount of dilution in net tangible book value to new investors in this offering

   US$4.28    US$12.85

 

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A US$1.00 increase (decrease) in the assumed initial public offering price of US$14.50 per ADS would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by US$19.5 million, the pro forma as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.03 per ordinary share and US$0.09 per ADS and the dilution in pro forma as adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.31 per ordinary share and US$0.91 per ADS, assuming no change to the number of ADSs offered by us as set forth on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2021, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
    Total Consideration     Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      Percent     Amount      Percent  

Existing shareholders

     643,354,477        91.1   US$ 1,410,295,149        83.5   US$ 2.19      US$ 6.57  

New investors

     63,000,000        8.9   US$ 279,185,000        16.5   US$ 4.43      US$ 13.29  
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

     706,354,477        100.0   US$ 1,689,480,149        100.0     
  

 

 

    

 

 

   

 

 

    

 

 

      

The pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of the ADSs and other terms of this offering determined at pricing.

The discussion and tables above assume no exercise of any share options and restricted share units outstanding as of the date of this prospectus. As of the date of this prospectus, there are 27,743,125 Class B ordinary shares issuable upon exercise of outstanding share options at a weighted average exercise price of US$0.10 per share and restricted share units to receive a total of 3,113,456 Class B ordinary shares, and there are 33,304,427 Class B ordinary shares available for future issuance upon the exercise or vesting of future grants of share-based awards under our 2017 Plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include but are not limited to:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors as compared to the United States; and

 

   

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

A majority of our assets and operations are located in China. All of our directors and officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these individuals, or to bring an action against us or these individuals in the United States, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

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

Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given , (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained

 

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in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, there is uncertainty with regard to Cayman Islands law on whether judgments of courts of the United States predicated upon the civil liability provisions of the securities laws of the United States or any State will be determined by the courts of the Cayman Islands. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. Because such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws has not yet been made by a court of the Cayman Islands, it is uncertain whether such judgments would be enforceable in the Cayman Islands. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

PRC

Han Kun Law Offices, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of China would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Han Kun Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

Corporate History

We were founded in October 2014. From our inception to June 2017, we operated our on-demand DMW retail business through Beijing Missfresh E-commerce Co., Ltd., or Beijing Missfresh, and its subsidiaries, and we used Beijing Missfresh as our holding company to raise early-stage equity financings.

In April 2015, Missfresh Limited was incorporated in the Cayman Islands, and Missfresh HK Limited was then established by Missfresh Limited as a wholly owned subsidiary in Hong Kong. In July 2015, Qingdao Missfresh E-commerce Co., Ltd., or Qingdao Missfresh, was established by Missfresh HK Limited as a wholly foreign-owned enterprise in the PRC to expand our business in the neighborhood retail industry.

To facilitate financing and offshore listing, we decided to use Missfresh Limited as our offshore holding company and completed a restructuring in June 2017. As part of this restructuring, in June 2017, Missfresh Limited gained control over Beijing Missfresh through Qingdao Missfresh by entering into a series of contractual arrangements with Beijing Missfresh and its shareholders. In December 2018, we terminated the contractual arrangements with Beijing Missfresh and its shareholders as the businesses operated by Beijing Missfresh were no longer prohibited or restricted for foreign ownership under PRC laws and regulations, and then Missfresh HK Limited acquired 100% of the equity interests in Beijing Missfresh. Qingdao Missfresh was dissolved in July 2019 as it no longer engaged in any substantial business activities.

To expand our business in the neighborhood retail industry, we established Beijing Missfresh Bianligou E-Commerce Co., Ltd., or Beijing Bianligou, in August 2017, and further entered into a series of contractual arrangements with Beijing Bianligou and its shareholders in February 2018, through which Jinan Missfresh Bianligou Network Technology Co., Ltd., or Jinan Bianligou, a wholly foreign-owned enterprise in the PRC established by Mrfresh HK Limited through Mrfresh Limited, our wholly owned subsidiary in Hong Kong, in January 2018, effectively controlled Beijing Bianligou. In May 2019, Missfresh HK Limited acquired 100% of the equity interests in Jinan Bianligou as a result of our business and equity restructuring. In December 2020, we terminated the contractual arrangements with Beijing Bianligou and its shareholders as the businesses operated by Beijing Bianligou were no longer prohibited or restricted for foreign ownership under PRC laws and regulations, and Missfresh HK Limited acquired 100% of the equity interests in Beijing Bianligou.

To further expand our business in the neighborhood retail industry, Changshu Missfresh E-Commerce Co., Ltd., or Changshu Missfresh, was established in January 2020 and a new Qingdao Missfresh E-Commerce Co., Ltd. was established in January 2021 by Missfresh HK Limited as wholly foreign-owned enterprises in the PRC.

To launch our intelligent fresh market business operations, Changshu Daily Technology Co., Ltd. was established in August 2020 and Qingdao Daily Market Technology Co., Ltd. was established in November 2020, both of which are currently Missfresh HK Limited’s wholly foreign-owned enterprises in the PRC.

 

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Corporate Structure

The following diagram illustrates our corporate structure, including our principal subsidiaries, as of the date of this prospectus:

 

LOGO

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of operations and comprehensive loss data for the years ended December 31, 2018, 2019 and 2020, selected consolidated balance sheets data as of December 31, 2018, 2019 and 2020, and selected consolidated statements of cash flow data for the years ended December 31, 2018, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of operations data for the three months ended March 31, 2020 and 2021, selected consolidated balance sheets data as of March 31, 2021, and selected consolidated statements of cash flow data for the three months ended March 31, 2020 and 2021 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

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The following table presents our selected consolidated statements of operations and comprehensive loss data for the periods indicated:

 

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

Selected Consolidated Statements of Operations and Comprehensive Loss Data:

             

Net revenues

             

Sales of products through online platforms

    3,202,738       5,777,413       5,999,675       915,730       1,668,295       1,492,780       227,843  

Other revenues

    343,961       223,983       130,762       19,958       21,520       37,447       5,716  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    3,546,699       6,001,396       6,130,437       935,688       1,689,815       1,530,227       233,559  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

    (3,242,677     (5,480,499     (4,940,016     (753,994     (1,179,007     (1,341,249     (204,715

Fulfillment expenses

    (1,239,275     (1,832,978     (1,576,944     (240,689     (415,175     (440,224     (67,191

Sales and marketing expenses

    (795,478     (740,033     (589,192     (89,928     (98,656     (167,615     (25,583

General and administrative expenses (1)

    (287,438     (377,451     (298,775     (45,602     (81,833     (86,853     (13,256

Technology and content (1)

    (230,865     (469,655     (369,432     (56,386     (102,161     (94,794     (14,468
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

    (5,795,733     (8,900,616     (7,774,359     (1,186,599     (1,876,832     (2,130,735     (325,213
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (2,249,034     (2,899,220     (1,643,922     (250,911     (187,017     (600,508     (91,654
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income/(expense), net

    3,455       (2,574     23,431       3,576       (5,595     (2,772     (423

Interest income/(expense), net

    15,593       28,374       (33,119     (5,055     (1,858     (17,158     (2,619

Changes in fair value of options and embedded conversion feature

    —         —         5,216       796       —         10,292       1,571  

Share of results of equity investees

    (1,573     (36,023     (780     (119     (195     (201     (31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expenses

    (2,231,559     (2,909,443     (1,649,174     (251,713     (194,665     (610,347     (93,156

Income tax expenses

    —         —         —         —         —         (2     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (2,231,559     (2,909,443     (1,649,174     (251,713     (194,665     (610,349     (93,156
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of convertible redeemable preferred shares to redemption value

    (187,937     (378,731     (508,321     (77,585     (121,308     (151,213     (23,080

Accretion of convertible redeemable non-controlling preferred shares to redemption value

    (66,848     (37,219     (6,750     (1,030     —         (2,572     (393

Deemed dividends to convertible redeemable non-controlling preferred shareholders

    —         (148,919     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders of Missfresh Limited

    (2,486,344     (3,474,312     (2,164,245     (330,328     (315,973     (764,201     (116,639
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (2,231,559     (2,909,443     (1,649,174     (251,713     (194,665     (610,349     (93,156

Other comprehensive loss, net of tax

             

Foreign currency translation adjustment, net of nil tax

    22,134       40,333       (47,448     (7,242     6,254       21,867       3,338  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss, net of tax

    (2,209,425     (2,869,110     (1,696,622     (258,955     (188,411     (588,482     (89,818

Accretion of convertible redeemable preferred shares to redemption value

    (187,937     (378,731     (508,321     (77,585     (121,308     (151,213     (23,080

Accretion of convertible redeemable non-controlling preferred shares to redemption value

    (66,848     (37,219     (6,750     (1,030     —         (2,572     (393

Deemed dividends to convertible redeemable non-controlling preferred shareholders

    —         (148,919     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to ordinary shareholders of Missfresh Limited

    (2,464,210     (3,433,979     (2,211,693     (337,570     (309,719     (742,334     (113,301
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders of Missfresh Limited

             

Net loss per share — Basic and diluted

    (30.78     (39.82     (21.94     (3.35     (3.35     (7.34     (1.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing net loss per share

             

Basic and diluted

    80,775,998       87,258,997       98,647,803       98,647,803       94,352,113       104,132,597       104,132,597  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Measure: (2)

             

Adjusted net loss

    (2,215,906     (2,777,021     (1,589,698     (242,635)       (175,757     (598,406     (91,333

 

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Notes:

(1)

Share-based compensation expenses were allocated as follows:

 

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

General and administrative expenses

     5,880        36,185        15,939        2,433        5,685        3,060        467  

Technology and content

     9,773        96,237        43,537        6,645        13,223        8,883        1,356  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15,653        132,422        59,476        9,078        18,908        11,943        1,823  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

See “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measure.”

The following table presents our selected consolidated balance sheets data as of the dates indicated:

 

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

Selected Consolidated Balance Sheets Data:

            

Cash and cash equivalents

     2,611,345       553,140       866,113       132,195       1,844,220       281,483  

Restricted cash

     1,471       7,958       56,269       8,588       116,500       17,781  

Accounts receivable, net

     9,261       55,226       41,403       6,319       34,247       5,227  

Inventories, net

     133,991       169,292       173,688       26,510       182,804       27,901  

Prepayments and other current assets

     248,563       318,331       192,824       29,431       168,997       25,794  

Total current assets

     3,173,785       1,103,947       1,449,423       221,225       2,405,290       367,118  

Operating lease right-of-use assets, net

     362,686       677,496       469,644       71,682       548,492       83,716  

Property and equipment, net

     120,434       223,767       143,864       21,958       155,363       23,713  

Total assets

     3,754,096       2,101,506       2,162,762       330,102       3,230,847       493,122  

Accounts payable

     739,438       1,419,339       1,088,431       166,127       1,079,287       164,731  

Deferred Revenue

     87,273       110,398       119,214       18,196       117,307       17,905  

Accrued expenses and other current liabilities

     684,133       389,439       347,468       53,033       309,811       47,286  

Operating lease liabilities, current

     172,064       294,598       252,740       38,576       280,070       42,747  

Total current liabilities

     1,702,908       2,418,772       2,897,848       442,298       2,713,171       414,110  

Total liabilities

     1,861,368       2,741,988       3,069,281       468,464       2,931,597       447,448  

Total mezzanine equity

     5,874,619       6,642,966       8,529,146       1,301,802       10,465,239       1,597,307  

Total shareholders’ deficit

     (3,981,891     (7,283,448     (9,435,665     (1,440,164     (10,165,989     (1,551,633

Total liabilities, mezzanine equity and shareholders’ deficit

     3,754,096       2,101,506       2,162,762       330,102       3,230,847       493,122  

 

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The following table presents our selected consolidated statements of cash flow data for the periods indicated:

 

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

Selected Consolidated Statements of Cash Flow Data:

             

Net cash used in operating activities

    (1,723,783     (1,966,946     (1,611,788     (246,007     (226,629     (589,547     (89,982

Net cash provided by/(used in) investing activities

    (342,134     (36,032     (235,009     (35,868     (127,304     12,350       1,885  

Net cash provided by/ (used in) financing activities

    3,973,275       (81,901     2,274,980       347,230       510,950       1,589,757       242,644  

Effects of exchange rate changes on cash and cash equivalents and restricted cash

    22,249       33,161       (66,899     (10,212     6,254       25,778       3,934  

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

    1,929,607       (2,051,718     361,284       55,143       163,271       1,038,338       158,481  

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

    683,209       2,612,816       561,098       85,640       561,098       922,382       140,783  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    2,612,816       561,098       922,382       140,783       724,369       1,960,720       299,264  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section titled “Selected Consolidated Financial Data’’ and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors’’ and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

Overview

Missfresh is rebuilding neighborhood retail from the ground up in China with our innovative technology and business model. We invented the DMW model by building and operating DMWs in May 2015, before any other player in on-demand DMW retail industry, according to iResearch. Through the convenient locations of our DMWs and technology-enabled DMW management, we operate an online-and-offline integrated on-demand retail business offering fresh produce and FMCGs, which share the characteristics of high-frequency purchases with regular and universal demand. We strive to make grocery shopping more delightful, more efficient, more affordable and more trustworthy. To that end, we operated a technology-enabled network of 631 DMWs in 16 cities in China as of March 31, 2021. We have also built up a full stack of proprietary technology to empower participants in the neighborhood retail business such as supermarkets, fresh markets and local retailers with our core capabilities.

Through our “Missfresh” mobile application and Mini Program embedded in third-party social platforms, which feature substantially similar user interface and functions, consumers can easily purchase quality grocery at their fingertips and receive high-quality products delivered by our delivery riders to their doorstep in 39 minutes on average in the first three months of 2021. We appeal to a new generation of consumers who are willing to pay for the high-quality and convenient experience in grocery shopping. We had 5.1 million, 7.2 million, 8.7 million and 7.9 million effective users in 2018, 2019, 2020 and the twelve months ended March 31, 2021, respectively. We accumulated a total of over 31 million transacting users as of March 31, 2021.

According to iResearch, in terms of GMV, we ranked first in China’s on-demand DMW retail industry in 2018 and 2019, respectively, and ranked second in 2020. During 2020, we focused on the growth of our effective users, and continued to invest in technological infrastructure upgrade. During the same period, we generated an average price per order of RMB94.6 for our on-demand DMW retail business, the highest among DMW players, and achieved industry-leading AI adoption level in China’s on-demand DMW retail industry, with higher fulfillment margin than the average of the other three major players in the same industry, according to iResearch. In 2020, our market share of China’s on-demand DMW retail industry in terms of GMV was 28%, ranked first in North China, according to iResearch. We also ranked the highest by satisfaction rate of consumers compared to our competitors, according to a survey conducted by iResearch in February 2021.

To further digitalize the neighborhood retail industry end-to-end, we launched our intelligent fresh market business in the second half of 2020 and started our retail cloud business initiative in 2021, further empowering players in the neighborhood retail industry to embrace the digital transformation with our AI-driven technology platform and other core capabilities.

Since our inception in 2014, we have achieved significant growth. Our total net revenues increased from RMB3,546.7 million in 2018 to RMB6,001.4 million in 2019 and RMB6,130.4 million (US$935.7 million) in 2020, and our total net revenues was RMB1,689.8 million and RMB1,530.2 million (US$233.6 million) in the three months ended March 31, 2020 and 2021, respectively. Our gross profit, calculated as total net revenues minus cost of revenue, increased by 71.3% from RMB304.0 million in 2018 to RMB520.9 million in 2019, and

 

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further increased by 128.5% to RMB1,190.4 million in 2020, and our gross profit was RMB510.8 million and RMB189.0 million (US$28.8 million) in the three months ended March 31, 2020 and 2021, respectively. Our gross margin improved significantly from 8.6% in 2018 to 8.7% in 2019, and further to 19.4% in 2020 and our gross margin was 30.2% and 12.3% in the three months ended March 31, 2020 and 2021, respectively. We incurred a net loss of RMB2,231.6 million, RMB2,909.4 million and RMB1,649.2 million (US$251.7 million) in 2018, 2019 and 2020, respectively, and a net loss of RMB194.7 million and RMB610.3 million (US$93.2 million) in the three months ended March 31, 2020 and 2021, respectively. Our adjusted net loss, a non-GAAP measure, was RMB2,215.9 million, RMB2,777.0 million and RMB1,589.7 million (US$242.6 million) in 2018, 2019 and 2020, respectively, and RMB175.8 million and RMB598.4 million (US$91.3 million) in the three months ended March 31, 2020 and 2021, respectively. See “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measure” for a reconciliation of our adjusted net loss to net loss.

Key Factors Affecting Our Results of Operations

Our business, results of operations and financial condition are affected by general factors driving China’s economy, the e-commerce industry, and the neighborhood retail industry. These factors include urbanization rate, levels of per capita disposable income, levels of consumer spending, rate of internet and mobile penetration, rate of online consumption penetration of the fresh produce industry, development of cold chain logistics, standardization of supply chain of agricultural products, overall grocery spending, and other general economic conditions in China that affect consumption and business activities in general.

While our business is influenced by general factors affecting our industry, our operating results are more directly affected by company-specific factors, including the following major factors:

 

   

our ability to expand our user base and retain effective users and increase their spending;

 

   

our ability to manage product supply chain and merchandising;

 

   

our ability to further enhance our fulfillment capabilities;

 

   

our ability to effectively and efficiently conduct sales and marketing;

 

   

our ability to effectively invest in enhancing our technology capabilities; and

 

   

our ability to implement new strategic initiatives.

Our ability to expand our user base and retain effective users and increase their spending

We primarily generate our revenue from sales of grocery on our “Missfresh” mobile application and Mini Program. Our sales of products through online platforms increased significantly from RMB3,202.7 million in 2018 to RMB5,777.4 million in 2019 and RMB5,999.7 million (US$915.7 million) in 2020. Increases in the number of annual effective users and annual spending per effective user are two key drivers of our revenue growth. Effective users, defined as transacting users whose payments in a given period, net of coupons and incentives offered to them, exceed our procurement cost to purchase the products that are sold to such transacting users, contributed a substantial majority of our product sales. Effective users are strategically important to us and are a key factor that affects our results of operations and financial performance. The number of effective users increased from 5.1 million in 2018 to 7.2 million in 2019 and further to 8.7 million in 2020. In the twelve months ended March 31, 2021, the number of effective users were 7.9 million. The annual spending per effective user was RMB558.0 in 2018, RMB690.4 in 2019, RMB712.8 in 2020, and RMB705.8 in the twelve months ended March 31, 2021, primarily attributable to our success in attracting and retaining effective users and increasing annual spending per effective user with our expanding product offerings and improved customer services.

Our ability to attract new effective users and increase annual spending per effective user depends on our ability to engage with users, offer high-quality products and expand our product selection. We primarily target urban consumers, who have demand for efficient grocery delivery and represent the largest segment of our user

 

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base. Overall, our target users are tech-savvy, adept at online shopping and social media and are more inclined to purchase high-quality grocery and appreciate the convenience we offer. In addition, our ability to increase consumer spending also depends on our ability to continually deliver a compelling shopping experience on our platforms. To this end, we offer a wide selection of high-quality grocery at competitive prices on our platforms and provide speedy and reliable on-demand delivery. In the three months ended March 31, 2021, we offered over 4,300 SKUs of quality products through our on-demand DMW retail business. We also offered a wider range of over 20,000 SKUs through next day delivery in the three months ended March 31, 2021. As a result, the total items purchased by effective users increased from 245.3 million in 2018 to 450.4 million in 2019 and 554.9 million in 2020. The total orders placed by effective users increased from 32.5 million in 2018 to 59.1 million in 2019 and 65.1 million in 2020. In the twelve months ended March 31, 2021, the total items purchased and total orders placed by effective users were 514.4 million and 62.2 million, respectively.

Our ability to manage product supply chain and merchandising

Our ability to source and merchandise high-quality grocery is critical to our success. Our target consumers tend to pursue high-quality grocery, which, in turn, requires us to establish a standardized and efficient product supply chain. We source the majority of our grocery directly from the product origin. Proximity to origin enables us to develop stronger relationships with local suppliers and producers, which, in turn, provide us access to a stable supply of high-quality grocery and enable us to reduce costs by eliminating multiple layers of middlemen. In addition, we have formed strategic partnerships with a select group of suppliers and producers. Leveraging our smart supply chain system, we are able to collaborate directly with some of our suppliers and producers on planning and production and share with them tools and insights to enable them to improve their efficiency, and produce high-quality grocery for our consumers. Also, to ensure the safety and quality of our product offerings, we use an end-to-end supply chain operation for grocery and implemented strict quality control standards and procedures for our products, such as full-chain traceability. We conduct daily inspections on our DMWs, such as temperature and hygiene. We provide tailored storage conditions to different grocery, and control storage and delivery conditions from end to end. We believe that our strict quality control, site management and delivery procedures are key to ensuring a high level of user satisfaction.

Our results of operations are also affected by the mix of products we offer. Driven by our industry expertise and AI technologies, we are able to expand and optimize our category mix and SKU portfolio, and improve our merchandise pricing ability, to achieve healthy gross margin with competitive pricing.

We use AI-driven demand forecast through our RAIN to make informed decisions at key steps of our product supply chain so that we can control our inventory risk. We believe our ability to manage product sourcing and supply chain will help us ensure the stable and adequate supply of grocery. Leveraging our technology and AI capabilities, we are able to apply efficient inventory management toward a growing variety of grocery. Our overall inventory loss rate was kept low at 2.5% in 2020.

Furthermore, as our business further grows in scale, we expect to obtain more favorable terms from suppliers, including pricing terms, credit periods and volume-based discounts. We also aim to create value for our suppliers by offering them valuable insights on market demand, consumer preferences and supply chain information based on our vast user base and large demand. We believe these value propositions will also help us deepen our relationships with, and obtain favorable terms from, suppliers and optimize our procurement costs.

Our ability to further enhance our fulfillment capabilities

Our results of operations depend in part on our ability to fulfill orders efficiently and effectively to meet the complex logistics demands for grocery. Our fulfillment network, featured by our integrated DMWs, quality control centers and hourly on-demand delivery services, is the backbone of our superior consumer experience.

We have built a network of DMWs with room temperate and refrigerated storage capability that each covers neighborhoods within a three-kilometer radius. All the DMWs are managed under our centralized management

 

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system using proprietary logistics and inventory management technologies and systems. As of March 31, 2021, we operated 631 DMWs, covering 16 cities in China, with approximately 200,500 square meters of total floor area. Our technology-driven DMWs enable us to match inventories with each neighborhood’s needs, resulting in a speedy and cost-efficient delivery to consumers. We invest heavily in our technological infrastructure to maximize the level of automation, and therefore fulfillment efficiency, of our DMWs. We plan to further expand our DMW network in strategically selected areas to support our business expansion. We also plan to build large-scale, customized quality control centers equipped with the latest technology infrastructure to improve our fulfillment efficiency and product quality, accommodate greater product selection and fulfill the anticipated sales of our own products. Our ability to continue to invest, expand and enhance our DMW network, quality control centers and the underlying technology, our RAIN, is critical to our results of operations.

In addition, enhancing on-demand delivery is also critical to further improving our fulfillment system. Our well-trained dedicated delivery riders enable us to provide services to consumers, which helps improve our user satisfaction rate and strengthen our brand image. In 2020, over 22,000 delivery riders have completed at least one delivery to our users. Leveraging our smart logistics system, we have visibility towards the entire delivery process and control the delivery rider dispatching and delivery route planning, which takes into account of order time, traffic, and the type of grocery being delivered. We also collaborate with reputable delivery service providers to supplement our own delivery force during peak times. We have established procedures in selecting the delivery service providers we engage with, including detailed review of their operating history, fleet condition, reliability and other comprehensive criteria. In 2020, we achieved an average delivery time of around 45 minutes for all intra-city delivery orders, and each of our delivery riders could deliver 50 orders per day on average.

Our fulfillment expenses are the largest contributor to our operating expenses. Our fulfillment expenses were RMB1,239.3 million, RMB1,833.0 million and RMB1,576.9 million (US$240.7 million) in 2018, 2019 and 2020, respectively, and RMB415.2 million and RMB440.2 million (US$67.2 million) in the three months ended March 31, 2020 and 2021, respectively. Fulfillment expense as percentage of total net revenues decreased from 34.9% in 2018 to 30.5% in 2019 and further down to 25.7% in 2020 and increased from 24.6% in the three months ended March 31, 2020 to 28.8% in the three months ended March 31, 2021, primarily due to increases in labor costs and more subsidies to riders during Chinese New Year holidays.

Our ability to effectively and efficiently conduct sales and marketing

Our results of operations depend in part on our ability to effectively and efficiently conduct sales and marketing that attract and retain consumers. Our online social marketing efforts serve one purpose: expanding our channels to reach out to our target consumers with all types of needs. We leverage social networks as an effective and efficient tool for user acquisition and engagement. We are one of the earliest adopters of the Mini Program, which helps generate a considerable portion of our revenue. See “Business—Smart Sales and Marketing” for a detailed description of our marketing strategies. We have established an intelligent system to adjust marketing strategies across regions in China to improve our return on sales and marketing spending. We plan to continually advance our smart marketing capabilities to refine our marketing and user acquisition strategy. Our success in using social media to conduct accurate and targeted user acquisition has contributed to higher brand recognition and higher user acquisition efficiency.

Our sales and marketing expenses are also a significant contributor to our operating expenses. In 2018, 2019 and 2020, our sales and marketing expenses were RMB795.5 million, RMB740.0 million and RMB589.2 million (US$89.9 million), respectively, accounting for 22.4%, 12.3% and 9.6% of our total net revenues, respectively. We incurred RMB98.7 million and RMB167.6 million (US$25.6 million) of sales and marketing expenses in the three months ended March 31, 2020 and 2021, respectively, accounting for 5.8% and 11.0% of our total net revenues, respectively. We will continue to improve our marketing strategies to enhance our sales and marketing efficiency in the future.

 

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Our ability to effectively invest in enhancing our technology capabilities

Our results of operations depend in part on our ability to invest in enhancing our technology capabilities. We have made significant investments in developing our technology platform and AI capabilities that enable service automation, operation digitalization and intelligent decision-making. In 2018, 2019 and 2020, our technology and content expenses were RMB230.9 million, RMB469.7 million and RMB369.4 million (US$56.4 million), respectively, and in the three months ended March 31, 2020 and 2021, our technology and content expenses were RMB102.2 million and RMB94.8 million (US$14.5 million), respectively. We expect to continue to make investment in the development and implementation of new technologies. Specifically, we plan to continue to invest in improving and expanding our technology infrastructure, talent recruitment in the fields of digitalization and AI technologies to support our new strategic initiatives including retail cloud platform and intelligent fresh markets business. We believe investment in technology will deliver overall long-term growth and increase our operating efficiency.

Our ability to implement new strategic initiatives

In our effort to further digitalize the neighborhood retail industry, we have launched our intelligent fresh market business and started our retail cloud business initiative. See “Business–– Our Intelligent Fresh Market Business” and “Business—Our Retail Cloud Services Business” for a more detailed description of these two strategic initiatives. Our ability to develop these two new initiatives is expected to impact our financial performance in the future.

Impact of COVID-19

Our results of operations and financial condition have been and may continue to be affected by the spread of COVID-19. Although China had substantially controlled the spread of COVID-19 by the end of 2020, the extent to which COVID-19 impacts our results of operations will depend on the future developments of the pandemic which are highly uncertain. See also “Risk Factors —Risks Related to Our Business and Industry—Our operations have been and may continue to be affected by the COVID-19 pandemic.”

Despite the adverse impact of the COVID-19 pandemic, due to the social distancing measures imposed as a result of the COVID-19 pandemic, more consumers have started changing their grocery shopping habits from offline to online and from “in store” to “at home,” which, in turn, has benefited integrated retail platforms with a standardized and efficient supply chain. As a result, our effective users increased from 7.2 million in 2019 to 8.7 million in 2020, and our gross profit increased by 128.5% from RMB520.9 million in 2019 to RMB1,190.4 million in 2020.

Key Components of Results of Operations

Net revenues

Our net revenues consist of (i) sales of products through online platforms, and (ii) other revenues.

Our sales of products through online platforms include sales of grocery primarily through our “Missfresh” mobile application and Mini Program, and, to a lesser extent, other third-party platforms. Our sales of products through other third-party platforms were not material during the periods presented. We recognize revenues from sales of products through online platforms net of discounts, return allowances, and value-added taxes (VAT).

Our other revenues primarily consist of (i) membership fees we charge to consumers that join our Missfresh membership program, and (ii) sale of products through our “convenience go” vending machines.

 

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The following table sets forth the breakdown of our net revenues, in amounts and as percentages of net revenues for the periods presented:

 

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

Sales of products through online platforms

    3,202,738       90.3       5,777,413       96.3       5,999,675       915,730       97.9       1,668,295       98.7       1,492,780       227,843       97.6  

Other revenues

    343,961       9.7       223,983       3.7       130,762       19,958       2.1       21,520       1.3       37,447       5,716       2.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    3,546,699       100.0       6,001,396       100.0       6,130,437       935,688       100.0       1,689,815       100.0       1,530,227       233,559       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our sales of products through online platforms grew significantly from 2018 to 2020 and slightly decreased from the three months ended March 31, 2020 to the three months ended March 31, 2021. We expect the growth to continue and be a main contributor to our total revenues in the foreseeable future, as we attract and retain effective users, and increase purchases from effective users.

Cost of Revenues

The following table sets forth our cost of revenues for each of the periods presented:

 

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

Cost of revenues

     3,242,677        5,480,499        4,940,016        753,994        1,179,007        1,341,249        204,715  

Our cost of revenues consists primarily of our purchase price of products sold, product processing and packing costs, inbound shipping charges, and write-downs of disposed inventory. In 2018, 2019 and 2020, our purchase price of products sold was the largest component of our cost of revenues, amounting to RMB3,154.3 million, RMB5,324.6 million and RMB4,743.1 million (US$723.9 million), respectively. In the three months ended March 31, 2020 and 2021, our purchase price of products sold was also the largest component of our cost of revenues, amounting to RMB1,141.4 million and RMB1,271.4 million (US$194.1 million), respectively. Shipping charges to receive products from suppliers are included in inventories and recognized as cost of revenues upon sale of products to consumers.

The following table sets forth our gross profit, calculated as net revenues minus cost of revenues, gross margin and gross profit growth rate for the periods presented:

 

          For the Year Ended
December 31,
    For the Three
Months Ended
March 31,
 
          2018     2019     2020     2020     2021  

Gross profit

   (RMB in thousands)      304,022       520,897       1,190,421       510,808       188,978  

Gross margin

   (%)      8.6     8.7     19.4     30.2     12.3

Gross profit growth rate

   (%)        71.3     128.5 %        (63.0 )% 

Our gross profit increased by 71.3% from RMB304.0 million in 2018 to RMB520.9 million in 2019, primarily due to an increase in our sales of products through online platforms, including mainly our “Missfresh” mobile application and Mini Program. Our gross profit further increased by 128.5% to RMB1,190.4 million

 

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(US$181.7 million) in 2020. The accelerating growth was primarily driven by the improvement in gr