DRS 1 filename1.htm DRS

As confidentially submitted to the Securities and Exchange Commission on June 28, 2019

Registration No. 333-      

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ECMOHO Limited

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   5961   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3F, 1000 Tianyaoqiao Road

Xuhui District

Shanghai, 200030

The People’s Republic of China

+86 21 6113 2270

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

 

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

 

 

Copies to:

 

Ching-Yang Lin, Esq.

Sullivan & Cromwell LLP

28th Floor

Nine Queen’s Road Central

Hong Kong

+852 2826 8688

 

James C. Lin, Esq.

Li He, Esq.

Davis Polk & Wardwell LLP

18th Floor

The Hong Kong Club Building

3A Chater Road

Hong Kong

+852 2533 3300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

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, 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
  Proposed
maximum
aggregate
offering price(3)
  Amount of
registration fee

 

Class A ordinary shares, par value US$0.00001 per share(1) (2)

                             

 

 

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

(2) Includes Class A 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, and also includes Class A ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These Class A 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(o) under the Securities Act of 1933.

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, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated

                American Depositary Shares

 

LOGO

ECMOHO Limited

Representing              Class A Ordinary Shares

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

ECMOHO Limited is offering              ADSs to be sold in the offering. Each ADS represents Class A ordinary shares, par value US$0.00001 per share.

Prior to this offering, there has been no public market for the ADSs or our shares. It is currently estimated that the initial public offering price per ADS will be between US$             and US$             . We have applied to list the ADSs on the NASDAQ Global Select Market under the symbol .

We are an “emerging growth company” as defined under applicable U.S. securities laws and, as such, we are eligible for reduced public company reporting requirements.

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 13 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

   US$                    US$                

Underwriting discounts and commissions(1)

   US$        US$    

Proceeds, before expenses, to us

   US$        US$    

 

(1)

For a description of compensation payable to the underwriters, see “Underwriting.”

The underwriters have the option to purchase up to an additional ADSs from us at the initial public offering price less the underwriting discounts and commissions within 30 days from the date of this prospectus.

Upon the completion of this offering, our outstanding shares will consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have same rights except for voting and conversion rights. Each holder of our Class B ordinary shares is entitled to ten votes per share and each holder of our Class A ordinary shares is entitled to one vote per share on all matters submitted to them for a vote. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. We will be a “controlled company” under the NASDAQ Stock Market Rules because our co-founders, Ms. Zoe Wang and Mr. Leo Zeng, will beneficially own, in aggregate, 100% of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately      % of our total issued and outstanding share capital and      % of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option.

The underwriters expect to deliver the ADSs against payment in New York, New York on             , 2019.

 

UBS Investment Bank    CICC

Prospectus dated             , 2019


 

 

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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     13  

Special Note Regarding Forward-Looking Statements

     51  

Use of Proceeds

     52  

Dividend Policy

     53  

Capitalization

     54  

Dilution

     56  

Enforceability of Civil Liabilities

     58  

Corporate History and Structure

     60  

Selected Consolidated Financial and Operating Data

     65  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     68  

Our Market Opportunities

     84  

Business

     88  

Regulation

     101  

Management

     119  

Principal Shareholders

     125  

Related Party Transactions

     127  

Description of Share Capital

     129  

Description of American Depositary Shares

     139  

Shares Eligible for Future Sale

     151  

Taxation

     152  

Underwriting

     158  

Expenses Relating to this Offering

     169  

Legal Matters

     170  

Experts

     171  

Where You Can Find Additional Information

     172  

Index to Consolidated Financial Statements

     F-1  

You should rely only on the information contained in this prospectus or in any related free writing prospectus that we have filed with the SEC. We have not authorized anyone to provide you with information that is different. This prospectus may only be used where it is legal to offer and sell these securities. The information contained in this prospectus is current only as of its date.

Until             , 2019 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who came 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 this prospectus or any filed free writing prospectus outside the United States.

 

i


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 and notes 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” and information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding whether to buy the ADSs. This prospectus contains information from an industry report, dated June 2019, commissioned by us and prepared by Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., or Frost & Sullivan, an independent market research firm, to provide information regarding our industry and our market position in the PRC.

Our Mission

Our mission is to improve the health and well-being of consumers in China. We strive to achieve our mission by empowering consumers with access to quality products and trustworthy content to better address their health and wellness needs and those of their families.

Our Business

We are one of China’s leading integrated solution providers in the rapidly growing non-medical health and wellness market. As an integrated solution provider, we act as the bridge between brand owners and Chinese consumers by marketing and distributing health supplements and food, mother and child care products, personal care products, household healthcare equipment and other health and wellness products. Through over seven years of operation, we have built up an ecosystem where Chinese consumers are provided with customized health and wellness solutions that include quality products and trustworthy content.

We ranked first in China’s non-medical health and wellness integrated solution industry in terms of revenue in 2018 with a market share of 2.6%, according to Frost & Sullivan. The non-medical health and wellness integrated solution industry is the fastest growing segment within China’s health and wellness market, according to the same source. Leveraging our strong relationships with leading health and wellness brands home and abroad, comprehensive online channel coverage, loyal customer base, proven content generation and distribution capabilities, deep industry knowhow and extensive consumer data, we believe we are well positioned to solidify our leading position in China’s highly fragmented non-medical health and wellness integrated solution industry and to serve China’s broader health and wellness market.

As of May 31, 2019, we sourced around 5,000 SKUs of quality health and wellness products from around 40 brand partners, including Abbott, Gerber, Perrier, Puritan’s Pride and Wyeth Nutrition, and offered them to consumers through various online and offline channels, including major e-commerce platforms, such as Tmall and JD.com, social e-commerce platforms, such as Pinduoduo, Yunji and Little Red Book, as well as other online and offline retailers. We also provide value-added services, such as designing and operating online stores and organizing online and offline marketing campaigns, to our brand partners to extend their consumer outreach.

In addition, as consumers in China are increasingly seeking higher quality health and wellness products, we believe there is a growing need for trustworthy health and wellness content that guides consumers to reliable products that suit their own health and wellness needs. To address this growing need, we partner with over 800 healthcare experts and KOLs to generate health and wellness content, combined with product recommendations, and distribute such content to consumers through multiple online and offline channels. In the month of May 2019, we, together with these healthcare experts and KOLs, generated around 2,000 health and wellness articles.



 

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We optimize our brand partner and product portfolio from time to time by selecting brands and products that best address consumer needs in China based on the analysis of our 7.0 million consumer profiles and our market insights. Such market insights into Chinese consumer demand are in turn valued by our brand partners. We also have two proprietary brands, KGC and HST, which address the underserved demand for household healthcare equipment and traditional Chinese herbal tonics.

We have developed and recently launched XG Health platform, an integrated family health management and service platform. XG Health offers consumers a rich array of health management plans, prepared by doctors and nutritionists, as well as health and wellness products. Consumers may also reach out to the healthcare experts on XG Health for further inquiries and receive customized non-medical health and wellness recommendations. In addition, we have rolled out a pilot program to partner with specialty stores in “lower-tier” cities, townships and rural area in Anhui Province in China, which may source health and wellness products from us through XG Health and host health and wellness presentations given by healthcare experts we work with.

Our net revenues grew by 102.6% from US$98.2 million in 2017 to US$199.0 million in 2018. Our net income attributable to ECMOHO Limited grew by 117.9% from US$2.8 million in 2017 to US$6.1 million in 2018.

 

Our Market Opportunities

China’s health and wellness industry, which encompasses both medical and non-medical services and products related to the maintenance, recovery and enhancement of health, grew at a total CAGR of 13.0% over the period 2014 to 2018, while China’s non-medical health and wellness sector grew at a CAGR of 16.8% over the same period. The non-medical health and wellness integrated solution industry is the fastest growing market segment within China’s health and wellness market. According to Frost & Sullivan, this market segment grew at a CAGR of 50.9% over the period 2014 to 2018, and is expected to continue to grow at a CAGR of 20.3% between 2018 and 2023.

Several factors generate market opportunities and promote growth in the PRC health and wellness industry, including:

 

   

the rising spending power and health awareness of Chinese consumers;

 

   

the increasing life expectancy combined with an aging population;

 

   

the prevalence of health issues and chronic diseases;

 

   

increased demand for better health and wellness products;

 

   

the emergence of “lower-tier” cities, townships and rural areas in China as core drivers of the health and wellness integrated solution market; and

 

   

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

Our Strengths

We attribute our success to the following strengths:

 

   

a leading integrated solution provider in China’s rapidly growing non-medical health and wellness market;



 

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strong ability to generate and distribute health and wellness content, leading to a loyal customer base;

 

   

new retail model empowered by comprehensive channel coverage;

 

   

strong relationships with leading health and wellness brand owners from around the world;

 

   

key market insights and precision marketing based on extensive consumer data and strong data analytics; and

 

   

visionary management team with substantial industry experience.

Our Strategies

To further grow our business and enhance our competitive position, we intend to pursue the following strategies:

 

   

expand our product and service offerings;

 

   

expand our offline channel coverage;

 

   

expand our content generation and distribution program;

 

   

continue to invest in our consumer profiling and data analytics capabilities; and

 

   

pursue strategic collaboration, investment and acquisition opportunities in order to expand our product and service offerings, extend our geographic reach and enhance our technological capabilities.

Our Challenges

Our business and successful execution of our strategies are subject to certain challenges, risk and uncertainties, including:

 

   

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

 

   

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

 

   

our ability to anticipate changes in customer and consumer preferences;

 

   

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

 

   

our ability to compete effectively against other e-commerce companies, offline competitors or new entrants to the health and wellness market;

 

   

our ability to obtain additional capital on acceptable terms as and when required;

 

   

regulatory changes in the PRC and compliance with such regulations; and

 

   

our ability to effectively manage our inventory and warehousing capabilities.

We also face additional risks, uncertainties and challenges that may materially affect our business, financial condition and results of operations. You should consider the risks discussed in the section headed “Risk Factors” and elsewhere in this prospectus before investing in us.



 

3


Corporate History and Structure

Our business commenced its operations in December 2011, when our co-founders, Ms. Zoe Wang and Mr. Leo Zeng, established our predecessor, Shanghai ECMOHO Health Biotechnology Co., Ltd., or ECMOHO Shanghai, incorporated under the laws of the PRC, with the goal of improving the health and well-being of Chinese consumers.

In May 2013, we became the exclusive distributor and brand manager in China of our first international brand partner, Puritan’s Pride, a U.S.-based manufacturer of vitamins, minerals, herbs and other nutritional supplements. We remain Puritan’s Pride’s exclusive distributor and brand manager in China as of today.

In January 2014, we commenced operation of the Puritan’s Pride cross-border flagship store on Tmall Global.

In July 2016, we began working with Gerber Baby Products, an established U.S.-based manufacturer and distributor of infant healthcare products.

In September 2017, we began working with Wyeth Nutrition, an established international brand that focuses on nutrition products for mothers, infants and young children.

In June 2018, ECMOHO Limited was incorporated under the laws of the Cayman Islands, and ECMOHO (Hong Kong) Health Technology Limited, or ECMOHO Hong Kong, was incorporated under the laws of Hong Kong and wholly owned by ECMOHO Limited. In July 2018, ECMOHO Hong Kong acquired 97.5% of the equity interest of ECMOHO Shanghai from our co-founders and certain other shareholders of ECMOHO Shanghai. See “Related Party Transactions – Other Transactions with Related Parties – Transactions with our co-founders”.

In April 2019, we launched XG Health, our proprietary integrated family health management and service platform, which offers consumers a range of health and wellness products and rich content.

In June 2019, ECMOHO Hong Kong, through an onshore subsidiary, entered into an agreement to acquire the remaining 2.5% of the equity interest of ECMOHO Shanghai from its minority shareholders.



 

4


The following diagram illustrates our corporate structure and the place of incorporation of each of our significant subsidiaries and our variable interest entity as of the date of this prospectus:

 

LOGO

 

(1)

In June 2019, ECMOHO Hong Kong, through an onshore subsidiary, entered into an agreement to acquire the remaining 2.5% of the equity interest of ECMOHO Shanghai from its minority shareholders.

(2)

Contractual arrangements include exclusive technology consulting and service agreement, power of attorney, equity pledge agreement, exclusive call option agreement and spousal consent letters.



 

5


(3)

Shanghai Yibo Medical Equipment Co., Ltd. is our variable interest entity in China and is 50% owned by Ms. Zoe Wang and 50% owned by Mr. Leo Zeng, our co-founders.

Upon the completion of this offering, our outstanding shares will consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have same rights except for voting and conversion rights. Each holder of our Class B ordinary shares is entitled to ten votes per share and each holder of our Class A ordinary shares is entitled to one vote per share on all matters submitted to them for a vote. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. We will be a “controlled company” under the NASDAQ Stock Market Rules because our co-founders, Ms. Zoe Wang and Mr. Leo Zeng, will beneficially own, in aggregate, 100% of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately      % of our total issued and outstanding share capital and % of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option.

Corporate Information

Our principal executive offices are located at 3F, No. 1000 Tianyaoqiao Road, Xuhui District, Shanghai, 200030, the People’s Republic of China. Our telephone number at this address is +86 21 6113-2270. The office of the Company is at the offices of Hermes Corporate Services Ltd., Fifth Floor, Zephyr House, 122 Mary Street, P.O. Box 31493, George Town, Cayman Islands.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our corporate website is www.ecmoho.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is                     .

Implications 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, or the JOBS Act. 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, or Section 404, 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. We have elected to take advantage of the benefits of the extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) 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 as of the end of our fiscal year if the market value of our ADSs that are held



 

6


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.

Conventions that Apply to This Prospectus

Unless we indicate otherwise, all information in this prospectus reflects no exercise by the underwriters of their option to purchase up to additional ADSs representing Class A ordinary shares from us.

Except where the context otherwise requires and for purposes of this prospectus only:

 

   

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

 

   

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

 

   

“ADSs” refers to American depositary shares, each of which represents Class A ordinary shares;

 

   

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

 

   

“CAGR” refers to compound annual growth rate;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

“Frost & Sullivan Report” refers to an industry report commissioned by us and prepared by Frost & Sullivan, an independent market research firm, which contains data regarding the markets in which we operate;

 

   

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

 

   

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

 

   

“major brand partners” refers to our brand partners whose products contributed over US$10.0 million to our product sales revenues in the designated period;

 

   

“new tier one cities” refers to Hangzhou, Suzhou, Chengdu, Wuhan, Nanjing, Tianjin, Ningbo, Chongqing, Xi’an, Wuxi, Qingdao, Changsha, Zhengzhou, Dongguan and Shenyang;



 

7


   

“ordinary shares” as of the date hereof refers to our ordinary shares comprising Class A-1 ordinary shares, Class A-2 ordinary shares, Class A ordinary shares and Class B ordinary shares, each class having par value US$0.00001 per share, and upon and after the completion of this offering, to our Class A and Class B ordinary shares, par value US$0.00001 per share;

 

   

“paying consumers” means consumers who purchase products directly from the online flagship stores we operate on third-party e-commerce platforms or from our proprietary XG Health platform, and does not include any consumers who purchase from retailors that source products from us;

 

   

“repeat purchase rate” of a certain period refers to the percentage of paying consumers in that period who had made more than one purchase with us in such period or in prior periods;

 

   

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

 

   

“Shanghai Yibo”, “our variable interest entity” or “our VIE” refers to Shanghai Yibo Medical Equipment Co., Ltd.;

 

   

“SKU” refers to refers to stock keeping unit, which, for the purpose of this prospectus, can be a combination of other stock keeping units;

 

   

“tier one cities” refers to Beijing, Shanghai, Guangzhou and Shenzhen;

 

   

“tier two cities” refers to Wenzhou, Hefei, Fuzhou, Foshan, Jinhua, Jiaxing, Quanzhou, Harbin Nantong, Xiamen, Jinan, Dalian, Changzhou, Taizhou, Shaoxing, Shijiazhuang, Kunming, Nanchang, Changchun, Xuzhou, Huizhou, Taiyuan, Yantai, Nanning, Weifang, Guiyang, Baoding, Zhongshan, Lanzhou and Urumqi; and

 

   

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

Our reporting currency is the U.S. dollar. This prospectus contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.8632 to US$1.00, the exchange rate set by the People’s Bank of China on December 31, 2018. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus 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. On June 26, 2019, the exchange rate set by the People’s Bank of China was RMB6.8701 to US$1.00.

The Offering

 

Offering Price

We currently anticipate that the initial public offering price will be between US$                and US$                per ADS.

 

ADSs Offered by Us

ADSs

 

ADSs Outstanding Immediately After This Offering

ADSs (or                ADSs if the underwriters exercise in full their option to purchase additional ADSs).

 

Ordinary Shares Outstanding Immediately After This Offering

Class A ordinary shares and                Class B ordinary shares.

 

The ADSs

Each ADS represents                shares that will be held by                . The ADSs will be evidenced by ADRs.


 

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Ordinary Shares

Upon the completion of this offering, our outstanding shares will consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have same rights except for voting and conversion rights. Each holder of our Class B ordinary shares is entitled to ten votes per share and each holder of our Class A ordinary shares is entitled to one vote per share on all matters submitted to them for a vote. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. For a description of Class A ordinary shares and Class B ordinary shares, see “Description of Share Capital.”

 

Over-allotment Option

We have granted to the underwriters an option, exercisable for 30 days from the date of the prospectus, to purchase up to an aggregate of                additional ADSs at the initial public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotment.

 

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$                 million (or US$                 million if the underwriters exercise in full their option to purchase additional ADSs) from this offering, after deducting the underwriter discounts, commissions and estimated offering expenses payable by us. We intend to use our net proceeds from this offering for (i) working capital to expand our product and service offerings; (ii) payment for a portion of the consideration of the purchase of shares from a minority shareholder of ECMOHO Shanghai; (iii) repayment of certain short-term borrowings; and (iv) general corporate purposes and potential acquisitions, investments and alliances. We have no present commitments or agreements to enter into any acquisitions, investments or alliances. See “Use of Proceeds” for more information.

 

Lock-up

We, [our executive officers, directors and shareholders] have agreed with the underwriters not to sell, transfer or dispose of any ADSs, 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.

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ADSs.

 

Payment and Settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust company on                , 2019.

 

Depositary

                        .

 

Proposed Trading Symbol

                        .


 

9


Summary Consolidated Financial and Operating Data

The following summary consolidated statements of comprehensive income data and summary consolidated statements of cash flows data for the years ended December 31, 2017 and 2018 and summary consolidated balance sheets data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

You should read this “Summary Consolidated Financial Data 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. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods.

Summary Consolidated Statements of Comprehensive Income Data

 

     Year ended December 31,  
     2017     2018  
     Amount     % of
total net
revenues
    Amount     % of
total net
revenues
 
     (in thousands of U.S. dollars, except for share,
per share data and percentages)
 

Net revenues:

        

Product sales

     95,573       97.3       176,098       88.5  

Services

     2,665       2.7       22,917       11.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     98,238       100.0       199,015       100.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     (69,124     (70.4     (140,153     (70.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29,114       29.6       58,862       29.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Fulfillment expenses

     (6,217     (6.3     (13,097     (6.6

Sales and marketing expenses

     (15,529     (15.8     (27,462     (13.8

General and administrative expenses

     (4,004     (4.1     (9,069     (4.6

Research and development expenses

     (485     (0.5     (1,669     (0.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (26,235     (26.7     (51,297     (25.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,879       2.9       7,565       3.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Finance expenses, net

     (145     (0.1     (926     (0.5

Income before income tax expenses

     2,804       2.9       6,567       3.3  

Income taxes expenses

     (80     (0.1     (417     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,724       2.8       6,150       3.1  

Net income attributable to ECMOHO Limited

     2,825         6,124    
  

 

 

     

 

 

   

Net loss attributable to ECMOHO Limited’s ordinary shareholders(1)

     (1,147       (21,808  
  

 

 

     

 

 

   

Comprehensive income attributable to ECMOHO Limited

     3,618         5,454    
  

 

 

     

 

 

   

Net loss per share attributable to ECMOHO Limited’s ordinary shareholders

        

—basic and diluted

     (0.01       (0.26  

Weighted average number of Ordinary Shares

        

—basic and diluted

     81,162,400         84,970,000    

Pro forma net earnings per share attributable to ECMOHO Limited’s ordinary shareholders(2)

        

—basic (unaudited)

         0.05    

—diluted (unaudited)

         0.05    

Pro forma weighted average number of Ordinary Shares

        

—basic (unaudited)

         115,235,462    

—diluted (unaudited)

         115,330,908    


 

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(1)

Net income attributable to ECMOHO Limited less: (i) accretion on Round A convertible redeemable preferred shares to redemption value; (ii) accretion on Round B convertible redeemable preferred shares to redemption value; (iii) accretion on Series A convertible redeemable preferred shares to redemption value; and (iv) extinguishment of convertible redeemable preferred shares.

(2)

The unaudited pro-forma earnings per share for the year ended December 31, 2018 giving effect to the assumed conversion of all the convertible preferred shares into ordinary shares as of the issuance dates at the conversion ratio of one-for-one and the weighted average number of the convertible preferred shares during the year ended December 31, 2018.

Summary Consolidated Statements of Cash Flow Data

 

     Year ended December 31,  
     2017      2018  
     (in thousands of U.S.
dollars)
 

Net cash used in operating activities

     (2,444      (40,756

Net cash used in investing activities

     (492      (1,748

Net cash provided by financing activities

     1,567        44,036  

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

     12,079        10,689  

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

     10,689        12,965  

Summary Consolidated Balance Sheets Data

 

     As of December 31,     Pro forma(1)
As of December 31, 2018
 
     2017     2018  
     (in thousands of U.S. dollars)  

Current assets:

      

Cash and cash equivalents

     10,689       10,336       10,336  

Accounts receivable, net

     12,322       33,840       33,840  

Inventories, net

     17,366       53,683       53,683  

Total current assets

     44,513       111,747       111,747  
  

 

 

   

 

 

   

 

 

 

Total assets

     48,447       117,772       117,772  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     24,280       74,829       74,829  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     24,831       75,148       75,148  

Total mezzanine equity

     43,974       74,846       6,393 (2) 

Total shareholders’ (deficit)/equity

     (20,358     (32,222     36,231  
  

 

 

   

 

 

   

 

 

 

 

(1)

The unaudited pro-forma balance sheet as of December 31, 2018 assumes the completion of the initial public offering on such date and the conversion thereupon of all outstanding convertible preferred shares into ordinary shares at the conversion ratio of one for one.

(2)

Representing the 2.5% of the equity interest of ECMOHO Shanghai held by minority shareholders, which are with liquidation preference and redeemable at the option of these minority shareholders upon certain events that are not solely within our control. In June 2019, ECMOHO Hong Kong, through an onshore subsidiary, entered into an agreement to acquire such equity interest.



 

11


Summary Operating Data

 

     Year ended December 31,     Five months ended
May 31,
 
     2017     2018     2019  

Number of cumulative paying consumers at the end of the respective periods

     4.6 million       6.3 million       7.0 million  

Repeat purchase rate

     32     34     35

Number of brands at the end of the respective periods

     41       76       59  

Number of brand partners at the end of the respective periods

     23       52       38  

Number of major brand partners at the end of the respective periods

     2       5       4  

Non-GAAP Measures

Adjusted Net Income

We use adjusted net income, a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net income represents net income excluding share-based compensation expenses, and such adjustment has no impact on income tax.

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

 

     Year ended December 31,  
     2017      2018  
     (in thousands of US$)  

Adjusted net income

     2,724        6,507  

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

The table sets forth a reconciliation of our adjusted net income in the years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income:

 

     Year ended December 31,  
     2017      2018  
     (in thousands of US$)  

Net income

     2,724        6,150  

Add: share-based compensation expenses

     —          357  
  

 

 

    

 

 

 

Adjusted net income

     2,724        6,507  
  

 

 

    

 

 

 


 

12


RISK FACTORS

An investment in our ADSs involves material risks. You should carefully consider the risks and uncertainties set forth below, as well as all of the other information included in this prospectus, before deciding to invest in our ADSs. The occurrence of any of the following risks could materially and adversely affect our business, financial condition, results of operations and prospects. In any such case, the market price of our ADSs could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

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

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

   

changes in the spending power of Chinese consumers;

 

   

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

 

   

the ongoing health and wellness market deficiencies and consumer mistrust of incumbent health and wellness product and service providers. See “Our Market Opportunities”.

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

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

To realize our mission of providing comprehensive health and wellness solutions to our consumers, we have expanded our business, and plan to continue expanding our business. We have been widening our relationships with existing brand partners to include more offerings, procuring new brand partners with different products, improving our logistic and fulfillment capabilities to support our expanded offering and growing through acquisitions of complementary businesses. This expansion has contributed to a heightened level of complexity of our business, in terms of both the type and scale of our operations, which may place a significant strain on our operational, financial and technical resources and increase demands on our management and employees. We cannot assure you that we will be able to manage our expansion successfully, and failure to do so may materially and adversely affect our business, financial condition and results of operations.

 

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We are also continuously executing a number of growth initiatives, strategies and operating plans designed to enhance our business, including launching various new services, such as our XG Health platform, an integrated family health management and service platform. The anticipated benefits from these efforts are based on assumptions that may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits that we expect to achieve, such as expanding our product and service offerings, expanding our offline channel coverage, and strengthening our XG Health platform, or it may be more costly to do so than we anticipate. In addition, profitability, if any, in the new areas that we expand into may be lower than in our existing business, and we may not be successful enough in these newer areas to recoup our investments in them. If any of these circumstances were to occur, our business, financial condition and results of operations may be materially and adversely affected.

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

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

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

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

In addition, a small number of brand partners contribute a significant portion of our total revenues. For example, in 2018, the single largest brand partner in terms of the revenue contribution of its products accounted for 15% of our total revenues, and the ten largest brand partners in terms of the revenue contribution of their products, in the aggregate, accounted for 69% of our total revenues. Moreover, three of the ten largest brand partners in terms of revenue contribution in 2018 are under the common control of a global food and beverage company. The loss of one or more of our largest brand partners may result in a material and adverse effect on our financial condition and results of operation.

In such a rapidly changing market, the needs of our brand partners are also constantly evolving to keep pace with consumer demands. If we fail to respond to the evolving needs of our brand partners, our continuing relationships with existing brand partners, our reputation and the demand for our services may be adversely

 

14


affected. This may have a material and adverse impact on our business, financial position and results of operations.

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

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

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

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

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

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

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

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

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

 

15


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

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

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

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

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

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

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

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

Various regulatory authorities of the PRC government regulate value-added telecommunications services, food business, pharmaceutical operations and services, online drug and medical device operations and online trading and e-commerce. Violations of regulations may lead to the imposition of significant penalties which may affect our business, operations, reputation and financial prospects. In respect of the healthcare industry, in

 

16


particular, any violation of the relevant laws, rules and regulations may result in harsh penalties and, under certain circumstances, lead to criminal prosecution. See—“Regulation” for details.

As we introduce new products and services to our customers, we may be required to comply with additional laws and regulations that are yet to be determined. To comply with such additional laws and regulations, we may be required to obtain necessary certificates, licenses or permits, as well as expend additional resources to monitor regulatory and policy developments. Our failure to adequately comply with such additional laws and regulations may delay, or possibly prevent, some of our products or services from being offered to users, which may have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

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

 

17


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

 

   

the purchase history of consumers;

 

   

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

 

   

market intelligence, including intelligence on product innovation and introduction;

 

   

changes in consumer spending patterns; and

 

   

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

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

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

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

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

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

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

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

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

 

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online sales promotion event that falls on December 12 of each year). In addition, we generally experience a lower level of sales activity in the first quarter due to the Lunar New Year holiday, during which the volumes of online purchases and logistical operations drop significantly due to vacations and business closures.

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

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

We depend on a small number of e-commerce channels to sell products to consumers. As a result, we derive a substantial portion of our revenue from activity on these channels. For example, sales on Alibaba’s Tmall platform contributed 34% of our total net revenue for the year ended December 31, 2018.

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

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

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

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

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

We maintain cooperation arrangements with third-party couriers to deliver our products to our customers. We rely on a select number of third-party delivery services, for example Cainiao, the primary deliverer of cross-border sales through the Tmall platform. In 2018, Cainiao was paid 39% of our third-party delivery fees, and the goods delivered by Cainiao accounted for 19% of our revenue in the same period. As such we may face adverse consequences if there are interruptions to, or failures in, these third parties’ delivery services. Such interruptions or failures could prevent the timely or proper delivery of our products to consumers, eroding consumer

 

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confidence and reducing repeat orders. These interruptions may be due to events that are beyond our control or the control of these delivery companies, such as inclement weather, natural disasters, transportation disruptions or labor unrest. While we may claim compensation for disruptions under our standard agreements with third-party delivery services, such claims are subject to a complicated review process and we cannot provide assurance that any compensation payments would make up for the lost consumer goodwill. Also, any significant increase in delivery fees charged by these third parties may result in significant increase in our online distribution expenses. If we fail to find other reliable third-party couriers at commercially acceptable terms, our profitability may be harmed.

In addition, if our third-party couriers fail to comply with applicable PRC rules and regulations, our delivery services may be materially and adversely affected. We may not be able to find alternative delivery companies to provide delivery services in a timely and reliable manner, or at all. Delivery of our products could also be affected or interrupted by the merger, acquisition, insolvency or government shut-down of the delivery companies we engage to make deliveries. If our products are not delivered in proper condition or on a timely basis, our reputation could suffer and we may experience a material adverse effect on our financial condition and results of operations.

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

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

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

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

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

 

   

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

 

   

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

 

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

 

   

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

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

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

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

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

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

We may be subject to legal proceedings and claims from time to time where these statements or representations are found to result in harm to our customers. These claims and legal proceedings may be expensive and time-consuming to investigate and defend and may divert resources and management attention from the operation of our business. Although these claims may not be successful, they may harm our reputation and reduce our ability to attract customers and users.

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

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

Changes to trade policies, treaties and tariffs in the jurisdictions in which we operate, or are contemplating operating, or the perception that these changes could occur, could adversely affect the financial and economic conditions in such jurisdictions, as well as our international and cross-border operations, our financial condition and results of operations. The U.S. administration under President Trump has advocated greater restrictions on trade generally, imposed and significantly increased tariffs on certain goods imported into the United States, particularly from China, and has recently taken steps toward restricting trade in certain goods. Among the goods currently subject to tariffs are items which form part of the healthcare and supplement supply chain, including certain chemicals used in the manufacture of healthcare supplements. These trade developments could materially

 

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impact our business as certain of our brand partners are based in the United States, and thus may face increased difficulty in sourcing base ingredients for their products, or cost-effectively developing new products with restricted or more expensive base ingredients. As a result, we may face an increase in our operating costs as our suppliers raise their prices to absorb their increased costs, or an inability to meet the demands of the consumers who purchase from us, and a resulting decrease in our profits.

The PRC has taken several measures in response to these U.S. administration trade policies. For example, the PRC has increased tariffs on certain goods from the United States, the total value of which is US$110 billion.

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

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

Exchange rate fluctuations may negatively affect our results of operations.

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

In addition, substantially all of our operating expenses are denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi while a significant portion of our debt is denominated in U.S. dollars. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of the Renminbi may materially reduce any dividends payable on our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our Class A ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount we would receive. As such, currency fluctuations may materially and adversely affect our financial condition and results of operations.

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

PRC advertising laws and regulations require the content of advertisements to be fair, accurate, not misleading and in full compliance with applicable laws. The Provisional Regulation on the Release of Food Advertisements, released by the SAIC on December 30, 1996 and amended on December 3, 1998, prohibits advertisers from expressly or impliedly indicating the healthcare effects of ordinary foods. In addition, the content of healthcare food advertisements must follow the specifications and the label approved by the health

 

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administrative authorities of the State Council. We have made efforts to ensure our advertisements and related advertising practices are in compliance with applicable regulations. However, we cannot assure you that we have fully complied with the requirements of PRC regulatory authorities or will be able to fully comply with the requirements of PRC regulatory authorities regarding advertising. If we are found in violation of applicable advertising laws and regulations, we may face serious penalties including fines, revocation of our business licenses and discontinuance of our advertising activities. As a result, we may not be able to publish new advertisements in a timely manner, and our turnover and reputation could be materially affected. Moreover, governmental actions and civil claims may be filed against us for misleading or inaccurate advertising. We may have to spend significant resources in defending against such actions, and these actions may damage our reputation, result in reduced turnover, and negatively affect our results of operations.

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

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

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

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

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

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

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

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

 

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

Any failure to maintain the satisfactory performance of our XG Health platform could materially and adversely affect our business and reputation.

The satisfactory performance, reliability and availability of our XG Health platform are important to our success. Certain adverse technological events may, individually or collectively, materially and adversely affect our business, reputation, financial condition and results of operations. Such adverse events include, but are not limited to, system interruptions caused by latent flaws in the technology underpinning our platform, communication and system failures including failure of third-party platform or payment systems on which we rely, errors encountered during system upgrades or system expansions, computer viruses, hacking or other attempts to harm our systems. We can provide no assurance that our current security mechanisms will be sufficient to protect our systems from such adverse events. Any such adverse events could materially and adversely affect our business, reputation, financial condition and results of operations.

We may experience system interruptions if too many consumers attempt to access our XG Health platform within a short period of time due to promotions or other increases in demand. Such interruptions may make our platform unavailable or cause our platform to perform sub-optimally, which may prevent us from transmitting orders to our fulfillment operations, reducing the volume of transactions on our platform as well as its attractiveness to consumers. As a result, we may experience a material and adverse effect on our business, financial condition and results of operations due to lost revenue.

In order to support our business and facilitate its growth, we must continue to improve the technology underpinning our platform and ensure that timely upgrades are carried out in accordance with our improvement strategies. Despite our best efforts, we cannot be certain that we will be successful in executing these system upgrades and improvement strategies. In particular, our systems may experience disruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, if at all, or compatible.

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

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

 

   

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

 

   

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

 

   

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

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

As we expand our operations, we may be subject to additional laws in other jurisdictions where our brand partners, consumers and other participants are located. The laws, rules and regulations of other jurisdictions may impose requirements and penalties that are more stringent than, or conflict with, those under PRC law,

 

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compliance with which could require significant resources and costs. Our privacy policies and practices concerning the collection, use and disclosure of user data are located on our websites and on our XG Health platform. Any failure, actual or perceived, by us to comply with our posted privacy policies or with any regulatory requirements or privacy protection-related laws, rules and regulations could result in proceedings or actions against us by governmental entities or others. These proceedings or actions may subject us to significant penalties and negative publicity and require us to change our business practices. Any such occurrence could increase our costs and materially and adversely affect our reputation, financial condition and results of operations. See—“Regulation” for details.

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

The distribution of medical information and medical advertisements are subject to PRC regulations. Any website operator that provides medical information services must obtain certain licenses and approvals by relevant authorities before engaging in such businesses in the PRC. See “Regulation—Regulations Relating to Online Operation of Drugs and Medical Devices” and “Regulation—Regulations Relating to Advertising”.

We believe it is improbable for PRC governmental authorities to deem the contents distributed by us to be medical information or medical advertisements, and we have not been subject to any regulatory authority’s inquiries or investigations in connection with the content displayed on our platforms. However, if certain information displayed on our XG platform or otherwise distributed by us is considered medical information or medical advertisement by relevant authorities, it will subject us to additional regulations. As a non-medical health and wellness integrated solution provider, we do not possess the required licenses or approvals. Consequently, if required by relevant authorities, we may need to scale back, rearrange or alter the content of information displayed on our platforms.

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

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

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

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

 

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Despite the law having taken effect, there remains a high degree of uncertainty in its interpretation and enforcement, especially in terms of protection of personal information. This uncertainty presents a risk for us due to the large volume of personal data that we collect through our various touchpoints. As it is not clear what the law will require in a given scenario nor how these requirements may be interpreted, we cannot assure you that we would be able to comply with such requirements in a timely manner. Failure to comply may lead to fines, orders of rectification, confiscation of illegal gains, revocation of the business permit or license and other government actions, which may materially and adversely affect our business, financial condition and results of operations.

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

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

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

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

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

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

 

   

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

 

   

the increased uncertainty in the wake of the “Brexit” referendum in the United Kingdom in June 2016, in which the majority of voters voted in favor of the United Kingdom’s exit from the European Union;

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

 

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

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

We may be the target of anti-competitive, harassing, or other detrimental conduct by third parties. Such conduct includes complaints, anonymous or otherwise, to regulatory agencies. We may be subject to government or regulatory investigation as a result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Additionally, allegations, directly or indirectly against us, may be posted in internet chat-rooms or on blogs or websites by anyone, whether or not associated with us, on an anonymous basis. Consumers value readily available information concerning retailers, manufacturers, and their goods and services and often act on such information without further investigation or authentication and without regard to its accuracy. The availability of information on social media platforms and devices is virtually immediate, as is its impact. Social media platforms and devices immediately publish the content their subscribers and participants post, often without filters or checks on the accuracy of the content posted. Information posted may be inaccurate and adverse to us, and it may harm our financial performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction. Our reputation may be negatively affected as a result of the public dissemination of anonymous allegations or malicious statements about our business, which in turn may cause us to lose market share, customers and revenues and adversely affect the price of our ADSs.

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

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

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

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

 

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

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

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

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

In the course of our ordinary business operations, we may become a party to litigation, legal proceedings, claims, disputes or arbitration proceedings from time to time. We are currently involved in several lawsuits. For example, in March 2016 we entered into a cooperation framework agreement to establish a joint venture with Shanghai Heng Shou Tang Health Food Co. Ltd., Shanghai Heng Shou Tang Pharmaceutical Co., Ltd. and Mr. Wei Song. As part of the agreement, Shanghai Heng Shou Tang Health Food Co. Ltd. and Shanghai Heng Shou Tang Pharmaceutical Co., Ltd. agreed to contribute their ownership in a number of trademarks to the joint venture. However, only a portion of such trademarks have been transferred to us to date. In October 2018, we filed a civil claim against the joint venture partners in the Shanghai Xuhui People’s Court to enforce the transfer of the remaining trademarks, claim damages amounting to RMB7.19 million (US$1.05 million) and request that Shanghai Heng Shou Tang Health Food Co. Ltd. and Shanghai Heng Shou Tang Pharmaceutical Co., Ltd. be enjoined from using the brand name “Heng Shou Tang” in all categories. On January 10, 2019, Shanghai Heng Shou Tang Health Food Co. Ltd., Shanghai Heng Shou Tang Pharmaceutical Co., Ltd. and Song Wei filed a counterclaim to rescind the agreement and allege damages amounting to RMB3.25 million (US$0.47 million). We cannot assure you that the dispute will be resolved in our favor. In the case of an adverse judgment, we may be required to cease using the relevant trademarks or pay the monetary damages, and the joint venture may be dissolved, which may adversely affect our results of operations.

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

 

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

We plan to expand our business both geographically and in terms of the products and services that we offer to our customers and brand partners. In pursuit of this strategy, we may enter into strategic alliances, including joint ventures or equity investments, with various third parties to further our business purpose from time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by a third party and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such third party.

In addition, when appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased delay and costs, and may derail our business strategy if we fail to do so. Any international operations that we absorb as part of any acquisitions may give rise to risks and challenges that could adversely affect our business, such as compliance with international legal and regulatory requirements, further management of fluctuations in currency exchange rates or competition from local incumbents with superior local market knowledge and competitive advantages. Moreover, we cannot be certain that any international expansion efforts can be completed as planned or achieve the intended results, or that any negative results from acquired interests would not affect our business as a whole.

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

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

The Chinese economy has been experiencing increases in inflation and labor costs in recent years. As a result, average wages in China are expected to continue to grow. In addition, various PRC laws and regulations designed to enhance labor protection require us to pay certain statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments could be subject to late payment fees, fines and/or other penalties. As the interpretation and implementation of these laws and regulations are still evolving, our employment practices may not at all times be deemed to be in compliance with the applicable laws and regulations. For example, we implement a comprehensive working hour system instead of the standard working hour system in respect of some of our employees, but we have not yet obtained the required approval from the relevant government authority. If the relevant authorities determine that we should make supplemental social insurance and housing fund contributions and that we are subject to fines and legal sanctions, our business, financial condition and results of operations could be adversely affected. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased

 

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labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations could be adversely affected.

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

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

As a result of the initial public offering, we expect to become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 and the rules and regulations of the NASDAQ. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Following our initial public offering, we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 20-F filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. In addition, when we cease to be an “emerging growth company” as the term is defined in the Jumpstart Our Business Startups Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. We may experience difficulty in meeting these reporting requirements in a timely manner.

In the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2017 and 2018, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2018. In accordance with U.S. GAAP and financial reporting requirements set forth by the SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The material weakness identified relates to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize key controls over financial reporting and to prepare consolidated financial statements and related disclosures. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting. We are required to do so only after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control weaknesses may have been identified. To remedy our identified material weakness subsequent to December 31, 2018, we plan to undertake steps to strengthen our internal control over financial reporting, including: (i) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, (ii) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with SEC reporting requirements, (iii) preparing comprehensive

 

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accounting policies, manuals and closing procedures to improve the quality and accuracy of our period-end financial closing process and (iv) preparing comprehensive accounting policies, manuals and closing procedures to improve the quality and accuracy of our period-end financial closing process. However, we cannot assure you that we will remediate our material weakness in a timely manner.

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

An occurrence of a natural disaster, widespread health epidemic or other outbreaks could have a material adverse effect on our business, financial condition and results of operations.

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

We may not have sufficient insurance coverage.

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

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

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

In addition, we compete with other businesses for premises at certain locations or of desirable sizes. As a result, even though we could extend or renew our leases, rental payments may significantly increase as a result of

 

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the high demand for the leased properties. Moreover, we may not be able to locate desirable alternative sites for our current leased properties as our business continues to grow and failure in relocating our affected operations could adversely affect our business and operations.

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

We have not registered certain of our lease agreements with the relevant government authorities. Under the relevant PRC laws and regulations, we may be required to register and file with the relevant government authority executed leases. The failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, but the competent housing authorities may order us to register the lease agreements in a prescribed period of time and impose a fine ranging from RMB1,000 (US$145.7) to RMB10,000 (US$1,457.0) for each non-registered lease if we fail to complete the registration within the prescribed timeframe.

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

Risks Related to Our Corporate Structure

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

Immediately after completion of this offering, our co-founders, Ms. Zoe Wang, who serves as our Chief Executive Officer, and Mr. Leo Zeng, who serves as our Chief Operating Officer will collectively hold             % of the total voting rights in our company, assuming the underwriters do not exercise their option to purchase additional ADSs, and we are, and expect to continue to be immediately after the completion of this offering, a “controlled company” as defined under the NASDAQ Stock Market Rules. As a controlled company, we rely on certain exemptions that are available to controlled companies from the NASDAQ corporate governance requirements. Examples of the requirements from which we are exempt include the requirements that:

 

   

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

 

   

our compensation committee be composed entirely of independent directors; and

 

   

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

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

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

 

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

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

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

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

 

   

exercise effective control over Shanghai Yibo;

 

   

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

 

   

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

Because of these contractual arrangements, we are the primary beneficiary of Shanghai Yibo and hence consolidate its financial results as our variable interest entity, or VIE. For a detailed discussion of these contractual arrangements, see “Corporate History and Structure”.

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

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

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

 

   

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

 

   

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

 

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

 

   

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

 

   

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

The imposition of any of these penalties would result in a material adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of Shanghai Yibo in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of Shanghai Yibo or our right to receive substantially all the economic benefits and residual returns from Shanghai Yibo and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of Shanghai Yibo in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have an adverse effect on our financial condition and results of operations.

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

Although substantially all of our revenues are generated by our PRC and Hong Kong subsidiaries and substantially all of our assets are held by our PRC and Hong Kong subsidiaries, we have relied and expect to continue to rely on contractual arrangements with Shanghai Yibo and its shareholders to hold our Internet Content Provider license, or ICP license, to enable us to manage value-added telecommunication business. For a description of these contractual arrangements, see “Corporate History and Structure”. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE.

If our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages. We cannot assure you such remedies will be effective. For example, if the shareholders of Shanghai Yibo were to refuse to transfer their equity interest in Shanghai Yibo to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, we may have to take legal actions to compel them to perform their contractual obligations.

All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. See “Risks Related to Doing Business in the People’s Republic of China—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations”. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Additionally, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay.

 

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Our VIE holds the ICP license. In the event we are unable to enforce our contractual arrangements, we may not be able to exert effective control over our VIE or to conduct the relevant businesses. As a result, our business, financial condition, results of operations and prospects would be adversely affected.

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

The shareholders of our VIE, Ms. Zoe Wang and Mr. Leo Zeng, may have potential conflicts of interest with us. These shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which would have a material adverse effect on our ability to effectively control our VIE and receive substantially all the economic benefits from it. For example, the shareholders may be able to cause our agreements with Shanghai Yibo to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

PRC regulations of loans to PRC entities and direct investment in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our majority owned subsidiary, Shanghai ECMOHO Health Biotechnology Co. Limited, or ECMOHO Shanghai.

We may transfer funds to our majority owned subsidiary, Shanghai ECMOHO Health Biotechnology Co. Limited, or ECMOHO Shanghai, or finance ECMOHO Shanghai by means of shareholder loans or capital contributions upon completion of this offering. Any such loans to ECMOHO Shanghai, which is a foreign-invested enterprise, cannot exceed statutory limits, which is the cross-border financing risk weighted balance calculated based on a special formula or the difference between the registered capital and the total investment amount of such subsidiary, and shall be registered with the State Administration of Foreign Exchange, or the SAFE, or its local counterparts. Furthermore, any capital contributions we make to ECMOHO Shanghai shall be approved by MOFCOM, or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to provide loans or capital contributions to ECMOHO Shanghai in a timely manner may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

On March 30, 2015, SAFE promulgated the Notice on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprise, or SAFE Circular 19, which launched a nationwide reform of the administration of the foreign exchange settlement of the capital of Foreign-invested Enterprises, or FIEs, and allows FIEs to convert their foreign currency capital contribution into Renminbi funds at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign currency capital contribution for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. On June 9, 2016, SAFE promulgated the Circular on Reforming and Regulating Policies on the Management of the Settlement of Foreign Exchange of Capital Account, or the SAFE Circular 16. SAFE Circular 16 reiterates some of the rules set forth in SAFE Circular 19, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under its business scope. Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from the net proceeds of this offering, which may adversely affect our business, financial condition and results of operations.

Contractual arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC VIE owes additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material adverse tax consequences if the

 

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PRC tax authorities determine that the contractual arrangements between ECMOHO Shanghai, our subsidiary in China, Shanghai Yibo, our VIE in China, and its shareholders were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust Shanghai Yibo’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Shanghai Yibo for PRC tax purposes, which could in turn increase their tax liabilities. In addition, the PRC tax authorities may impose punitive interest on Shanghai Yibo for the adjusted but unpaid taxes at the rate of 5% over the basic RMB lending rate published by the People’s Bank of China for a period according to the applicable regulations. Our financial position could be materially and adversely affected if our VIE’s tax liabilities increase or if they are required to pay punitive interest.

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which will become effective on January 1, 2020 and replace the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Foreign Owned Enterprise Law as the legal basis for foreign investment in the PRC. The Foreign Investment Law stipulates three forms of foreign investment, which do not include contractual arrangements. Notwithstanding the above, the Foreign Investment Law provides that a foreign investment includes foreign investors investing in China through “any other methods” under laws, administrative regulations, or provisions prescribed by the State Council. It is possible that future laws, administrative regulations or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign investment, at which time it will be uncertain whether contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how such arrangements will be treated by relevant PRC authorities. There is no guarantee that the contractual arrangements in relation to our VIE and our business will not be materially and adversely affected in the future due to changes in PRC laws and regulations. If future laws, administrative regulations or provisions prescribed by the State Council mandate further actions by companies with existing contractual arrangements, we may face substantial uncertainties as to the timely completion of such actions. In those cases, we may be required to unwind the contractual arrangements and/or dispose of our VIE, which could have a material and adverse effect on our business, financial condition and result of operations.

Risks Related to Doing Business in the People’s Republic of China

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

Most of our operations are conducted in the PRC and substantially all of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.

The PRC economy differs from the economies of most developed countries in many respects, including the extent 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 by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.

 

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While the PRC economy has experienced significant growth in the past four decades, growth has been uneven, both geographically and among various sectors of the economy. 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 also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.

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

Most of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules 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 may be cited for reference but have limited precedential value.

In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, 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 which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.

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

Any requirement to obtain prior approval under the M&A Rules and/or any other regulations promulgated by relevant PRC regulatory agencies in the future could delay this offering and failure to obtain any such approvals, if required, could have a material adverse effect on our business, operating results and reputation as well as the trading price of our ADSs, and could also create uncertainties for this offering.

On August 8, 2006, six PRC regulatory agencies, including MOFCOM, the State-Owned Assets Supervision and Administration Commission, or the SASAC, the State Administration of Taxation, or the SAT, the SAIC, the China Securities Regulatory Commission, or the CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and were amended on June 22, 2009. The M&A Rules include, among other things, provisions that purport to require that an offshore special purpose vehicle formed for the purpose of an overseas listing of securities in a PRC company obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles.

 

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However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles.

While the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC counsel, Commerce & Finance Law Offices, that the CSRC approval is not required in the context of this offering because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings under the prospectus are subject to the M&A Rules; (ii) when we set up our offshore holding structure, ECMOHO Shanghai, currently our major PRC subsidiary, was a then existing foreign-invested entity and not a PRC domestic company as defined under the M&A Rules, and the acquisition by ECMOHO (Hong Kong) Health Technology Limited of the equity in ECMOHO Shanghai was not subject to the M&A Rules; and (iii) no provision in the M&A Rules clearly classifies the contractual arrangements among ECMOHO Shanghai, our VIE and its shareholders as a type of transaction subject to the M&A Rules. However, uncertainties still exist as to how the M&A Rules will be interpreted and implemented, and the opinion of our PRC counsel is 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 the relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for this offering or if the CSRC or any other PRC government authorities promulgates any interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for this offering, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as our ability to complete this offering. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered by this prospectus. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery may not occur. See “Regulation — Regulations Relating to Overseas Listing and M&A”.

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

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including but not limited to the MOFCOM, the MIIT, the NMPA, the NHFPC and SAIC and their counterparts. Together, these government authorities promulgate and enforce regulations that cover many aspects of the operation of food and pharmaceutical businesses, medical and healthcare services and internet-related business, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in such business. The laws and regulations related to medical and healthcare services and internet-related business are evolving rapidly, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations. Under PRC laws, an entity must obtain the food operation license from SAIC or its counterpart for conducting healthcare-related products wholesale and retail business, the pharmaceutical operation license from the CFDA or its counterpart for conducting pharmaceutical wholesale and retail business, and the value-added telecommunication service operating licenses from the MIIT or its counterpart for either online information services or third-party e-commerce platform. We have made great efforts to obtain all applicable licenses and permits necessary to our main business. However, the interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the pharmaceutical operation, medical and healthcare services and internet-related business have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, pharmaceutical operation and internet-related business industry in China, including our business, we cannot assure you that we have obtained all the permits or licenses required for conducting our

 

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business or will be able to maintain our existing licenses or obtain new ones. For example, the address on some of our Food Operation Permits is inconsistent with our actual operation address. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.

Under the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM in advance of any transaction where the parties’ revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target, while under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review. Due to the level of our revenues, our proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million in the year prior to any proposed acquisition would be subject to MOFCOM merger control review. As a result, many of the transactions we may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval 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. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity structure. If MOFCOM’s practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially and adversely affected and there may be significant uncertainty as to whether we will be able to complete large acquisitions in the future in a timely manner or at all.

PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.

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 the SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle”. SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

 

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We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and are aware that Ms. Zoe Wang and Mr. Leo Zeng have each completed the necessary registration with the local SAFE branch or qualified banks as required by SAFE Circular 37. However, we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and cannot assure you that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, since SAFE Circular 37 was recently promulgated and it is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.

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

Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who have been granted restricted shares, RSUs or options may follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes an overseas listed company. After our company becomes an overseas listed company upon completion of this offering, we and our directors, executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who have been granted restricted shares, RSUs or options will be subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in China for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payment under our equity incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly foreign-owned enterprises in China and limit our wholly foreign-owned enterprises’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our directors and employees under PRC law.

In addition, the State Administration for Taxation has issued circulars concerning employee share options or restricted shares. Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares or RSUs vest, will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company 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 related to their share options, restricted shares or RSUs. Although we currently withhold income tax from our PRC employees in connection with their exercise of options and the vesting of their restricted shares and RSUs, if the employees fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC government authorities.

 

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We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements.

We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries and on remittances from the variable interest entities, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. The laws, rules and regulations applicable to our PRC subsidiaries and certain other subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.

Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up for previous years’ accumulated losses, if any, to fund certain statutory reserves, until the aggregate amount of such fund reaches 50% of its registered capital. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. As of December 31, 2017 and 2018, these restricted assets totaled RMB237.6 million (US$36.4 million) and RMB239.6 million (US$34.9 million), respectively .

Limitations on the ability of the variable interest entities to make remittance to the wholly foreign-owned enterprises to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.

We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.

Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008 and were last amended on December 29, 2018, enterprises established under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The SAT issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or the Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by individuals or foreign enterprises, the determining criteria set forth in Circular 82 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income, and our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is 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”.

 

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Dividends payable to our foreign investors and gains on the sale of our ADSs or Class A ordinary shares by our foreign investors may be subject to PRC tax.

Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Any gain realized on the transfer of ADSs or Class A ordinary shares by such investors is also subject to PRC tax at a current rate of 10% which in the case of dividends will be withheld at source if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our Class A ordinary shares or ADSs, and any gain realized from the transfer of our Class A ordinary shares or ADSs, may be treated as income derived from sources within the PRC and may as a result be subject to PRC taxation. See “Regulation — Regulations Relating to Taxation”. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or Class A ordinary shares by such investors may be subject to PRC tax at a current rate of 20%. Any PRC tax liability may be reduced under applicable tax treaties. However, it is unclear whether holders of our ADSs or Class A ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas if we are considered a PRC resident enterprise. If dividends payable to our non-PRC investors, or gains from the transfer of our ADSs or Class A ordinary shares by such investors are subject to PRC tax, the value of your investment in our ADSs or Class A ordinary shares may decline significantly.

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

On February 3, 2015, the SAT issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Transfer of Assets by Non-Resident Enterprises, or the SAT Circular 7. The SAT Circular 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Circular 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Circular 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. On October 17, 2017, the SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Circular 37, which came into effect on December 1, 2017. The SAT Circular 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. 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 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.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Circular 7 and/or SAT Circular 37. For transfer of shares in our company that do not qualify for the

 

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public securities market safe harbor by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Circular 7 and/or SAT Circular 37. As a result, we may be required to expend valuable resources to comply with SAT Circular 7 and/or SAT Circular 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

Restrictions on currency exchange may limit our ability to utilize our revenue effectively.

A portion of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly foreign-owned enterprises, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our ADSs. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.

The audit report included in this registration statement is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.

Our auditor, the independent registered public accounting firm that issued the audit reports included elsewhere in this registration statement filed with the U.S. Securities and Exchange Commission, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with applicable professional standards. Our auditor is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or 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 PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. 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 PCAOB and audit Chinese companies that trade on U.S. exchanges.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. However, it remains unclear what further actions, if any, the SEC and PCAOB will take to address the problem.

This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ADSs 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

 

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outside of China that are subject to 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.

Proceedings instituted by the SEC against certain PRC-based accounting firms, including the affiliate of our independent registered public accounting firm, and/or any related adverse regulatory development in the PRC, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC instituted administrative proceedings against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United States.

On January 22, 2014, the administrative law judge presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit papers and other documents to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months.

On February 6, 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to the delisting of our ADSs from NYSE or the termination of the registration of our ADSs under the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Failure to make adequate contributions to various employee benefit plans and withhold individual income tax on employees’ salaries as required by PRC regulations may subject us to penalties.

Companies operating in China are required to participate in various government-mandated employee benefit contribution plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit contribution plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Companies operating in China are also required to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment. We may be subject to late fees and fines in relation to the underpaid employee benefits and under-withheld individual income tax, our financial condition and results of operations may be adversely affected.

 

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Risks Related to our ADSs and this Offering

There has been no public market for our ADSs or Class A ordinary shares prior to this offering, and an active public trading market for our ADSs and Class A ordinary shares may not develop and the ADSs may trade below the public offering price.

Prior to this offering, there has been no public market for our ADSs or Class A ordinary shares underlying the ADSs. However, a liquid public market for our ADSs may not develop. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The public offering price for our ADSs has been determined by negotiation among us and the underwriters based upon several factors, and the price at which our ADSs trade after this offering may decline below the public offering price. Investors in our ADSs may experience a significant decrease in the value of their ADSs regardless of our operating performance or prospects.

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

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed companies based in China. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities after their offerings, including technology companies and transaction service platforms, may affect the attitudes of investors toward Chinese companies listed in the U.S., 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 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 conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the U.S., China and other jurisdictions in late 2008, early 2009, the second half of 2011 and in 2015, which may have a material adverse effect on the trading price of our ADSs.

In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:

 

   

regulatory developments affecting us or our industry;

 

   

announcements of studies and reports relating to the quality of our credit offerings or those of our competitors;

 

   

changes in the economic performance or market valuations of other transaction service platforms;

 

   

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 the markets for car buyers and for financing facilitation services;

 

   

announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;

 

   

additions to or departures of our senior management;

 

   

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

 

   

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

 

   

sales or perceived potential sales of additional Class A ordinary shares or ADSs.

 

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Substantial future sales or perceived potential sales of our ADSs, Class A ordinary shares or other equity securities in the public market could cause the price of our ADSs to decline significantly.

Sales of our ADSs, Class A ordinary shares or other equity securities 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 significantly. Upon completion of this offering, we will have Class A ordinary shares outstanding, including Class A ordinary shares represented by ADSs, assuming the underwriters do not exercise their option to purchase additional shares. All ADSs sold in this offering will be freely transferable by persons other than our “affiliates” without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. The Class A ordinary shares 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 (if applicable to such holder), 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 applicable lock-up period at the discretion of one of the designated representatives of the underwriters of this offering. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market price of our ADSs could decline significantly. See “Underwriting — Lock-up Agreements”.

Certain major holders of our Class A ordinary shares will have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable lock-up periods 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 significantly.

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 Class A ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$ per ADS, representing the difference between the initial public offering price of US$ per ADS and our net tangible book value per ADS as of June 30, 2018 after giving effect to the net proceeds to us from this offering. In addition, you may experience further dilution to the extent that our Class A ordinary shares are issued upon the exercise of any share options. See “Dilution” for the description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.

It is our policy not to offer guidance on earnings. 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 significantly.

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

We have a dual-class share structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class A ordinary

 

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shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. We will sell Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

Immediately prior to the completion of this offering, our founders, Ms. Zoe Wang and Mr. Leo Zeng, will beneficially own all of our issued and outstanding Class B ordinary shares. These Class B ordinary shares will constitute approximately             % of our total issued and outstanding share capital and             % 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 over-allotment option, or approximately             % of our total issued and outstanding share capital and % of the aggregate voting power of our total issued and outstanding share capital if the underwriters exercise their over-allotment option in full. See “Principal Shareholders.” As a result of the dual-class share structure and the concentration of ownership, holders of Class B ordinary shares will have considerable influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, 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 A ordinary shares and ADSs may view as beneficial.

As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our Class A ordinary shares and the ADSs than they would enjoy if we were a domestic U.S. company.

We are exempted from certain corporate governance requirements of NASDAQ by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on NASDAQ. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. Currently, we plan to rely on home country practice with respect to our corporate governance after we complete this offering. Specifically, we do not plan to (i) have a majority of the board be independent; (ii) have a compensation committee or a nominations or corporate governance committee consisting entirely of independent directors; or (iii) have an audit committee be comprised of at least three members. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ corporate governance requirements.

As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders than they would enjoy if we were a domestic U.S. company.

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;

 

47


   

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

 

   

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

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

As an emerging growth company, we are exempt from certain 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 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 have elected to take advantage of the benefits of the extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and most of our directors and all of our executive officers reside outside the United States.

We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our wholly foreign-owned enterprises and the variable interest entities. Most of our directors and all of our executive officers reside outside the United States and a substantial portion of their assets are located outside of 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 Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws of the United States or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States or China, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities”.

Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2018 Revision) (as amended) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law

 

48


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 English common law, which provides persuasive, but not binding, authority in a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

You, as holders of our ADSs, may have fewer rights than holders of our Class A ordinary shares and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under our memorandum and articles of association, the minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your Class A ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

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. 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.

You may not receive distributions on our Class A ordinary shares or any value for such Class A ordinary shares if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our Class A ordinary shares that your ADSs represent. However, the depositary is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs,

 

49


Class A ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may materially reduce the value of your ADSs.

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

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NASDAQ, imposes various requirements on the corporate governance practices of public companies. 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 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 have elected to take advantage of the benefits of the extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs and has made and will continue to make some corporate activities more time-consuming and costly. When 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 and the other rules and regulations of the SEC. In addition, we have incurred 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 expect these rules and regulations to increase our legal and financial compliance costs, but we cannot predict or estimate the additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. 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 with respect to the business, financial condition and results of operations of our company and our current expectations, assumptions, estimates and projections about our industry. All statements other than statements of historical fact in this prospectus are forward-looking statements. These forward-looking statements can be identified by words or phrases such as words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “should,” “will” and similar expressions. These forward-looking statements include, without limitation, statements relating to:

 

   

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

 

   

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

 

   

our ability to anticipate changes in customer and consumer preferences;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

regulatory changes in the PRC and compliance with such regulations;

 

   

our ability to effectively manage our inventory and warehousing capabilities;

 

   

proper functioning of our XG Health platform;

 

   

our own information technology systems and infrastructure;

 

   

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

 

   

other risk factors discussed under “Risk Factors.”

You should thoroughly read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors that could adversely impact our business and financial performance. In addition, we operate in an evolving environment; new risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

You should not rely upon forward-looking statements as predictions of future events or a guarantees of future performance. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by third-party providers of market intelligence. These industry publications and reports generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, we have not independently verified the data.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$             million after deducting estimated underwriting discounts and commissions and the estimated offering expenses payable by us but before deducting expenses payable by us and based upon the assumed initial public offering price of US$             per ADS (the mid-point of the estimated public offering price range shown on the cover page of this prospectus). A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) the net proceeds to us from this offering by US$             million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus.

We currently intend to use these net proceeds in the following manner:

 

   

US$             for working capital to expand our product and service offerings;

 

   

US$             for payment of a portion of the consideration of the purchase of shares from a minority shareholder of ECMOHO Shanghai;

 

   

US$             for the repayment of certain short-term borrowings; and

 

   

the balance for general corporate purposes, working capital and potential acquisitions, investments and alliances. We have no present commitments or agreements to enter into any acquisitions, investments or alliances.

If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and to our consolidated variable interest entity only through loans, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in the People’s Republic of China.”

To the extent that the net proceeds of the offering are not immediately applied for the above purposes, we intend to deposit the proceeds into short-term, interest-bearing financial instruments or demand deposits.

 

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DIVIDEND POLICY

We were formed on June 7, 2018 and have not declared or paid any dividends since our formation. We have no plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. The board of directors will determine the payment of any future dividends.

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

The declaration and payment of dividends will depend upon, among other things, future earnings, capital requirements, our financial condition and general business conditions. See “Description of Share Capital — Dividends”.

After the adjustment for the number of shares represented by each ADS, holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit agreement, less the fees and expenses payable under the deposit agreement. Cash dividends, if any, on our ordinary shares will be paid in U.S. dollars. Other distributions, if any, will be paid by the depositary to holders of our ADSs in any means it deems legal, fair and practical. See “Description of American Depositary Shares — Share Dividends and Other Distributions”.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the re-designation of 7,938,915 Series A preferred shares as Class A ordinary shares, 9,519,000 Class A-1 ordinary shares as Class A ordinary shares and 10,817,100 Class A-2 ordinary shares as Class A ordinary shares, in each case 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) the re-designation of 7,938,915 Series A preferred shares as Class A ordinary shares, 9,519,000 Class A-1 ordinary shares as Class A ordinary shares and 10,817,100 Class A-2 ordinary shares as Class A ordinary shares, in each case on a one-for-one basis immediately prior to the completion of this offering; and (ii) the issuance and sale of              Class A ordinary shares in the form of ADSs by us in this offering at an initial public offering price of US$             per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the underwriters do not exercise their option to purchase additional ADSs).

You should read this table together with our financial statements, including related notes, appearing elsewhere in this prospectus. The adjustment is based on the assumed initial offering price to the public of US$             per ADS, and reflects the deduction of underwriter discounts and commissions and other estimated expenses of the global offering. The information does not include the shares represented by the restricted share units in respect of up to 3,971,453 shares as described under “Management – Stock Incentive Plans”.

 

     As of December 31, 2018  
     Actual      Pro Forma      Pro Forma
Adjusted(1)
 
     US$      US$      US$  
     (in thousands)  

Mezzanine equity

        

Class A-1 convertible redeemable preferred shares (US$ 0.00001 par value; 9,519,000 shares authorized, issued and outstanding as of December 31, 2018; redemption amount of US$7,641,780 as of December 31, 2018; No shares issued and outstanding on a pro-forma basis as of December 31, 2018)

     19,495        —                        

Class A-2 convertible redeemable preferred shares (US$0.00001 par value; 13,663,700 shares authorized as of December 31, 2018, 10,817,100 shares issued and outstanding as of December 31, 2018; redemption amount of US$22,011,640 as of December 31, 2018; No shares issued and outstanding on a pro-forma basis as of December 31, 2018)

     26,083        —       

Series A convertible redeemable preferred shares (US$0.00001 par value; 7,938,915 shares authorized, issued and outstanding as of December 31, 2018; redemption amount of US$ 22,926,600 as of December 31, 2018; No shares issued and outstanding on a pro-forma basis as of December 31, 2018)

     22,875        —       

Redeemable non-controlling interests

     6,393        6,393     
  

 

 

    

 

 

    

 

 

 

Total mezzanine equity

     74,846        6,393     
  

 

 

    

 

 

    

 

 

 

 

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     As of December 31, 2018  
     Actual     Pro Forma     Pro Forma
Adjusted(1)
 
     US$     US$     US$  
     (in thousands)  

Shareholders’ (deficit)/equity

      

Share capital
(US$0.00001 par value; 4,955,646,857 shares authorized; 93,528,000 shares issued; 90,681,400 shares outstanding as of December 31, 2018; 43,806,015 Class A ordinary shares and 75,150,400 Class B ordinary shares issued and outstanding on a pro forma basis as of December 31, 2018; 43,806,015 Class A ordinary shares and 75,150,400 Class B ordinary shares issued and outstanding on a pro forma as adjusted basis as of December 31, 2018 (unaudited)).

     1       1    

Additional paid-in capital(2)

     —         68,453                     

Treasury stock (US$0.00001 par value; 2,846,600 shares at December 31,2018)

     —         —      

Subscription receivables

     (9,261     (9,261  

Accumulated other comprehensive loss

     (1,420     (1,420  

Accumulated deficit

     (21,853     (21,853  

Non-controlling interests

     311       311    
  

 

 

   

 

 

   

 

 

 

Total Shareholders’ (deficit)/equity

     (32,222     36,231    
  

 

 

   

 

 

   

 

 

 

Total liabilities, mezzanine equity and shareholders’ (deficit)/equity

     117,772       117,772    
  

 

 

   

 

 

   

 

 

 

Notes:

 

(1)

Assumes that the underwriters do not exercise their option to purchase additional ADSs.

(2)

A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per share, the mid-point of the range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total equity attributable to equity holders of our company and total capitalization by US$.

 

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DILUTION

If you invest in our 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.

As of December 31, 2018, our historical net tangible book value (deficit) was approximately US$             , or US$             per ordinary share outstanding at that date, and US$             per ADS. Net tangible book value represents the amount of our total tangible assets less our total liabilities. Pro forma net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all our issued and outstanding convertible Series A preferred shares, Class A-1 ordinary shares and Class A-2 ordinary shares. Pro forma as adjusted net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all of our Series A preferred shares, Class A-1 ordinary shares and Class A-2 ordinary shares and the issuance of ordinary shares in the form of ADSs by us in this offering. Dilution is determined by subtracting pro forma as adjusted net tangible book value per ordinary share from the public offering price per ordinary share.

Without taking into account any other changes in net tangible book value after December 31, 2018, other than to give effect to (i) the automatic conversion of all of our issued and outstanding convertible Series A preferred shares, Class A-1 ordinary shares and Class A-2 ordinary shares into             of our Class A ordinary shares concurrently with the completion of this offering and (ii) our sale of the ADSs offered in this offering at the assumed initial public offering price of US$             per ADS, with estimated net proceeds of US$             million after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at December 31, 2018 would have been US$            , or US$             per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share, and US$             per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share, and US$             per ADS, to new investors in this offering. The following table illustrates such dilution:

 

     Per ordinary
share
     Per ADS  

Assumed initial public offering price per ordinary share

     

Net tangible book value per ordinary share at December 31, 2018

     

Pro forma net tangible book value per ordinary share after giving effect to the automatic conversion of all of our issued and outstanding convertible Series A preferred shares, Class A-1 ordinary shares and Class A-2 ordinary shares into Class A ordinary shares

     

Pro forma as adjusted net tangible book value per ordinary share after giving effect to (i) the automatic conversion of all of our issued and outstanding convertible Series A preferred shares, Class A-1 ordinary shares and Class A-2 ordinary shares into Class A ordinary shares and (ii) the issuance of ordinary shares in the form of ADSs in this offering

     

Dilution in net tangible book value per ordinary share to new investors in the offering

     

 

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The following table summarizes the number of ordinary shares purchased from us as of      , the total consideration paid to us and the average price per ordinary share/ADS paid by existing investors and by new investors purchasing ordinary shares evidenced by ADSs in this offering at the assumed initial public offering price of US$             per ADS giving effect to underwriting discounts and commissions and other estimated offering expenses payable by us:

 

     Ordinary Shares Purchased     Total Consideration     Average Price
per Ordinary
Share
Equivalent
   Average
Price per
ADS
     Number    Percentage     Amount    Percentage           
                (US$ million)     US$    US$

Existing shareholders

                                                                                         

New investors

                                         
  

 

  

 

 

   

 

  

 

 

   

 

  

 

Total

        100.00        100.00     
  

 

  

 

 

   

 

  

 

 

   

 

  

 

If the underwriters exercise in full their option to purchase additional shares, our existing shareholders would own approximately          % and our new investors would own approximately         % of the total number of our ordinary shares outstanding after this offering.

A US$1.00 increase (decrease) in the assumed initial public offering price per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$             million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$             per ADS, and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no exercise of the underwriters’ option to purchase additional ADSs and no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and the estimated aggregate offering expenses payable by us. The pro forma 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 our ADSs and other terms of this offering determined at pricing.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because 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 foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws than the United States and provides less protection for investors. In addition, Cayman Islands companies do not have standing to sue before the federal courts of the United States.

Substantially all of our assets are located outside the United States. In addition, a majority of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce 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.

We have appointed                           as our agent to receive service of process with respect to any action brought against us in the U.S. District Court for the Southern District of New York in connection with this offering under the federal securities laws of the United States or the securities laws of any State in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York in connection with this offering under the securities laws of the State of New York.

Walkers (Hong Kong), our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (1) 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 (2) 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.

Walkers (Hong Kong) 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 in personam 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 (a) is given by a competent foreign court with jurisdiction to give the judgment, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty; and (e) was not obtained 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, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

Commerce & Finance Law Offices, our counsel as to PRC law, has advised us that (1) it is uncertain whether the courts of the PRC would 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, and (2) there is uncertainty as to whether the

 

58


courts of the PRC would entertain original actions brought in the PRC 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.

Commerce & Finance Law Offices has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments under certain circumstances in accordance with the requirements of the PRC Civil Procedure Law. Commerce & Finance Law Offices has advised us further that under PRC law, a foreign judgment that does not otherwise violate basic legal principles, state sovereignty, safety or social public interest may be recognized and enforced by a PRC court, based either on bilateral treaties or international conventions contracted by China and the country where the judgment is made or on reciprocity between jurisdictions. As there currently exists no bilateral treaty, international convention or other form of reciprocity between China and the United States governing the recognition of judgments, including those predicated upon the liability provisions of the U.S. federal securities laws, it is uncertain whether a PRC court would enforce judgments rendered by U.S. courts.

 

 

In making an investment decision relating to our ADSs, you should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell ADSs and seeking offers to buy 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 ADSs.

 

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CORPORATE HISTORY AND STRUCTURE

Our Major Corporate Milestones

Our business commenced its operations in December 2011, when our co-founders, Ms. Zoe Wang and Mr. Leo Zeng, established our predecessor, Shanghai ECMOHO Health Biotechnology Co., Ltd., or ECMOHO Shanghai, incorporated under the laws of the PRC, with the goal of improving the health and well-being of Chinese consumers.

In May 2013, we became the exclusive distributor and brand manager in China of our first international brand partner, Puritan’s Pride, a U.S.-based manufacturer of vitamins, minerals, herbs and other nutritional supplements. We remain Puritan’s Pride’s exclusive distributor and brand manager in China as of today.

In January 2014, we commenced operation of the Puritan’s Pride cross-border flagship store on Tmall Global.

In July 2016, we began working with Gerber Baby Products, an established U.S.-based manufacturer and distributor of infant healthcare products.

In September 2017, we began working with Wyeth Nutrition, an established international brand that focuses on nutrition products for mothers, infants and young children.

In June 2018, ECMOHO Limited was incorporated under the laws of the Cayman Islands, and ECMOHO (Hong Kong) Health Technology Limited, or ECMOHO Hong Kong, was incorporated under the laws of Hong Kong and wholly owned by ECMOHO Limited. In July 2018, ECMOHO Hong Kong acquired 97.5% of the equity interest of ECMOHO Shanghai from our co-founders and certain other shareholders of ECMOHO Shanghai. See “Related Party Transactions – Other Transactions with Related Parties – Transactions with our co-founders”.

In April 2019, we launched XG Health, our proprietary integrated family health management and service platform, which offers consumers a range of health and wellness products and rich content.

In June 2019, ECMOHO Hong Kong, through an onshore subsidiary, entered into an agreement to acquire the remaining 2.5% of the equity interest of ECMOHO Shanghai from its minority shareholders.

Our Corporate Structure

We conduct our business in China through our various subsidiaries and our variable interest entity, Shanghai Yibo.

 

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The following diagram illustrates our corporate structure and the place of incorporation of each of our significant subsidiaries and VIE as of the date of this prospectus:

 

LOGO

 

(1)

In June 2019, ECMOHO Hong Kong, through an onshore subsidiary, entered into an agreement to acquire the remaining 2.5% of the equity interest of ECMOHO Shanghai from its minority shareholders.

(2)

Contractual arrangements include exclusive technology consulting and service agreement, power of attorney, equity pledge agreement, exclusive call option agreement and spousal consent letters.

(3)

Shanghai Yibo Medical Equipment Co., Ltd. is our variable interest entity in China and is 50% owned by Ms. Wang and 50% owned by Mr. Zeng, our co-founders.

 

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Contractual Arrangements with Our Variable Interest Entity

PRC laws and regulations impose restrictions on foreign ownership and investment in, among other areas, internet-based businesses such as provision of online information and other value-added telecommunication services. Similar to all other entities with foreign-incorporated holding company structures in our industry in China, we operate our internet-based business in the PRC through our subsidiaries and the variable interest entity. To comply with PRC laws and regulations, we have entered into a series of contractual arrangements with our variable interest entity which is fully owned by PRC citizens. Our variable interest entity holds, where applicable, the ICP licenses and other regulated licenses and operate our internet-based business in which foreign investment is restricted or prohibited.

Based on these contractual arrangements, our variable interest entity allows us to:

 

   

exercise effective control over our variable interest entity and its subsidiary;

 

   

receive substantially all of the economic benefits from our variable interest entity and its subsidiary; and

 

   

have an exclusive option to purchase all or part of the equity interest in our variable interest entity when, and to the extent, permitted by PRC law.

As a result of these contractual arrangements, we have become the primary beneficiary of our variable interest entity under U.S. GAAP. We have consolidated the financial results of our variable interest entity and its subsidiary in our consolidated financial statements in accordance with U.S. GAAP. Up to December 31, 2018, the operations of Shanghai Yibo were still in a preliminary stage and had immaterial impact on the consolidated financials of our business.

The following is a summary of the contractual arrangements with our variable interest entity and its shareholders.

Agreements that Allow Us to Receive Substantially All Economic Benefits from Our Variable Interest Entity

Exclusive Technology Consulting and Service Agreement. Under the exclusive technology consulting and service agreement between ECMOHO Shanghai and Shanghai Yibo, ECMOHO Shanghai has the exclusive right to provide to Shanghai Yibo consulting and services related to, among other things, research and development, system operation, advertising, internal training and technical support. ECMOHO Shanghai has the exclusive ownership of intellectual property rights created as a result of the performance of this agreement. In exchange, Shanghai Yibo agrees to pay ECMOHO Shanghai an annual service fee, at an amount that is agreed by ECMOHO Shanghai. Unless ECMOHO Shanghai provides valid notice of termination 90 days prior to the term of agreement ending, this agreement will remain effective for 10-years to be automatically renewed for another 10 years thereafter.

Agreements that Provide Us with Effective Control over Our Variable Interest Entity

Powers of Attorney. The shareholders of Shanghai Yibo, have each executed a power of attorney to irrevocably appoint ECMOHO Shanghai or its designated person as their attorney-in-fact to exercise all of their rights as shareholders of Shanghai Yibo, including, but not limited to, the right to convene and attend shareholder meetings, vote on any resolution that requires a shareholder vote, such as the appointment or removal of directors and executive officers, and other voting rights pursuant to the then-effective articles of association of Shanghai Yibo. The power of attorney will remain in force for so long as the controlling shareholders remain the shareholders of Shanghai Yibo.

Equity Pledge Agreement. Pursuant to the equity pledge agreement among ECMOHO Shanghai, Shanghai Yibo, and the shareholders of Shanghai Yibo, the shareholders pledged all of their equity interests in Shanghai

 

62


Yibo to guarantee their and Shanghai Yibo’s performance of their obligations under the contractual arrangements including the exclusive technology consulting and service agreement, the exclusive option agreement and the power of attorney. In the event of a breach by Shanghai Yibo or its shareholders of contractual obligations under these agreements, ECMOHO Shanghai, as pledgee, will have the right to dispose of the pledged equity interests in Shanghai Yibo. The shareholders of Shanghai Yibo also undertake that, during the term of the equity pledge agreement, they will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests. During the term of the equity pledge agreement, ECMOHO Shanghai has the right to receive all of the dividends and profits distributed on the pledged equity interests. As of the date of this prospectus, the equity pledge for our variable interest equity has been registered with local PRC authorities.

Spousal Consent Letters. Pursuant to the spousal consent letter, each of the respective spouse of the shareholders of Shanghai Yibo, unconditionally and irrevocably agreed that the equity interest in Shanghai Yibo held by and registered in the name of his/her spouse will be disposed of pursuant to the equity pledge agreement, the exclusive call option agreement and the power of attorney. The spouse agreed not to assert any rights over the equity interest in Shanghai Yibo held by his/her spouse. In addition, in the event that the spouse obtains any equity interest in Shanghai Yibo held by his/her spouse for any reason, the spouse agreed to be bound by the contractual arrangements.

Agreements that Provide Us with the Option to Purchase the Equity Interests in Our Variable Interest Entity

Exclusive Call Option Agreement. Pursuant to the exclusive call option agreement between ECMOHO Shanghai, Shanghai Yibo and its shareholders, the shareholders of Shanghai Yibo irrevocably grant ECMOHO Shanghai an exclusive option to purchase, at its discretion, or have its designated person to purchase, to the extent permitted under PRC law, all or part of the equity interests in Shanghai Yibo. The purchase price shall be the lowest price permitted by applicable PRC law. In addition, Shanghai Yibo has granted ECMOHO Shanghai an exclusive option to purchase, at its discretion, or have its designated person to purchase, to the extent permitted under PRC law, all or part of Shanghai Yibo’s assets at the book value of such assets, or at the lowest price permitted by applicable PRC law, whichever is higher. The shareholders of Shanghai Yibo undertake that, without our prior written consent or the prior written consent of ECMOHO Shanghai, they may not increase or decrease the registered capital, dispose of its assets, incur any debt or guarantee liabilities, enter into any material purchase agreements, conduct any merger, acquisition or investments, amend its articles of association or provide any loans to third parties. The exclusive call option agreement will remain effective until all equity interest in Shanghai Yibo held by its shareholders and all assets of Shanghai Yibo are transferred or assigned to ECMOHO Shanghai or its designated representatives.

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

However, our PRC counsel, Commerce & Finance Law Offices, advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel. If the PRC government finds the agreements that establish our internet-based business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties, including being prohibited from continuing operations. See “Risk Factors — Risks Related to Our Corporate Structure” and “Risk Factors — Risks Related to Doing Business in the People’s Republic of China”.

 

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In addition, the shareholders of our VIE, Ms. Zoe Wang and Mr. Leo Zeng, may have potential conflicts of interest with us. These shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which would have a material adverse effect on our ability to effectively control our VIE and receive substantially all the economic benefits from it. See “Risk Factors — Risk Related to Our Corporate Structure”.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive income data and selected consolidated statements of cash flows data for the years ended December 31, 2017 and 2018 and selected consolidated balance sheets data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

You should read this “Selected Consolidated Financial Data 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. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods.

Selected Consolidated Statements of Comprehensive Income Data

 

     Year ended December 31,  
     2017     2018  
     Amount     % of
total net
revenues
    Amount     % of
total net
revenues
 
     (in thousands of U.S. dollars, except percentages,
share and per share data)
 

Net revenues:

        

Product sales

     95,573       97.3       176,098       88.5  

Services

     2,665       2.7       22,917       11.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     98,238       100.0       199,015       100.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     (69,124     (70.4     (140,153     (70.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross income

     29,114       29.6       58,862       29.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Fulfillment expenses

     (6,217     (6.3     (13,097     (6.6

Sales and marketing expenses

     (15,529     (15.8     (27,462     (13.8

General and administrative expenses

     (4,004     (4.1     (9,069     (4.6

Research and development expenses

     (485     (0.5     (1,669     (0.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (26,235     (26.7     (51,297     (25.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,879       2.9       7,565       3.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Finance expenses, net

     (145     (0.1     (926     (0.5

Income before income tax expenses

     2,804       2.9       6,567       3.3  

Income taxes expenses

     (80     (0.1     (417     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,724       2.8       6,150       3.1  

Net income attributable to ECMOHO Limited

     2,825         6,124    
  

 

 

     

 

 

   

Net loss attributable to ECMOHO Limited’s ordinary shareholders(1)

     (1,147       (21,808  
  

 

 

     

 

 

   

Comprehensive income attributable to ECMOHO Limited

     3,618         5,454    
  

 

 

     

 

 

   

Net loss per share attributable to ECMOHO Limited’s ordinary shareholders

        

—basic and diluted

     (0.01       (0.26  

Weighted average number of Ordinary Shares

        

—basic and diluted

     81,162,400         84,970,000    

Pro forma net earnings per share attributable to ECMOHO Limited’s ordinary shareholders(2)

        

—basic (unaudited)

         0.05    

—diluted (unaudited)

         0.05    

Pro forma weighted average number of Ordinary Shares

        

—basic (unaudited)

         115,235,462    

—diluted (unaudited)

         115,330,908    

 

(1)

Net income attributable to ECMOHO Limited less: (i) accretion on Round A convertible redeemable preferred shares to redemption value; (ii) accretion on Round B convertible redeemable preferred shares to redemption value; (iii) accretion

 

65


  on Series A convertible redeemable preferred shares to redemption value; and (iv) extinguishment of convertible redeemable preferred share.
(2)

The unaudited pro-forma earnings per share for the year ended December 31, 2018 giving effect to the assumed conversion of all the convertible preferred shares into ordinary shares as of the issuance dates at the conversion ratio of one-for-one and the weighted average number of the convertible preferred shares during the year ended December 31, 2018.

Selected Consolidated Statements of Cash Flow Data

 

     Year ended December 31,  
     2017        2018  
     (in thousands of U.S. dollars)  

Net cash used in operating activities

     (2,444        (40,756

Net cash used in investing activities

     (492        (1,748

Net cash provided by financing activities

     1,567          44,036  

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

     12,079          10,689  

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

     10,689          12,965  

Selected Consolidated Balance Sheet Data

 

    As of December 31,     Pro forma(1)
As of December 31, 2018
 
    2017     2018  
    US$     US$     US$  

Current assets:

     

Cash and cash equivalents

    10,689       10,336       10,336  

Accounts receivable, net

    12,322       33,840       33,840  

Inventories, net

    17,366       53,683       53,683  

Total current assets

    44,513       111,747       111,747  
 

 

 

   

 

 

   

 

 

 

Total assets

    48,447       117,772       117,772  
 

 

 

   

 

 

   

 

 

 

Total current liabilities

    24,280       74,829       74,829  
 

 

 

   

 

 

   

 

 

 

Total liabilities

    24,831       75,148       75,148  

Total mezzanine equity

    43,974       74,846       6,393  

Total shareholders’ (deficit)/equity

    (20,358     (32,222     36,231  
 

 

 

   

 

 

   

 

 

 

 

(1)

The unaudited pro-forma balance sheet as of December 31, 2018 assumes the completion of the initial public offering on such date and the conversion thereupon of all outstanding convertible preferred shares into ordinary shares at the conversion ratio of one for one.

(2)

Representing the 2.5% of the equity interest of ECMOHO Shanghai held by minority shareholders, which are with liquidation preference and redeemable at the option of these minority shareholders upon certain events that are not solely within our control. In June 2019, ECMOHO Hong Kong, through an onshore subsidiary, entered into an agreement to acquire such equity interest.

 

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Selected Operating Data

 

     Year ended December 31,     Five months ended
May 31,
 
     2017     2018     2019  

Number of cumulative paying consumers at the end of the respective periods

     4.6 million       6.3 million       7.0 million  

Repeat purchase rate

     32     34     35

Number of brands at the end of the respective periods

     41       76       59  

Number of brand partners at the end of the respective periods

     23       52       38  

Number of major brand partners at the end of the respective periods

     2       5       4  

Non-GAAP Measures

Adjusted Net Income

We use adjusted net income, a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net income represents net income excluding share-based compensation expenses, and such adjustment has no impact on income tax.

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

 

     Year ended December 31,  
     2017      2018  
     (in thousands of US$)  

Adjusted net income

     2,724        6,507  

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

The table sets forth a reconciliation of our adjusted net income in the years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income:

 

     Year ended December 31,  
     2017      2018  
     (in thousands of US$)  

Net income

     2,724        6,150  

Add: share-based compensation expenses

     —          357  
  

 

 

    

 

 

 

Adjusted net income

     2,724        6,507  
  

 

 

    

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with the section entitled “Selected Consolidated Financial and Other Data” and with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements”.

Overview

We are one of China’s leading integrated solution providers in the rapidly growing non-medical health and wellness market. As an integrated solution provider, we act as the bridge between brand owners and Chinese consumers by marketing and distributing health supplements and food, mother and child care products, personal care products, household healthcare equipment and other health and wellness products. Through over seven years of operation, we have built up an ecosystem where Chinese consumers are provided with customized health and wellness solutions that include quality products and trustworthy content.

We generate revenues from product sales and services. Product sales revenues are generated through sales to consumers and to retailers as well as sales from consignment arrangements with certain e-commerce platforms. Services revenues primarily consist of the fixed project-based service fees we charge our brand partners value-added services, such as marketing solutions. Our net revenues grew by 102.6% from US$98.2 million in 2017 to US$199.0 million in 2018. Product sales revenues represented 97.3% and 88.5% of our total net revenues in 2017 and 2018, respectively. Our net income attributable to ECMOHO Limited grew significantly from US$2.8 million in 2017 to US$6.1 million in 2018.

Key Factors Affecting Our Results of Operations

Our results of operations are affected by the general factors driving China’s health and wellness industry, including:

 

   

rising spending power and health awareness;

 

   

an aging population and increasing life expectancy;

 

   

prevalence of health issues and chronic diseases; and

 

   

increased demand for trustworthy health and wellness products.

In addition, our results of operations are affected by the increasing penetration of mobile internet and e-commerce. See “Our Market Opportunities” for details.

In particular, our results of operations are affected by company specific factors, including the following:

 

   

Our ability to expand our product and service offerings. We mainly generate our revenues by selling products to consumers and retailers and providing services primarily to brand partners. Our ability to expand our product and service offerings is therefore critical to the growth of our revenues.

 

   

Our ability to retain and attract consumers. Consumers are central to all of our sources of revenue. They purchase products from us or from retailers with whom we have supply agreements and, through their purchases, provide us with market insights that allow us to provide marketing solutions to our brand partners. We would need to retain existing and attract new consumers to maintain and grow our revenues.

 

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Our ability to retain and attract brand partners, retailers and content generators. Brand partners, retailers and content generators are crucial to our ability to provide consumers with quality products and trustworthy content. See “Business” for additional information. We would need to continue to attract new brand partners, retailers and content generators to grow our ecosystem and revenues.

 

   

Our ability to manage growth, control costs and manage working capital. Our business growth will result in substantial demands on our management, operational, technological, financial and other resources. Our ability to control cost is key to our success. In addition, our ability to gain better insight into inventory turnover and sales patterns, which allows us to optimize the use of our working capital, may also affect our financial condition and results of operation.

Key Components of Results of Operations

Net Revenues

We generate revenues from product sales and services. Product sales revenues are generated through sales to consumers and retailers, such as third-party e-commerce platforms as well as sales from consignment arrangements with certain e-commerce platforms. Services revenues primarily consist of the fixed project-based service fees we charge our brand partners for our value-added services, such as designing and running online stores and organizing offline marketing activities. We recorded revenues net of return allowances, value-added tax and sales incentives, if any. See “Business – Our Business Model and Services” for additional information.

The following table sets forth the components of our net revenues for the periods indicated:

 

     Year ended December 31,  
     2017     2018  
     Amount      % of total     Amount      % of total  
     (in thousands of U.S. dollars, except percentages)  

Product sales

     95,573        97.3     176,098        88.5

Services

     2,665        2.7       22,917        11.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     98,238        100.0     199,015        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

We expect our net revenues to increase as we continue to expand our brand partner portfolio and product and service offerings. The percentage of our services revenues of the total revenues increased significantly from 2.7% in 2017 to 11.5% in 2018, as we set up a dedicated services team in May 2018 to better serve our existing brand partners’ needs for marketing solutions and to acquire new brand partners.    

Cost of Revenues

Cost of revenues consists of cost of product sales and cost of services. Cost of product sales is comprised of the purchase price of the products sourced from our brand partners, purchase rebates and inventory write-downs. Cost of services consists of (i) advertising and promotion fees paid to third parties and (ii) employee wages and benefits, both attributable to the provision of value-added services to our brand partners.

 

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The following table sets forth a breakdown of our cost of revenues:

 

     Year ended December 31,  
     2017     2018  
     Amount      % of total     Amount      % of total  
     (in thousands of U.S. dollars, except percentages)  

Cost of product sales

     68,262        98.8 %      128,846        91.9

Cost of services

     862        1.2       11,307        8.1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     69,124        100.0     140,153        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

We expect our cost of revenues to increase in line with the growth in our net revenues.

Operating Expenses

Our operating expenses consist of fulfillment expenses, sales and marketing expenses, general and administrative expenses, and research and development expenses. The following table sets forth the components of our operating expenses for the periods indicated:

 

     Year ended December 31,  
     2017     2018  
     Amount      % of total     Amount      % of total  
     (in thousands of U.S. dollars, except percentages)  

Fulfillment expenses

     6,217        23.7     13,097        25.5

Sales and marketing expenses

     15,529        59.2       27,462        53.5  

General and administrative expenses

     4,004        15.3       9,069        17.7  

Research and development expenses

     485        1.8       1,669        3.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     26,235        100.0     51,297        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Fulfillment expenses primarily consist of warehousing, shipping and handling costs for dispatching and delivering products to consumers, employee wages and benefits for the relevant personnel, and customs clearance expenses. We expect our fulfillment expenses to increase in line with the growth of our product sales revenues.

Sales and marketing expenses primarily consist of advertising costs for the products we offer, employee wages and benefits for our sales and marketing staff, storefront fees paid to e-commerce platforms on which we operate and represent a pre-determined percentage of our sales revenues on these platforms, and travel and entertainment expenses. We expect our sales and marketing expenses to grow in line with the growth of our total net revenues.    

General and administrative expenses mainly consist of employee wages and benefits for corporate employees, rental expenses, audit and legal fees, amortization of both intangible assets and leasehold improvement, and other corporate overhead costs. We expect our general and administrative expenses to increase over time but at a lower rate than the growth of our total net revenues.

Research and development expenses principally consist of employee wages and benefits for research and development personnel, general expenses and depreciation expenses associated with research and development activities. We expect our research and development expenses to increase over time as we take on new business initiatives to support the growth of our business but at a lower rate than the growth of our total net revenues.

Net Income Attributable to ECMOHO Limited

Our net income attributable to ECMOHO Limited consists of our net income less our net income/(loss) attributable to the non-controlling interest shareholders and redeemable non-controlling interest shareholders.

 

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Our net income attributable to ECMOHO Limited was US$2.8 million and US$6.1 million in 2017 and 2018, respectively.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current tax laws of the Cayman Islands, we are not subject to income, corporation or capital gains tax, and no withholding tax is imposed upon the payment of dividends.

Hong Kong

Our subsidiaries incorporated in Hong Kong are subject to Hong Kong profit tax at a rate of 16.5% on their taxable income generated from operations in Hong Kong. Hong Kong does not impose a withholding tax on dividends.

China

Income Tax. According to the EIT Law, which was promulgated on March 16, 2007 and amended in 2017, and its implementing rules, an income tax rate of 25% generally applies to all enterprises incorporated in the PRC. Under the EIT Law, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a resident enterprise for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Although we believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes, PRC income tax at a rate of 25% would generally be applicable to our worldwide income if we were to be considered a PRC resident enterprise.

Dividend Withholding Tax. According to the EIT Law and its implementation rules, the profits of a foreign-invested enterprise arising in 2008 and thereafter that are distributed to its immediate holding company outside the PRC are subject to withholding tax at a rate of 10%, but a lower withholding tax rate may be applied if there is a beneficial tax treaty between the PRC and the jurisdiction of the foreign holding company. A holding company in Hong Kong, for example, will be eligible, with approval of the PRC local tax authority, to a 5% withholding tax rate under the Double Tax Avoidance Arrangement, if such holding company is considered a non-PRC resident enterprise and holds at least 25% of the equity interests in the PRC foreign-invested enterprise distributing the dividends. However, the PRC tax authorities will review preferential tax treatment and grant such treatment on a case-by-case basis. Therefore, if such Hong Kong holding company is not considered the beneficial owner of such dividends under applicable PRC tax regulations, such dividend will remain subject to withholding tax at a rate of 10%.

Value-Added Tax. Our product sales revenues were subject to value-added tax at a rate ranging from 10% to 17% in 2017 and 2018. Since April 1, 2019, our product sales revenues have been subject to value-added tax at a rate ranging from 9% to 13%. Our services revenues are subject to value-added tax at a rate of 6%. We are also subject to surcharges on value-added tax payments in accordance with PRC law. See “Regulation – Regulations Relating to Taxation – Value-added tax” for details.

Critical Accounting Policies

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

 

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Our principal accounting policies are set forth in Note 2 to our consolidated financial statements included elsewhere in this prospectus. We have identified the following accounting policies as the most critical to an understanding of our financial position and results of operations, because the application of these policies requires significant and complex management estimates, assumptions and judgment, and the reporting of materially different amounts could result if different estimates or assumptions were used or different judgments were made. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Revenue Recognition

We adopted ASC 2014-09 and its amendments (together, “ASC 606”) for all periods presented. According to ASC 606, revenue is recognized when control of the promised good or service is transferred to the customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We follow five steps in revenue recognition: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

Our revenues are derived from (i) product sales and (ii) providing services including online store operating services, promotion and marketing services primarily to our brand partners and certain other brand customers.

When either party to a contract has performed, we present the contract on the consolidated balance sheet as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. A receivable is recorded when we have an unconditional right to consideration. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. A contract asset is recorded when we have transferred products to the customer before payment is received or is due, and our right to consideration is conditional on future performance or other factors in the contract. No contract asset was recorded as at December 31, 2017 and 2018.

If we recognize a receivable before we transfer products to the customer, we will defer revenue recognition, which is also defined as a contract liability under the new revenue guidance. A contract liability is recorded when our obligation to transfer goods or services to a customer has not yet occurred but we have received consideration from the customer. We present such amounts as advances from customers on the consolidated balance sheet.

Product sales

Product sales revenues, other than those generated under consignment arrangements discussed below, are recognized when consumers or retailers physically accept the products, which is when the control of products is transferred, and are recorded net of return allowances, value-added tax and sales incentives, if any. Shipping and handling charges are included in net revenues. We typically do not charge shipping fees on orders exceeding a certain sale amount. Shipping and handling costs are considered fulfillment expenses and presented as part of our operating expenses.

We also enter into arrangements with certain e-commerce platforms pursuant to which we retain control over the goods until a sale is made to the end consumer. We believe such arrangement constitutes consignment arrangement under ASC 606-10-55-80, because (i) we do not relinquish control of the products, even though they are in the physical possession of the e-commerce platforms, and the products are considered our inventory until they are sold to end consumers; (ii) we retain the right to require the return of the products held with e-commerce platforms; (iii) the online platforms have no obligation to pay for the products that are in its physical possession.

Revenues generated through such consignment arrangements are recognized when sales are made to end customers and controls are transferred to end customers upon their acceptance in accordance with the sales report

 

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provided by the e-commerce platforms. Such revenues reflect the consideration paid by end consumers and do not take into account the sales commissions we pay to the relevant e-commerce platform, which are recorded as sales and marketing expenses.

Services

We offer our brand partners and certain other customers marketing solutions tailored to their needs and charge fixed project-based fees, including designing and operating online stores, running online promotional events, organizing online and offline marketing campaigns featuring social media influencers and circulating marketing messages to end consumers.

For services provided to customers, depending on the terms of the contract and the laws that apply to the contract, control of the services may be transferred over time or at a point in time. Control of the services is transferred over time if our performance:

 

   

provides all of the benefits received and consumed simultaneously by the customer;

 

   

creates and enhances an asset that the customer controls as we perform; or

 

   

does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.

If control of the services transfers over time, revenue is recognized over the period of the contract by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognized at a point in time when the customer obtains control of services.

With respect to our marketing services, the length of the periods over which services are provided is generally within months, we recognize such revenues when service is rendered and a service report is delivered to the customer, which marks the time when control of the service output has passed to the customer.

Consideration from our brand partners is considered to be in exchange for distinct service that we transfer to the brand partner, as i) services provided to brand partners can be sufficiently separable from our procurement of products from those brand partners, ii) consideration from the brand partner represents the standalone selling price of such service, and iii) the fees do not represent reimbursement of costs incurred by us to sell the brand partner’s products. We account for the service in the same way that it accounts for sales to other customers and revenues generated from these service arrangements are recognized on a gross basis and presented as services revenue on the consolidated statements of comprehensive income.

Practical expedients and exemption

Upon the election of the practical expedient under ASC 340-40-25-4, the incremental costs of obtaining a contract are expensed when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. For the years ended December 31, 2017 and 2018, respectively, no incremental cost was capitalized as assets.

Since there is no difference between the amount of promised consideration and the price of our products or services, and the actual length of time between our transfer of products or services to our customers and the payment for those products or services is less than one year, we have concluded that there is no significant financing component in place within our product sales or service arrangements as a practical expedient in accordance with ASC 606-10-32-18.

Sales returns

We generally offer consumers an unconditional right of return for a period of seven days upon receipt of products. We also offer certain retailers various rights of return after the acceptance of products. Return

 

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allowances, which reduce revenue and cost of sales, are estimated by categories of return policies offered to consumers and retailers, based on our historical data and subject to adjustments to the extent that actual returns differ or are expected to differ.

Sales incentives

We provide sales rebates to certain third-party online platforms/secondary distributors based on their purchase volume, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to the third-party online platforms/secondary distributors considering the contracted rebate rates and estimated sales volume based on significant management judgments according to historical experience such as the likelihood of reaching the purchase thresholds and sales forecasts, and account for it as a reduction of the transaction price.

Inventories

Inventories are stated at the lower of cost and market value. Cost is determined using the weighted average method. Provisions are made for excessive, slow moving, expired and obsolete inventories as well as for inventories with carrying values in excess of market value. Certain factors could impact the realizable value of inventories, so we continually evaluate the recoverability based on assumptions about customer demand and market conditions. The evaluation may take into consideration historical usage, inventory aging, expiration date, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, and other factors. The provision or write-down is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. If actual market conditions are more favorable, we may have higher gross margin when products that have previously been reserved or written down are eventually sold.

Income taxes

Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.

Deferred income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.

Share-based compensation and valuation of our ordinary shares

Share-based compensation expenses are measured at the grant date and categorized as either fulfillment expenses, sales and marketing expenses, general and administrative expenses or research and development expenses, depending on the job functions of the grantees.

For the restricted share units granted with service conditions, compensation expense is recognized using the straight-line method over the requisite service period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimate.

 

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For the restricted share units granted with performance conditions whose vesting is contingent upon meeting company-wide performance goals, compensation expenses are recognized using graded vesting method over the requisite service period in accordance with ASC 718 and will be adjusted for subsequent changes in the expected outcome of the performance-vesting condition. For the restricted share units granted with service conditions and the occurrence of an initial public offering as performance condition, cumulative share-based compensation expenses for the options that have satisfied the service condition will be recorded upon the completion of the initial public offering, using the graded vesting method.

For the restricted share units granted with market condition whose vesting is contingent on the Company’s market value exceeding a specific amount, Monte Carlo simulation has been applied to determine the fair value and requisite service period, and the corresponding compensation expense is recognized using the straight-line method over the estimated requisite service period unless the market condition is satisfied before the end of the initially estimated requisite service period.

The fair value of each restricted share units granted with market condition under the 2018 Plan during the year ended December 31, 2018 was estimated on the date of grant using the Monte Carlo model with the assumptions (or ranges thereof) set forth in the following table:

 

     Year ended December 31,  
     2018  

Expected volatility(a)

     50.0%  

Risk-free interest rate(b)

     4.1%  

Expected dividend yield(c)

     0%  

Contractual term

     10 years  

 

Notes:

(a)

Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation dates.

(b)

The risk-free interest rate of periods within the contractual life of the share option is based on the market yield of the US sovereign bond with a maturity life equal to the expected life to expiration.

(c)

We have no history or expectation of paying dividends on our ordinary shares.

Prior to the listing of our ADSs on the NASDAQ Global Select Market, determining the fair value of the share options required us to make complex and subjective judgments, assumptions and estimates, which involved inherent uncertainty. Had we used different assumptions and estimates, the resulting fair value of the restricted share units and the resulting share-based compensation expenses could have been different.

The following table sets forth the fair value of restricted share units and ordinary shares estimated at the date of option grants indicated below:

 

Date of Grant

  Restricted share
units granted
    Fair value
of restricted
share
units granted
with market
condition
    Fair value of
ordinary shares
    Discount for
Lack of

Marketability
    Discount Rate     Type of Valuation  

September 30, 2018

    3,971,453     US$ 0.72     US$ 2.06       8.0     20.0     Contemporaneous  

Prior to the listing of our ADSs on the NASDAQ Global Select Market, valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants’ Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, and with the assistance of an independent appraisal firm from time to time. The assumptions we use in the valuation

 

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model are based on future expectations combined with management judgment, with inputs of numerous objective and subjective factors, including the following:

 

   

our operating and financial performance;

 

   

current business conditions and projections;

 

   

our stage of development;

 

   

the prices, rights, preferences and privileges of our convertible preferred shares relative to our ordinary shares;

 

   

the likelihood of liquidity events or redemption events;

 

   

any adjustment necessary to recognize a lack of marketability for our ordinary shares; and

 

   

the market performance of industry peers.

In order to determine the fair value of our ordinary shares underlying each share-based award grant, we first determined our business enterprise value, or BEV, and then allocated the BEV to each element of our capital structure (convertible redeemable preferred shares and ordinary shares) using a hybrid method comprising the probability-weighted expected return method and the option pricing method. In our case, three scenarios were assumed, namely: (i) the liquidation scenario, in which the option pricing method was adopted to allocate the value between convertible preferred shares and ordinary shares, and (ii) the redemption scenario, in which the option pricing method was adopted to allocate the value between convertible preferred shares and ordinary shares, and (iii) the mandatory conversion scenario, in which equity value was allocated to convertible preferred shares and ordinary shares on an as-if converted basis. Increasing probability was assigned to the mandatory conversion scenario during 2017 and 2018 in light of preparations for our initial public offering.

In determining the fair value of our BEV, we applied the income approach/discounted cash flow, or DCF, analysis based on our projected cash flow using management’s best estimate as of the valuation date. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.

Internal Control Over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which we address our internal control over financial reporting. In connection with the audits of our consolidated financial statements as of and for the year ended December 31, 2018, 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 PCAOB, 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 relates to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize key controls over financial reporting and to prepare consolidated financial statements and related disclosures. The material weakness, if not timely remedied, may lead to significant misstatements in our consolidated financial statements.

Following the identification of the material weakness, we have taken measures and plan to continue to take measures to remedy these control deficiencies, including: (i) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel,

 

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(ii) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with SEC reporting requirements, (iii) preparing comprehensive accounting policies, manuals and closing procedures to improve the quality and accuracy of our period-end financial closing process and (iv) preparing comprehensive accounting policies, manuals and closing procedures to improve the quality and accuracy of our period-end financial closing process. However, we cannot assure you that all these measures will be sufficient to remediate the material weakness in time, or at all. See “Risk Factors—Risks Related to Our Business and Industry—If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.

Holding Company Structure

ECMOHO Limited is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries and consolidated variable interest entity and its subsidiary in China. As a result, ECMOHO Limited’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with its articles of association and PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and our consolidated variable interest entity and its subsidiary in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiaries in China may allocate a portion of their after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at their discretion, and our consolidated variable interest entity may allocate a portion of its after-tax profits based on PRC accounting standards to a surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.

 

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Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods presented, both in absolute terms and as a percentage of our total net revenues for the periods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of our future results of operations or future trends that may impact those results.

 

     Year ended December 31,  
     2017     2018  
     Amount      % of total net
revenues
    Amount      % of total net
revenues
 
     (in thousands of U.S. dollars, except percentages)  

Net revenues:

          

Product sales

     95,573        97.3     176,098        88.5

Services

     2,665        2.7       22,917        11.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net revenues

     98,238        100.0       199,015        100.0  

Cost of revenues

     (69,124      (70.4     (140,153      (70.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     29,114        29.6       58,862        29.6  

Operating expenses:

          

Fulfillment expenses

     (6,217      (6.3     (13,097      (6.6

Sales and marketing expenses

     (15,529      (15.8     (27,462      (13.8

General and administrative expenses

     (4,004      (4.1     (9,069      (4.6

Research and development expenses

     (485      (0.5     (1,669      (0.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     (26,235      (26.7     (51,297      (25.8

Operating income

     2,879        2.9       7,565        3.8  

Finance expense, net

     (145      (0.1     (926      (0.4

Foreign exchange gain/(loss), net

     106        0.1       (306      (0.2

Other (loss)/income, net

     (36      0.0       234        0.1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income tax expenses

     2,804        2.9       6,567        3.3  

Income tax expenses

     (80      (0.1     (417      (0.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     2,724        2.8     6,150        3.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to ECMOHO Limited

     2,825        2.9     6,124        3.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Net Revenues

Our net revenues totaled US$199.0 million in 2018, representing a significant increase from US$98.2 million in 2017. The increase in total net revenues was due to a 84.2% increase in product sales revenues from US$95.6 million in 2017 to US$176.1 million in 2018 and a significant increase in services revenues from US$2.7 million in 2017 to US$22.9 million in 2018. The increase in product sales revenues was mainly due to the high growth in the sales of products from existing brand partners as well as the introduction of new brands of health supplements, mother and child care and personal care products. The increase in services revenue was mainly because we set up a dedicated services team in May 2018 to better serve our brand partners’ needs for marketing solutions.

Cost of Revenues

Our cost of revenues increased by 102.9% from US$69.1 million in 2017 to US$140.2 million in 2018, which corresponded to the increases in both of our product sales revenues and services revenues. The increase

 

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was mainly driven by an increase in the volume of products we sold to customers, as well as an increase in advertising and promotion fees paid to third parties for providing value-added services to our brand partners.

Operating Expenses

Our total operating expenses increased by 95.8% from US$26.2 million in 2017 to US$51.3 million in 2018. Our operating expenses as a percentage of revenue decreased from 26.7% in 2017 to 25.8% in 2018.

Fulfillment Expenses. Our fulfillment expenses increased significantly from US$6.2 million in 2017 to US$13.1 million in 2018. The increase was primarily due to (i) increases in the volume of products shipped due to the growth of our business, (ii) an industry-wide increase in per-package shipment fees charged by third-party couriers and (iii) costs associated with operating a new warehouse we lease in Shanghai, including rental expenses, utilities, warehousing supplies and employee wages and benefits incurred in staffing this warehouse.

Sales and Marketing Expenses. Our sales and marketing expenses increased by 77.4% from US$15.5 million in 2017 to US$27.5 million in 2018. The increase was primarily due to (i) increases in our advertising costs as we launched more promotional events for the products we offer, (ii) higher employee wages and benefits for our sales and marketing staff resulting from increased headcounts and (iii) increases in storefront fees paid to e-commerce platforms in line with the growth of our sales revenues on these platforms.    

General and Administrative Expenses. Our general and administrative expenses increased significantly from US$4.0 million in 2017 to US$9.1 million in 2018. The increase was primarily due to (i) an increase in fees paid to our auditor and (ii) higher employee wages and benefits for our corporate employees resulting from increased headcounts.

Research and Development Expenses. Our research and development expenses increased significantly from US$0.5 million in 2017 to US$1.7 million in 2018. The increase was primarily due to higher employee wages and benefits for our research and development personnel resulting from headcount increases due to various ongoing development projects.

Operating Income

Our operating income increased significantly from US$2.9 million in 2017 to US$7.6 million in 2018.

Our operating margin, defined as our operating income divided by our net revenues, increased from 2.9% in 2017 to 3.8% in 2018. The increase in our operating margin was a result of the economies of scale resulting from the growth of our business in 2018.

Finance Expenses, Net

Our finance expenses increased significantly from US$0.1 million in 2017 to US$0.9 million in 2018 primarily due to an increase in our bank borrowings and the resulting increase in our interest expenses.

Foreign Exchange Gains/(Loss), Net

We recorded foreign exchange losses of US$0.3 million in 2018, as compared to foreign exchange gains of US$0.1 million in 2017.

Other Income/(Loss), Net

We recorded other income of US$0.2 million in 2018, as compared to other losses of approximately US$36,000 in 2017.

 

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Income Tax Expenses

Our income tax expenses increased significantly from US$80,576 in 2017 to US$0.4 million in 2018, as a result of (i) the increase in the profits recorded by our subsidiaries and (ii) the accumulated tax credit due to losses prior to 2017, which was deducted from our income tax payable in 2017.

Net Income

As a result of the foregoing, we recorded net income of US$2.7 million and US$6.1 million in 2017 and 2018, respectively.

Net Income attributable to ECMOHO Limited

We recorded net income attributable to ECMOHO Limited of US$2.8 million and US$6.1 million in 2017 and 2018, respectively, which is mostly in line with the change in our net income over the same period.

Liquidity and Capital Resources

We have financed our operations primarily through proceeds from private placements and short-term borrowings. As of December 31, 2018, we had cash and cash equivalents of US$10.3 million, restricted cash of US$2.6 million and short-term borrowings of US$22.0 million. Our restricted cash represents secured deposits held in designated bank accounts for loan draw-downs. Our cash and cash equivalents are primarily used for working capital and general corporate purposes. As of December 31, 2018, 39.3% of our cash and cash equivalents was held in China, including US$11,092 held by our variable interest entity. For details of the restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “–Holding Company Structure”.

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Year ended December 31,  
     2017        2018  
     (in thousands of U.S. dollars)  

Net cash used in operating activities

     (2,444        (40,756

Net cash used in investing activities

     (492        (1,748

Net cash provided by financing activities

     1,567          44,036  

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

     12,079          10,689  

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

     10,689          12,965  

On October 18, 2018, we obtained a revolving loan facility in an aggregate principal amount not exceeding US$25.0 million from Taipei Fubon Commercial Bank Co. Ltd., Hong Kong Branch. As of May 31, 2019, we had drawn down US$9.7 million from the revolving loan facility. In addition to the charges over the inventories, receivables and bank accounts of two of our subsidiaries, our co-founders have guaranteed this borrowing with a share charge and we plan to cancel the share charge after the completion of this offering. We believe that our current level of cash balances and cash flows will be sufficient for our anticipated cash needs for at least the next twelve months. However, we may need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If we determine that our cash requirements exceed our amounts of cash on hand or if we decide to further optimize our capital structure, we may seek to issue debt or equity securities or obtain additional credit facilities or other sources of funding.

Operating Activities

Net cash used in operating activities in 2018 was US$40.8 million, which reflects our net income of US$6.1 million, as adjusted for the effects of the changes in operating assets and liabilities and non-cash items.

 

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In 2018, the principal items accounting for changes in operating assets and liabilities were (i) an increase of US$37.6 million in our inventories in anticipation of increased sales in the first half of 2019 and (ii) an increase of US$23.2 million in our accounts receivable primarily due to the growth of our services revenues and sales to retailers, partially offset by an increase of US$12.4 million in our accounts payable as a result of higher levels of inventory. Adjustment for non-cash items primarily consisted of (i) inventory write-downs of US$0.6 million and (ii) depreciation and amortization expenses of US$0.6 million, partially offset by deferred tax expenses of US$1.1 million.

Net cash used in operating activities in 2017 was US$2.4 million, which reflects our net income of US$2.7 million, as adjusted for the effects of the changes in operating assets and liabilities, and non-cash items. In 2017, the principal items accounting for changes in operating assets and liabilities were an increase of US$9.7 million in our inventories, partially offset by a decrease of US$2.3 million in our prepayments and other current assets and an increase of US$1.4 million in our accounts payable. The increases in our inventories and accounts payable were primarily due to the growth of our business. The decrease in our prepayments and other current assets was primarily due to certain refunded guarantee deposits following the expiration of the supply agreements with two retailers. Adjustment for non-cash items primarily consisted of (i) inventory write-downs of US$1.2 million and (ii) depreciation and amortization expenses of US$0.5 million, partially offset by deferred tax expenses of US$0.1 million.

Investing Activities

Net cash used in investing activities in 2018 was US$1.7 million, consisting of (i) US$1.4 million incurred in purchases of property and equipment, (ii) payments of US$0.2 million for software procurement, and (iii) payments of US$0.1 million for acquisition of business license relating to our acquisition of Hangzhou Duoduo Supply Chain Management Co., Ltd.

Net cash used in investing activities in 2017 was US$0.5 million, primarily consisting of (i) payments of US$0.3 million for software procurement and (ii) payments of US$0.2 million for acquisition of business license relating to our acquisition of Hangzhou Duoduo Supply Chain Management Co., Ltd.

Financing Activities

Net cash provided by financing activities in 2018 was US$44.0 million, primarily consisting of (i) proceeds from borrowings of US$41.5 million, (ii) cash receipts from the issuance of Series A preferred shares of US$22.4 million, (iii) cash consideration of US$9.4 million for subscription of shares in our Company from the shareholders of ECMOHO Shanghai in connection with our corporate restructuring and (iv) advances from related parties of US$9.0 million, representing interest-free advances from Ms. Zoe Wang and Mr. Leo Zeng and their immediate family members, partially offset by (i) repayments of borrowings of US$23.5 million and (ii) cash payments of US$14.5 million for acquisition of equity interests of ECMOHO Shanghai from Ms. Zoe Wang and Mr. Leo Zeng in connection with our corporate restructuring. For details of our corporate restructuring, see Note 1(b) to our consolidated financial statements included elsewhere in this prospectus.

Net cash from financing activities in 2017 was US$1.6 million, primarily consisting of (i) proceeds from borrowings of US$4.8 million and (ii) proceeds of borrowings from related parties of US$3.0 million, representing borrowings from certain holders of non-controlling interest in our company or in our subsidiaries, partially offset by (i) repayments of borrowings of US$5.2 million and (ii) repayment of advances to related parties of US$1.0 million, representing repayment of interest-free advances to Ms. Zoe Wang and Mr. Leo Zeng and their immediate family members.

For details of our related party transactions, see “Related Party Transactions” and Note 21 to our consolidated financial statements included elsewhere in this prospectus.

 

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Capital Expenditures

We made capital expenditures of US$0.3 million and US$1.6 million in 2017 and 2018, respectively, primarily in relation to purchases of office and warehouse equipment and leasehold improvement. Our capital expenditures in 2019 are expected to be around US$1.0 million, primarily in relation to purchases of equipment for the warehouse we lease and operate in Shanghai, purchases of office equipment and leasehold improvement.

Contractual Obligations

As of December 31, 2018, we had operating lease commitments of US$1.7 million, US$1.2 million and US$0.1 million in 2019, 2020 and 2021, respectively. Our operating lease commitments relate to our corporate offices and warehouses.

Other than the above, we did not have any significant purchase commitments, capital commitments or other long-term liabilities as of December 31, 2018.

Inflation

To date, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year increases in the consumer price index for 2017 and 2018 were 1.6% and 2.1%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

A significant portion of our net revenues and expenses are denominated in Renminbi. Renminbi are not freely convertible into foreign currencies, including U.S. dollars. Our exposure to foreign exchange risk primarily relates to cash and cash equivalents and short-term borrowings denominated in Renminbi. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and Renminbi because the earnings of our PRC subsidiaries and variable interest entity are denominated in Renminbi, while our ADSs will be traded in U.S. dollars.

The value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. On August 11, 2015, the People’s Bank of China announced plans to improve the central parity rate of the Renminbi against the U.S. dollar by authorizing market-makers to provide parity to the China Foreign Exchange Trading Center operated by the People’s Bank of China with reference to the interbank foreign exchange market closing rate of the previous day, the supply and demand for foreign currencies as well as changes in exchange rates of major international currencies. Effective from October 1, 2016, the International Monetary Fund added Renminbi to its Special Drawing Rights currency basket. Such change and additional future changes may increase volatility in the trading value of the Renminbi against foreign currencies. The PRC government may adopt further reforms of its exchange rate system, including making the Renminbi freely convertible in the future. Accordingly, 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.

 

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To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ADSs, servicing our outstanding debt, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us.

As of December 31, 2018, we had Renminbi-denominated cash and cash equivalents amounting to US$4.7 million at the exchange rate of RMB6.8632 for US$1.00 as published by the People’s Bank of China on the same date. If Renminbi had depreciated by 10% against the U.S. dollar, our cash and cash equivalents would have decreased by US$0.5 million.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest expenses incurred on our short-term borrowings. As of December 31, 2018, we had short-term borrowings of US$22.0 million, of which 55.2% were denominated in U.S. dollars and 44.8% in Renminbi. The interest rates of our U.S. dollar-denominated short-term borrowings are pegged to the three-month LIBOR and the interest rates of our Renminbi-denominated short-term borrowings are pegged to the loan prime rate published by the People’s Bank of China. These short-term borrowings carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, our future interest expenses may increase due to changes in market interest rates. As of December 31, 2018, our short-term borrowings had a weighted average interest rate of 7.09% per annum.

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated combined financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements that are relevant to us, see Note 2(aj) to our consolidated financial statements included elsewhere in this prospectus.

 

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OUR MARKET OPPORTUNITIES

The PRC Health and Wellness Industry

The health and wellness industry represents a significant component of the national economy of the PRC. The industry generally encompasses services and products related to the maintenance, recovery and enhancement of health, spanning from the pre-natal stage through to aged care, and includes pharmaceuticals, nutrition and health products, medical equipment, and a range of healthcare and related management services. According to Frost & Sullivan, the market size of the PRC health and wellness industry reached RMB6,668.6 billion (US$971.6 billion) in 2018, and is expected to continuously increase, reaching RMB9,882.7 billion (US$1,437.4 billion) in 2023.

The PRC health and wellness industry comprises both medical (e.g., pharmaceuticals, medical devices, medical care) and non-medical (e.g., mother and child care, household health equipment, health supplements and food, cosmeceuticals and non-medical healthcare) products and services. The following chart sets forth a breakdown of the historical and projected market size of the PRC health and wellness industry for the periods indicated:

Market Size of the PRC Health and Wellness Industry by Trading Value

 

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Source: Frost & Sullivan

With the rapid development of e-commerce in China, the online penetration rate of non-medical products increased from 15.4% in 2014 to 25.0% in 2018, and is expected to reach 30.3% in 2023.

Non-medical Health and Wellness Integrated Solution Providers

According to Frost & Sullivan, integrated solution providers in the PRC non-medical health and wellness industry act as the bridge between consumers and health and wellness product brands, especially global brands, and occupy a central role in the value chain by combining global sourcing capabilities with local distribution channels and insights into PRC customer behaviors. Such providers typically offer one-stop IT solutions, online and offline store operations, digital marketing, warehousing and logistics and customer management as “integrated solution”.

 

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The Role of the Integrated Solution Provider

 

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Source: Frost & Sullivan

As the e-commerce market in China grows in complexity and more channels emerge, brands look to integrated solution providers with local knowledge and industry expertise to execute and integrate e-commerce strategies for them without the investment associated with establishing and maintaining local infrastructure and capabilities on their own. According to Frost & Sullivan, the market size of the non-medical health and wellness of integrated solution industry increased rapidly in the past five years, increasing from RMB8,308.6 million (US$1,210.6 million) in 2014 to RMB43,091.3 million (US$6,278.6 million) in 2018, representing a CAGR of 50.9%, driven by the rapid growth of e-commerce, especially the cross-border e-commerce during the same time. Supported by the favorable policies issued by the State Council and the General Administration of Customs, cross-border e-commerce enjoyed rapid growth from 2015 to 2016. In the future, the market size of non-medical health and wellness integrated solution industry is expected to maintain the steady growth and is expected to increase to RMB108,547.1 million (US$15,815.8 million) in 2023, representing a CAGR of 20.3% during the period from 2018 to 2023. The following chart sets forth the historical and projected market size of the non-medical health and wellness integrated solution industry by trading value in the PRC:

 

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Source: Frost & Sullivan

According to Frost & Sullivan, the PRC non-medical health and wellness integrated solution industry remains highly fragmented. There are a large number of small service providers that mainly focus on a few limited products or brands, and as a result, the estimated aggregated market share of the top five services providers in this industry in terms of trading value was approximately 9.5% in 2018.

 

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Key Drivers of PRC Health and Wellness Industry

The following factors generate market opportunities and promote growth in the PRC health and wellness industry.

Rising Spending Power and Health Awareness

The per capita annual disposable income in the PRC was RMB28,228.0 (US$4,113.0) in 2018 and is expected to grow to RMB37,833.9 (US$5,512.6) by 2023, representing a CAGR of 6.0% between 2018 and 2023, according to Frost & Sullivan. Such increases in disposable income and spending power render health and wellness products more affordable.

The health and wellness industry in China presents significant growth opportunities. In 2018, per capita healthcare expenditure in China was US$628.1, compared to US$11,150.1 in the United States, according to figures from the Department of Health and Human Services and the National Bureau of Statistics. Increasing awareness of chronic diseases and the importance of prevention combined with rising disposable incomes across all sectors of society in China will continue to drive demand for health and wellness products and services.

Aging Population and Increasing Life Expectancy

The PRC’s aging population, combined with increasing life expectancy, will continue to drive demand for health and wellness products. According to Frost & Sullivan and the National Bureau of Statistics of China, life expectancy in the PRC increased from 72.95 in 2005 to 76.34 years in 2015. The PRC’s population aged 65 and over grew at a CAGR of 4.2% between 2014 and 2018 and is expected to grow at a CAGR of 3.3% between 2018 and 2023. In 2018, there were 162.4 million individuals aged 65 and over, representing 11.6% of the PRC’s total population, and these numbers are expected to reach 191.4 million and 13.6% in 2023, respectively. As more people age and live longer, demand for healthcare products, including non-medical health and wellness products, will continue to increase.

Prevalence of Health Issues and Chronic Diseases

According to Frost & Sullivan, dietary and lifestyle changes and the effects of the PRC’s extended period of economic development, in particular urbanization and environmental pollution, have also led to an increasing prevalence of health issues such as obesity and chronic diseases, including diabetes, hypertension, heart diseases and cerebrovascular diseases. According to the World Health Organization, the PRC has the highest numbers of diabetics and obese children in the world, and chronic diseases accounted for more than 80% of deaths in the PRC in 2017. The treatment and prevention of such chronic diseases will continue to drive demand for health and wellness products and services.

Increased Demand for Better Health and Wellness Products

Chinese consumers increasingly demand better health and wellness products and services, as a growing middle class in the country comes to the market with higher expectations and additional knowledge (including information from overseas and online sources) about personal wellness. In addition, an aging population in the PRC and the disparity between the quality of medical treatment across regions have focused attention on the need for quality health and wellness products and services.

According to Frost & Sullivan, changes in consumer spending habits and product preferences in the PRC’s health and wellness market over the past 20 years show that the PRC’s growing middle class is increasingly preoccupied with general health and well-being and health maintenance products and eager to obtain reliable information about the quality and safety of health maintenance products.

 

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Chinese consumers regard reputable brands, including international brands, as a proxy for quality and as a key purchase driver in the health and wellness market. For example, according to Frost & Sullivan, sectors of the health and wellness market that have experienced substantial growth in recent years include infant care and aged care, with particular sales growth occurring for established international brands such as Gerber, Nestlé and Vitabiotics.

Market Deficiencies and Consumer Mistrust

The current Chinese health and wellness industry is underfunded and overwhelmed by the PRC’s large population and rapidly changing demographics. The mismatch between demand and supply engenders consumer mistrust of incumbent health and wellness product and service providers, as well as the PRC’s healthcare system overall. Deficiencies in the current health and wellness industry include:

 

   

fragmentation in the retail market;

 

   

inefficiency in distribution channels;

 

   

limited market data;

 

   

counterfeit health and wellness products;

 

   

low quality and untested products and services that are potentially dangerous to consumer health;

 

   

proliferation of black markets; and

 

   

corruption and unethical business practices.

In addition, according to Frost & Sullivan, Chinese consumers approach health and wellness expenditure in a less impulsive way and tend to remain loyal to the platforms and brands that they trust, and effective health and wellness marketing requires the establishment of a relationship of trust with consumers through consumer education, interaction and follow-up.

We believe that the overall weakness of the health and wellness sector in the PRC, the deep-rooted mistrust of medical institutions and supply chains and the importance of disease prevention provide significant growth opportunities to companies that focus on understanding consumer needs, sourcing quality products, maintaining a broad range of affordable options, and providing excellent customer service.

Untapped Demand in “Lower-tier” Cities, Townships and Rural Areas

According to Frost & Sullivan, “lower-tier” cities refer to the cities that are not developed to the level of “Tier One” cities, namely Beijing, Shanghai, Guangzhou and Shenzhen, or as urbanized in terms of population, economics, infrastructure or education as the 15 new tier one cities, including Hangzhou, Suzhou, Chengdu, Wuhan, Xi’an and Chongqing, or the 30 tier two cities including Wenzhou, Hefei, Fuzhou, Foshan, Jinhua and Jiaxing. According to Frost & Sullivan, in 2018, approximately 3.0%, 10.2% and 13.0% of China’s population lived in tier one, new tier one and tier two cities, respectively. The “lower-tier” cities, townships and rural areas, accounted for the remaining 73.8% of China’s population.

“Lower-tier” cities, townships and rural areas have traditionally enjoyed limited coverage and product offerings by established online sales channels, such as T-mall or JD.com. However, as they continue to develop, they provide significant market opportunities, and will be the core drivers of the health and wellness integrated solution market in the PRC, according to Frost & Sullivan. The market size of the health and wellness integrated solution industry in “lower-tier” cities, townships and rural area is expected to grow at a CAGR of 21.4% over the period from 2018 to 2023, as compared to CAGRs of 16.3%, 20.3%, 18.8% over the same period for the market size in tier one, new tier one and tier two cities respectively.

 

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BUSINESS

Our Mission

Our mission is to improve the health and well-being of consumers in China. We strive to achieve our mission by empowering consumers with access to quality products and trustworthy content to better address their health and wellness needs and those of their families.

Company Overview

We are one of China’s leading integrated solution providers in the rapidly growing non-medical health and wellness market. As an integrated solution provider, we act as the bridge between brand owners and Chinese consumers by marketing and distributing health supplements and food, mother and child care products, personal care products, household healthcare equipment and other health and wellness products. Through over seven years of operation, we have built up an ecosystem where Chinese consumers are provided with customized health and wellness solutions that include quality products and trustworthy content.

We ranked first in China’s non-medical health and wellness integrated solution industry in terms of revenue in 2018 with a market share of 2.6%, according to Frost & Sullivan. The non-medical health and wellness integrated solution industry is the fastest growing segment within China’s health and wellness market, according to the same source. Leveraging our strong relationships with leading health and wellness brands home and abroad, comprehensive online channel coverage, loyal customer base, proven content generation and distribution capabilities, deep industry knowhow and extensive consumer data, we believe we are well positioned to solidify our leading position in China’s highly fragmented non-medical health and wellness integrated solution industry and to serve China’s broader health and wellness market.

As of May 31, 2019, we sourced around 5,000 SKUs of quality health and wellness products from around 40 brand partners, including Abbott, Gerber, Perrier, Puritan’s Pride and Wyeth Nutrition, and offered them to consumers through various online and offline channels, including major e-commerce platforms, such as Tmall and JD.com, social e-commerce platforms, such as Pinduoduo, Yunji and Little Red Book, as well as other online and offline retailers. We also provide value-added services, such as designing and operating online stores and organizing online and offline marketing campaigns, to our brand partners to extend their consumer outreach.

In addition, as consumers in China are increasingly seeking higher quality health and wellness products, we believe there is a growing need for trustworthy health and wellness content that guides consumers to reliable products that suit their own health and wellness needs. To address this growing need, we partner with over 800 healthcare experts and KOLs to generate health and wellness content, combined with product recommendations, and distribute such content to consumers through multiple online and offline channels. In the month of May 2019, we, together with these healthcare experts and KOLs, generated around 2,000 health and wellness articles.

We optimize our brand partner and product portfolio from time to time by selecting brands and products that best address consumer needs in China based on the analysis of our 7.0 million paying consumer profiles and our market insights. Such market insights into Chinese consumer demand are in turn valued by our brand partners. We also have two proprietary brands, KGC and HST, which address the underserved demand for household healthcare equipment and traditional Chinese herbal tonics.

We have developed and recently launched XG Health platform, an integrated family health management and service platform. XG Health offers consumers a rich array of health management plans, prepared by doctors and nutritionists, as well as health and wellness products. Consumers may also reach out to the healthcare experts on XG Health for further inquiries and receive customized non-medical health and wellness recommendations. In addition, we have rolled out a pilot program to partner with specialty stores in “lower-tier” cities, townships and rural area in Anhui Province in China, which may source health and wellness products from us through XG Health and host health and wellness presentations given by healthcare experts we work with.

 

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Our net revenues grew by 102.6% from US$98.2 million in 2017 to US$199.0 million in 2018. Our net income attributable to ECMOHO Limited grew by 117.9% from US$2.8 million in 2017 to US$6.1 million in 2018.

Our Ecosystem

We have developed an ecosystem comprising consumers, brand partners, distributors, retailers and content generators. In our ecosystem, we provide consumers with quality health and wellness products and trustworthy health and wellness content. The following chart illustrates the interactions throughout our ecosystem:

 

 

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Our ecosystem provides the following value propositions to its participants:

 

   

To brand partners: Portal into a broad customer population, market insights gained from extensive touchpoints, tailored marketing solutions and fulfillment support

 

   

To consumers: Personalized health and wellness solutions comprising quality and authentic health and wellness products, trustworthy health and wellness content and customized health and wellness recommendations

 

   

To distributors and retailers: Reliable supplies of quality health and wellness products, consumer education and fulfillment support

 

   

To content generators: Convenient platform for content generation and distribution, feedback collection and traffic direction

Our Strengths

A leading integrated solution provider in China’s rapidly growing non-medical health and wellness market

We are a leading integrated solution providers in China’s non-medical health and wellness market. As an integrated solution provider, we act as the bridge between brand owners and Chinese consumers, providing consumers with quality health and wellness products and trustworthy content and offering attractive value propositions to key stakeholders along the industry value chain.

 

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The non-medical health and wellness integrated solution industry is the fastest growing market segment within China’s health and wellness market. According to Frost & Sullivan, this market segment grew at a CAGR of 50.9% from RMB8.3 billion (US$1.2 billion) in 2014 to RMB43.0 billion (US$6.3 billion) in 2018, and is expected to further increase to RMB108.6 billion (US$15.8 billion) in 2023, representing a CAGR of 20.3% between 2018 and 2023. The primary growth drivers of China’s non-medical health and wellness integrated solution industry are increasing online penetration of health and wellness consumption, penetration into lower-tier cities, townships and rural area and increasing health awareness. According to Frost & Sullivan, we ranked first in China’s non-medical health and wellness integrated solution industry in terms of revenue in 2018 with a market share of 2.6%.

We attribute our success to our strong relationships with leading international and domestic health and wellness brands, comprehensive online channel coverage, loyal customer base, proven content generation and distribution capabilities, extensive industry knowhow and robust technological capability. Equipped with such strengths, we believe we are well positioned to solidify our leading position in China’s highly fragmented non-medical health and wellness integrated solution industry and to serve China’s broader health and wellness market. According to Frost & Sullivan, China’s health and wellness market grew at a CAGR of 13.0% from RMB4,093.8 billion (US$596.5 billion) in 2014 to RMB6,668.6 billion (US$971.6 billion) in 2018, and is expected to further increase to RMB9,882.7 billion (US$1,440.0 billion) in 2023, representing a CAGR of 8.2% between 2018 and 2023.

Strong ability to generate and distribute health and wellness content, leading to a loyal customer base

Trustworthy health and wellness content, which allows consumers to discern which products are desirable, reliable or suitable, may not always be easily available or accessible in China, a problem that is more acute in “lower-tier” cities, townships and rural area. To address this problem, we partner with over 800 healthcare experts and KOLs to generate health and wellness content, combined with product recommendations, and distribute such content to consumers through multiple online and offline channels. In the month of May 2019, we, together with these experts and KOLs, generated around 2,000 health and wellness articles.

After consumers make purchases with us, we follow up with tailored content based on their historical purchases and projected health and wellness needs. Such content includes general health advice, customized daily health solutions of recommended exercises and recipes as well as relevant product recommendations. Leveraging the 7.0 million consumer profiles we have collected, we provide tailored product recommendations ranging from baby formula to nutritional supplements for seniors, covering every generation in a typical household and thus serving the health and wellness needs of the entire family.

To supplement our content distribution channels, we have recently launched our proprietary XG Health platform, an integrated family health management and service platform, to connect consumers, brand partners, retailers and healthcare experts. As of May 31, 2019, the platform distributed our proprietary health and wellness contents on a daily basis to more than 200,000 registered users.

We believe that content-driven marketing, coupled with quality products, leads to enhanced customer loyalty. As of May 31, 2019, nearly 7.0 million paying consumers had made purchases directly through the flagship stores operated by us on third-party e-commerce platforms. In particular, among such paying consumers who made purchases in 2018, approximately 34% are repeated purchasers who have made more than one purchase with us.

New retail model empowered by comprehensive channel coverage

We have built comprehensive online channel coverage that comprises major e-commerce platforms, such as Tmall and JD.com, social e-commerce platforms, such as Pinduoduo, Yunji and Little Red Book, other online retailers and our proprietary XG Health platform. Our online sales channels are equipped with established

 

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customer service capabilities. We have an in-house customer service team who handled a daily average of approximately 4,000 pre-sale enquiries in May 2019, 33.5% of which led to purchases. In addition, we have cooperated with over 30 doctors and nutritionists to publish health management plans, respond to consumers’ enquiries and make customized health and wellness recommendations on XG Health platform. We believe these value-added services have significantly enhanced our sales and marketing capabilities.

Our fulfillment and content generation capabilities, acquired through our extensive experience in online channel operations, have laid a solid foundation for us to augment our offline presence and to explore the untapped market potential in “lower-tier” cities. We have rolled out a pilot program to partner with specialty stores in “lower-tier” cities, townships and rural area in Anhui Province in China, who may source health and wellness products from us through XG Health and host health and wellness presentations given by healthcare experts we work with, thus giving local consumers offline access to a range of quality health and wellness products and trustworthy content.

We believe our comprehensive channel coverage will allow us to establish a new retail model that integrates online and offline channels and provides consumers a seamless shopping experience. In addition, our extensive touch points across multiple sales channels give us valuable market insights, especially into the vast and largely untapped consumer population in “lower-tier” cities, townships and rural areas, which further enhances our value propositions.

Strong relationships with leading health and wellness brand owners from around the world

We are a trusted partner to owners of around 60 leading health and wellness brands, including Abbott, Gerber, Puritan’s Pride, Wyeth Nutrition and Perrier. For some of our brand partners, we act as the exclusive online channel distributor in China. We strategically select brands with global recognition or a leading position in their respective industry to address consumer demand. According to Frost & Sullivan, we work with more health and wellness brands than any other non-medical health and wellness integrated solution provider in China.

We provide our brand partners with comprehensive channel coverage, deep market insights and a whole suite of marketing solutions. In particular, we provide certain major brand partners with tailor-made marketing plans based on our market analysis and consumer analysis and help them launch online and offline marketing campaigns. Our proven track record in helping our brand partners succeed in China’s health and wellness market has helped us strengthen existing brand partnerships and expand our brand partner portfolio and product portfolio. Three of our top five brand partners in terms of revenue contributed by their products in 2018 have worked with us for more than three years. The number of health and wellness brands we work with increased from 41 as of December 31, 2017 to 59 as of May 31, 2019. The number of SKUs we sourced from these brand partners increased around 4,000 as of December 31, 2017 to around 5,000 as of May 31, 2019.

As we deepen our relationship with our brand partners, we also help them grow their sales in China. In 2017 and 2018, there were respectively two and five major brand partners whose products contributed over US$10 million to our product sales revenues. In the five-month period ended May 31, 2019, four major brand partners already crossed the US$10 million threshold.

Key market insights and precision marketing based on extensive consumer data and strong data analytics

Our market insights, central to our value propositions, are based on the consumer data and analytics derived from our enterprise customer resource planning, or ECRP, system. We collect data from a wide variety of channels, including traffic and interactions on our XG Health platform, the online stores we operate on third-party e-commerce platforms and the social media accounts operated by us. These data include behavioral information such as consumers’ searches, inquiries and purchases as well as personal attributes volunteered by consumers. We construct context-rich user profiles by assigning behavior and personal attributes labels to each consumer. To date, we have accumulated profiles of 7.0 million paying consumers, which are updated and

 

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refined on an ongoing basis and help us devise individual-specific marketing plans. Analytics generated from this large dataset provide us with important insights about market trends, changes in consumer demographics and behavioral preferences, which are essential for us in designing broader campaigns for products and brands and optimizing our brand partner and product portfolio to better address consumer demand.

Visionary management team with substantial industry experience

Our visionary management team is the bedrock of our success. Members of the team possess on average over 15 years of industry experience and expertise in health and wellness, e-commerce, finance and corporate governance with a vision for growing an enterprise in China’s highly dynamic health and wellness market.

Our co-founders, Ms. Zoe Wang, who serves as our Chief Executive Officer, and Mr. Leo Zeng, who serves as our Chief Operating Officer, are pioneers in China’s health and wellness integrated solution industry. Ms. Wang was trained in traditional Chinese medicine and worked for 18 years as an advertising executive. Mr. Zeng has 15 years of experience in domestic and cross-border logistics and in e-commerce operations. Leveraging our co-founders’ expertise in health and wellness, sales and marketing and cross-border e-commerce, we became one of China’s first online cross-border health and wellness integrated solution providers.

Mr. Richard Wei, our Chief Financial Officer, has extensive experience in technology, finance and corporate governance. Mr. Wei was trained in computer science, worked as a technology equity analyst at global investment banks, and has served as the chief financial officer of a number of Asia-headquartered, SEC-registered public companies, including Shanda Games Limited, Spreadtrum Communications, Silicon Motion Technology Corporation, KongZhong Corporation and ASE Test Limited.

Mr. Guangbin You, our general manager in charge of the overall operation and management of the XG Health platform, has extensive sales, marketing and management experience in the healthcare industry. Prior to joining us, Mr. You worked for Wuhan Jiangmin Pharmaceutical Group for nearly 20 years, including nine years as national sales director and two years as the general manager of marketing.

Moreover, many members of the team have worked together for an extended period of time and helped build the Company from the ground up. The rapport that the team has built extends beyond the talent and skills of individual team members and contributes to a collective sense of mission.

Our Strategies

Expand our product and service offerings

We plan to expand our brand portfolio by strategically selecting brands that address unmet health and wellness needs of Chinese consumers. Based on the market insights acquired from the extensive touchpoints across multiple sales channels, we expect to focus in particular on certain underserved segments of the Chinese health and wellness market, such as maternal products, baby supplies, health supplements, health food and personal care products.

We will continue to focus on delivering high-quality, comprehensive solutions to our existing brand partners, and on identifying additional opportunities to strengthen our brand partner relationships by expanding the scope of cooperation providing additional services. Our plans include further investment in our fulfillment capabilities through our distribution channels and our warehouse and logistics infrastructure.

 

Expand our offline channel coverage

We believe there is significant unmet demand for health and wellness products in areas outside the tier one and tier two cities in China. Consumers in these areas prefer purchasing health and wellness products from local retailers, who usually have limited access to quality products and trustworthy content.

 

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To tap into such demand, we plan to expand our offline coverage in these areas, primarily by enrolling local specialty stores in “lower-tier” cities, townships and rural area on our XG Health platform and thus providing them with dependable supplies of quality products. We also plan to host more offline consumer engagement activities, such as health and wellness presentations, in those areas to enhance the health consciousness of local consumers, which we believe leads to increased demand for the products we offer. We intend to expand our offline coverage nationwide and focus on the “lower-tier” cities, townships and rural areas, which account for 73.8% of China’s population as at the end of 2018, according to Frost & Sullivan.

Expand our content generation and distribution program

We seek to strengthen XG Health’s reputation as a trustworthy source of health and wellness content. To that end, we plan to engage more doctors, nutritionists and other content generators to bolster the content generation and distribution function of XG Health. We also plan to expand our customer reward program and encourage consumers to further distribute the content generated on XG Health. We believe these efforts will extend the outreach of our trustworthy health and wellness content, leading to enhanced customer stickiness.

Continue to invest in our consumer profiling and data analytics capabilities

We plan to further invest in and strengthen our consumer profiling and analytics capabilities based on browsing history, purchase behaviors and consumer feedback. The significant volume of data we have amassed presents an advantage in developing, training and testing analytical tools, and we intend to capitalize on that advantage in enhancing our data analytics capabilities. We will explore to enhance the application of artificial intelligence in our data analytics by cooperating with third parties in this area. We envisage a range of potential applications emerging from this effort, such as enhancing the efficiency and applicability of customer profiling, increasing the hit rate of our recommendations of products and services, and augmenting the precision of our broader marketing campaigns.

Pursue strategic collaboration, investment and acquisition opportunities in order to expand our product and service offerings, extend our geographic reach and enhance our technological capabilities

We plan to pursue strategic collaboration, investment and acquisition opportunities to supplement our product and service offerings. In addition, we expect to explore opportunities that could usher us to promising new markets, potentially through collaborations with existing or new brand partners. This could include examining opportunities for marketing and selling well-known Chinese-branded health and wellness products to the overseas Chinese communities. We may also evaluate opportunities for collaboration, investments and acquisitions that enhance our technological capabilities.

Our Business Model and Services

We generate revenues through product sales to consumers and retailers and services primarily to brand partners. The following table sets forth a breakdown of our revenues for the periods indicated:

 

     Year ended December 31,  
     2017     2018  
     Amount      % of total     Amount      % of total  
     (in thousands of U.S. dollars, except percentages)  

Product sales

     95,573        97.3     176,098        88.5

Services

     2,665        2.7       22,917        11.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     98,238        100.0     199,015        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Product Sales

We carefully select products that suit consumer needs and sell these products through a variety of channels. Through online flagship stores we operate on third-party e-commerce platforms, such as Tmall and JD.com, we

 

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sell our brand partners’ and our proprietary brands’ products directly to consumers. Some brand partners authorize us to operate their flagship stores on specific e-commerce platforms, while others’ products are offered in our self-operated flagship stores on third-party e-commerce platforms. In addition, we generate product sales through our proprietary XG Health platform. For details about product sales through our XG Health platform, see “Our Proprietary Brands and Platform – XG Health”.

We also sell our brand partners’ and our proprietary brands’ products to third-party e-commerce platforms, such as Tmall-Mart, JD.com, and other online and offline retailers. We typically enter into supply agreements with such e-commerce platforms and other retailers with a term of 6 to 12 months, during which the e-commerce platforms or other retailers place orders to us from time to time for specified products based on a predetermined price or based on price negotiated at the time of the order. Some of these agreements set forth the purchase price for the specified products; others provide that such price shall be set forth in each purchase order following consultation between the retailer and us.

In addition, we enter into consignment arrangements with certain e-commerce platforms, pursuant to which the title to the products we deliver to these e-commerce platforms remains with us until these products are sold to end consumers. These e-commerce platforms pay us the purchase price of the underlying products according to pre-determined billing cycles, but they have the right to return to us for a full refund any product that is returned by end consumers or has remained unsold for a specified period of time.

Services

We offer our brand partners marketing solutions tailored to their needs and charge fixed project-based service fees. Leveraging the market insights generated from our consumer data, we help our brand partners formulate their marketing strategies. We then implement such strategies by organizing a range of marketing activities for our brand partners, including designing and operating online stores, running online promotional events, organizing offline marketing campaigns featuring social media influencers and circulating marketing messages to consumers. We also regularly conduct research on China’s health and wellness market and provide the analysis to our brand partners.

Our Brand Partners and Brand Partner Development and Services

Brand Partners

As of May 31, 2019, we sourced 59 brands of products from 38 brand partners. The products we source cover a wide range of categories, including health supplements and food, mother and child care products, and personal care products. The following table sets forth a selection of the brands we work with and the products we source:

 

Categories

  

Selected Brand Partners

  

Selected Products

Health Supplements and Food    Beijing Tong Ren Tang Health    American Ginseng
   Puritan’s Pride    Chondroitin & MSM Joint Soother
   Perrier    Mineral Water
   Wyeth Pharmaceutical    Centrum Multivitamin
Mother and Child Care Products    Abbott    Eleva Organic Baby Milk Powder
   Gerber    DHA & Probiotic Rice
   Lansinoh    Breastmilk Storage Bags
   Wyeth Nutrition    PROMAMA Algae Oil DHA
Personal Care Products    A.H.C    White Collagen Skincare Set
   Compeed    Anti Blister Stick

 

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The table below sets forth a breakdown of our product sales revenue by product category:

 

     Year ended December 31,  
     2017     2018  
     Amount      % of total     Amount      % of total  
     (in thousands of U.S. dollars, except percentages)  

Health Supplements and Food

     60,842        63.7     80,318        45.6

Mother and Child Care Products

     16,081        16.8       69,270        39.4  

Personal Care Products

     4,857        5.1       11,289        6.4  

Others*

     13,793        14.4       15,221        8.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     95,573        100.0     176,098        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

*

Includes household healthcare equipment and household cleaning products.

The growth in our product sales revenues in 2018 was primarily driven by the growth in the sales revenues of mother and child care products, which increased significantly from US$16.1 million in 2017 to US$69.3 million in 2018.

We typically enter into annual supply agreements with our brand partners and, in some cases, act as the exclusive online channel distributor in China. We purchase products from our brand partners at a discount to retail price by placing orders on an as-needed basis based on the projected sales cycle of the underlying product. We typically commit to sales targets and sometimes minimum inventory requirements with our brand partners. In return, we often receive sales rebates from our brand partners. Toward the end of the term, we assess the underlying products’ performance and negotiate with the brand partners on the renewal of the agreement. We constantly optimize our brand partner and product portfolio based on our consumer data and analytics derived from the traffic and interactions on our XG Health platform, the online stores we operate on third-party e-commerce platforms and the social media accounts operated by us.

We also provide value-added services to some of our brand partners under the service fee model. See “ – Our Business Model and Services – Services” for details. We enter into separate service agreements with those brand partners for such services.

Brand Partner Development and Services

Brand partner screening and acquisition

We are highly selective in screening and choosing brand partners. We primarily focus on brands with global recognition, long and proven track records or leading positions in their respective market segments. We further screen potential brand partners by analyzing consumer behaviors, including their searches, inquiries and purchases, in the online flagship stores we operate on third-party e-commerce platforms or on our proprietary XG Health platform. Such records reveal the latest trends in consumer demand, allowing us to constantly review and strategically select brands with products that address the needs of consumers in China. In addition, we identify brands with significant market potential based on our market insights with a view to developing them into our major brand partners. Brands are generally willing to consider partnering with us because of our valuable insights into consumer demand, which enables targeted marketing efforts that are more effective and efficient than conventional marketing efforts without the support of consumer data analytics.

We also seek to deepen our relationships with existing brand partners by expanding the brand portfolio that they distribute through us. Three of the ten largest brand partners in terms of revenue contribution in 2018 are under the common control of a global food and beverage company. While the partnership relationships were developed independently, we believe the trust developed through existing partnerships has been conducive to further partnerships with other brands owned by this company. At the beginning of 2017, we distributed only one brand owned by this company, and as the relationships deepened, we distributed 12 brands owned by this company as of May 31, 2019.

 

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Brand partner services

Each of our brand partners is assigned an operations team led by an experienced operations director, who is responsible for managing our relationship with the brand partner and provides consultation on the brand partner’s needs. Based on such needs, we provide our brand partners with tailored marketing solutions, such as designing and operating online stores and organizing online and offline marketing campaigns. We are committed to offering premium services to our major brand partners by formulating customized marketing strategies organizing promotion events through e-commerce flagship stores and offline events. We also support our brand partners with supply chain management.

 

Case Study: Facilitating the Chinese market expansion of an established global brand

Gerber is a leading U.S.-based baby food brand recognized and trusted by consumers around the world. In April 2015, Gerber officially commenced its cross-border e-commerce business in China. Recognizing our unique local knowledge and valuable market insights derived through our extensive touchpoints and data analytics capabilities, Gerber engaged us in July 2016 to operate its cross-border e-commerce business in China.

In order to successfully fulfill our mandate, we devised and implemented a comprehensive and multifaceted China strategy for Gerber, including the following:

 

   

operating Gerber’s flagship stores on major e-commerce platforms, such as Tmall Global, Kaola and JD Worldwide;

 

 

   

setting up an independent operations team and providing consumer support for each sales channel;

 

 

   

organizing online and offline promotional events;

 

 

   

developing and operating Gerber’s WeChat mall; and

 

 

   

providing supply chain support and inventory management.

 

 

LOGO

In 2018, the sales of Gerber’s cross-border e-commerce business in China generated through cooperation with us saw a year-on-year increase of 151.4%.

Our Proprietary Brands and Platform

Our Proprietary Brands

We have acquired two brands to provide tailored products that target underserved market niches. The products of these two brands are manufactured by third parties that we enter into annual manufacturing and supply agreements with.

 

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Heng Shou Tang

We acquired Heng Shou Tang, a traditional Chinese herbal tonics brand, in April 2016 to better serve the untapped demand of younger consumers in China for traditional Chinese herbal tonics. In 2017 and 2018, revenues from the sales of Heng Shou Tang products were US$3.2 million and US$3.4 million, respectively.

KGC

We acquired KGC, a household healthcare equipment brand that specializes in premium massage chairs, in December 2016, as our analytics showed low market penetration of massage chairs among the Chinese middle class, especially the younger office workers. We customized the KGC products based on our market insights and focus our marketing efforts on consumers suggested by our ECRP system. The sales revenues of KGC products increased from US$4.3 million in 2017 to US$7.1 million in 2018.

XG Health platform

We have developed XG Health, an integrated family health management and service platform that connects consumers with our brand partners and healthcare experts. XG Health is accessible to consumers through its WeChat public account and offers health management plans such as blood pressure control and weight management programs. These health management plans, prepared by the doctors and nutritionists we work with, contain detailed guidelines on dietary plans and other daily routines and, where relevant, include product recommendations. Consumers may reach out to these healthcare experts for further inquiries and receive customized non-medical health and wellness recommendations. We are in the process of entering into consulting agreements with these healthcare experts. Also available on XG Health are a rich array of carefully selected health and wellness products. Consumers may purchase these products for themselves or share the links to these products on social media and earn commissions.

 

In addition, we have recently launched an XG Health mobile app for retailers where they can source health and wellness products from us. We have rolled out a pilot program to invite owners of specialty stores in “lower-tier” cities, townships and rural area in Anhui Province in China to register on this app and plan to expand our offline coverage nationwide.

Content Generation and Promotional Activities

Content Generation

We partner with over 800 healthcare experts and KOLs to generate health and wellness content. These content generators provide general advice on trending non-medical health and wellness topics and, based on product information from our brand partners, combine such advice with product recommendations. The generated content is then vetted by the relevant brand partner and processed by our 122-person contents team, comprising specialists in editing and website design and in-house licensed nutritionists, for publication. Such content is published as articles and short videos on various social media accounts we operate and sometimes provided to news and information outlets with embedded links to our online stores. Our contents team receive ongoing training from and supervision by our legal team, ensuring that the content generated complies with the relevant PRC laws and regulations.

Online Promotional Activities

We operate online flagship stores on multiple e-commerce platforms. See “– Our Business Model and Services” for details. Our online presence is a crucial component of our sales and marketing strategy and consumer-centric ecosystem, and we use a number of methods to increase site traffic, including conducting sales promotions through the online flagship stores, paying for advertisements tied to certain health and wellness-related keywords on search engines and generating blogs and videos that increase our exposure to target consumers. In addition, we leverage our data analytics capabilities to conduct targeted marketing. See “—Technology Infrastructure” for details.

 

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Offline Promotional Activities

We regularly engage in a range of offline promotional activities. To attract consumers, we host free healthcare presentations given by medical practitioners that are open to the public, and where samples of health and wellness products related to the presentation’s topic are given out for free. To attract more retailers, we host promotional presentations for our brand partners that are attended by their senior executives. We also plan to host more offline consumer engagement activities, such as health and wellness presentations, in ”lower-tier” cities, townships and rural area in China to enhance the health consciousness of local consumers, which we believe leads to increased demand for the products we offer.

Fulfillment and Payment

From our years of experience in the cross-border and domestic e-commerce business, we have acquired significant knowhow in managing the entire fulfillment process. We engage third-party warehousing and logistics service providers to ship the products we source from our brand partners to the warehouses we designate. We store our inventory in facilities occupying an aggregate floor area of approximately 50,000 square meters, comprising the two warehouses we lease and operate in Shanghai and Hangzhou and facilities operated by third-party warehousing and logistics service providers located in different cities in China and different countries, including the United States and Korea. We monitor and adjust our inventory level on an ongoing basis based on our sales projections and the shipment schedule of our brand partners. In the case of cross-border e-commerce, we arrange bulk shipment from our brand partners’ overseas warehouses to cross-border bonded zones in China pending customs clearance. Once a consumer places an order and makes payment, we clear the products through customs, including making the necessary tax payment, and deliver the products to the consumer.

We deliver products purchased by consumers and retailers nationwide through 15 third-party couriers. We typically enter into annual service agreements with warehousing and logistics service providers and third-party couriers and assume risks of damage and loss not attributable to the service provider’s fault.

Technology Infrastructure

Our technology infrastructure is critical to our ability to serve consumers, including our data analytic capabilities. As of May 31, 2019, our technology and IT team consisted of 66 employees, including core team members with extensive experience with e-commerce and Internet companies in China.

Central to our data analytics capabilities is our enterprise customer resource planning, or ECRP, system. The ECRP system retrieves orders placed by consumers directly with us and creates a profile for each consumer. To remove duplicate profiles across different channels, the ECRP system runs a check on IP address and contact information, such as mobile number and delivery address. Based on the order placed, each consumer profile is automatically assigned labels that enable targeted marketing.

 

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Case Study: Targeted marketing along a consumer’s life cycle

Mrs. Sun is an expectant mother in Beijing. Seeking information and insights into making better health and wellness choices, Mrs. Sun visited the Wyeth Nutrition overseas flagship store on Tmall operated by us, upon which her first search and order was for folic acid, a substance generally taken by pregnant women to prevent birth defects.

Based on the registration information provided by Mrs. Sun and her initial search and purchase, our ECRP system began compiling an initial individualized consumer profile to be used in targeted product marketing and suggestions for content. This profile was then expanded as Mrs. Sun made other searches and purchases. Directed by pre-programmed algorithms, the ECRP system sent Mrs. Sun targeted information relating to pregnancy. Further, as time progressed, information that relates to each particular stage of pregnancy was sent to her, alongside customized promotional materials for best-selling products among women in her stage of pregnancy. The nature of these promotional materials continually changed to match her circumstances, including promoting baby formula and infant healthcare products once the time for Mrs. Sun’s delivery approached.

Mrs. Sun appreciates the recommendations she receives from us and the convenience of having relevant products and information for herself and her family shown to her. Mrs. Sun now purchases products for her baby directly from us, and is confident that the items she receives will be trustworthy, high quality and safe for her family.

Based on our consumers’ historical purchases and responses to our marketing messages, the ECRP system may assign each consumer numerous labels that differentiate their health and wellness needs, brand preferences, purchasing power and level of interest in our promotional activities. In addition, our data analysts monitor the sales data gathered by the ECRP system on an ongoing basis and identify trends in consumer demand.

We also license from third parties software programs that provide support for other aspects of our operations, including supply chain management, warehousing management and financial accounting. In addition, we are committed to ensuring the security and reliability of our technology infrastructure and safeguarding our data. We have adopted comprehensive cybersecurity and system back-up policies and regularly conduct internal audits on compliance with these policies. We also maintain a data recovery center in Songjiang District, Shanghai in China. We intend to further invest in our technology infrastructure to support the growth of our business.

Intellectual Property

We regard our trademarks, copyright, service marks, domain names, trade secrets, proprietary technologies and other intellectual property as critical to our success. To protect our proprietary rights in content, services and technology, we rely on trademark, copyright and trade secret protection laws in China. As of May 31, 2019, we owned 295 registered trademarks, including those relating to our “ECMOHO” brand name and our proprietary brands of “KGC” and “Heng Shou Tang”. As of the same date, we also owned 21 copyrights, 13 domain names and 11 patents in China and Hong Kong.

We use our brand partners’ names, logos and other marks in connection with marketing and selling their products. Some of our agreements with our brand partners provide us with licenses, typically coterminous with the agreement, to use their intellectual property for the said purposes; others require that we obtain the brand partner’s consent for specific uses of the brand partner’s intellectual property. We do not register our brand partners’ trademarks in China on their behalf.

Employees

As of May 31, 2019, we had a total of 619 full-time employees. We had a total of 397, 403 and 651 full-time employees as of December 31, 2016, 2017 and 2018, respectively. Substantially all of our full-time employees are based in China.

 

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The following table sets forth a breakdown of our employees as of May 31, 2019 by function:

 

Function

   Number  

Fulfillment

     67  

Sales and marketing

     420  

General and administrative

     66  

Research and development

     66  
  

 

 

 

Total

     619  
  

 

 

 

As required by laws and regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments including, among other things, pension, medical insurance, unemployment insurance, maternity insurance, on-the-job injury insurance and housing fund plans through a PRC government-mandated benefit contribution plan. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.

We typically enter into standard employment agreements and confidentiality agreements or clauses with our senior management and core personnel. These agreements include a standard non-compete covenant that prohibits the employee from competing with us, directly or indirectly, during his or her employment and for six months after termination of his or her employment.

We believe that we maintain a good working relationship with our employees, and we have not experienced any material labor disputes.

Properties and Facilities

Our corporate headquarters are located in Shanghai. We also lease office space in Hangzhou and warehouse space in Shanghai and Hangzhou. As of May 31, 2019, we leased an aggregate of approximately 6,000 square meters of office space and an aggregate of approximately 50,000 square meters of warehouse space. We believe that our existing properties and facilities are generally adequate for our current needs, but we expect to seek additional space as needed to accommodate our future growth.

Insurance

We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. Additionally, we provide accident insurance and supplementary medical insurance for certain key personnel. We do not maintain business interruption insurance, product liability insurance or key-man life insurance. We consider our insurance coverage sufficient for our business operations in China.

Legal Proceedings

From time to time, we are involved in legal proceedings in the ordinary course of our business. See “Risk Factors—Risks Related to Our Business and Industry—We may from time to time become party to litigation, other legal or administrative disputes and proceedings that may materially and adversely affect us.” for certain lawsuits involving Heng Shou Tang, our proprietary brand. Except as disclosed in this prospectus, we are currently not a party to any material legal or administrative proceedings.

 

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REGULATION

This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.

Regulations Relating to Foreign Investment

Investment in the PRC conducted by foreign investors and foreign-owned enterprises shall comply with the Catalogue for the Guidance of Foreign Investment Industries, or the Catalogue, which was first issued in 1995 and amended from time to time. The most updated Catalogue was promulgated by the Ministry of Commerce of the People’s Republic of China, or the MOFCOM, and the National Development and Reform Commission, or the NDRC, on June 28, 2017 and became effective on July 28, 2017, and contains specific provisions guiding market access of foreign capital and stipulates in detail the areas of entry pertaining to the categories of encouraged foreign investment industries, restricted foreign investment industries and prohibited foreign investment industries. The latter two categories are included in the Special Administrative Measures for Access of Foreign Investments, or the Negative List 2017, which was first introduced into the Catalogue in 2017, and listed, in a unified manner, the restrictive measures for the entry of foreign investment. On June 28, 2018, the MOFCOM and the NDRC jointly promulgated the Special Administrative Measures for Entry of Foreign Investment (Negative List) (2018 Edition), or the Negative List 2018, to replace the Negative List 2017, which took effect on July 28, 2018. Any industry not listed in the Negative List 2018 is a permitted industry and generally open to foreign investment unless specifically prohibited or restricted by PRC laws and regulations. According to the Negative List 2018, value-added telecommunications services (with the proportion of foreign investment not exceeding 50%, excluding e-commerce) is restricted for foreign investment.

On September 3, 2016, the Standing Committee of National People’s Congress, or the SCNPC, passed the Decision of the Standing Committee of the National People’s Congress on Revising Four Laws including the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises, or the Decision, which became effective on October 1, 2016. According to the Decision, the establishment, operation period and its extension, breakup, merger or any other major changes of a foreign-invested enterprise, or the FIE, in a sector not subject to special entry administrative measures will be simplified by going through government record-filing instead of a government approval process. According to the Announcement of the NDRC and the MOFCOM [2016] No.22 issued on October 8, 2016, the special entry administrative measures shall be applicable and implemented to the restricted foreign investment industries, prohibited foreign investment industries and encouraged foreign investment industries which have requirements as to shareholding and qualifications of senior management stipulated in the then-effective Catalogue. At the same date, the MOFCOM promulgated the Provisional Filing Administrative Measures on Establishment and Modifications for Foreign Investment Enterprises, as amended on July 30, 2017 and June 29, 2018, which request the establishment and modifications of FIEs not subject to the special entry administrative measures, to be filed with the delegated commerce authorities and specify the procedures and requirements for such filing in detail.

Foreign Investment Law

On March 15, 2019, the SCNPC promulgated the Foreign Investment Law, which will become effective on January 1, 2020 and replace the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Foreign Owned Enterprise Law, together with their implementation rules and ancillary regulations. The organization form, organization and activities of foreign-invested enterprises shall be governed, among others, by the PRC Company Law and the PRC Partnership Enterprise Law. Foreign-invested enterprises established before the implementation of the Foreign Investment Law may retain the original business organization and so on within five years after the implementation of this Law.

 

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Regulation Relating to Value-added Telecommunications Services

Foreign Investment in Value-Added Telecommunications

Foreign direct investment in telecommunications companies in China is regulated by the Administrative Provisions on of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which were issued by the State Council on December 11, 2001 and amended on September 10, 2008 and February 6, 2016, respectively. The FITE Regulations stipulate that a foreign-invested telecommunications enterprise in the PRC, or the FITE, must be established as a sino-foreign equity joint venture for operations in the PRC. Under the FITE Regulations and in accordance with WTO-related agreements, the foreign party investing in a FITE engaging in value-added telecommunications services may hold up to 50% of the ultimate equity interests of the FITE. In addition, the major foreign party to be the shareholder of the FITE must satisfy a number of stringent performance and operational experience requirements, including demonstrating a good track record and experience in operating a value-added telecommunications business. The FITE that meets these requirements must obtain approvals from the Ministry of Industry and Information Technology, or the MIIT, and the MOFCOM or their authorized local branches, which retain considerable discretion in granting approvals. Furthermore, the foreign party investing in e-commerce business, as a type of value-added telecommunications services, has been allowed to hold up to 100% of the ultimate equity interests of the FITE based on the Circular of the Ministry of Industry and Information Technology on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors in Online Data Processing and Transaction Processing (Operating E-commerce) Business issued on June 19, 2015 and the current effective Catalogue of Telecommunications Services, or the Telecom Catalogue.

On July 7, 2006, the Ministry of Information Industry of the PRC, or the MII, which is the predecessor of the MIIT, promulgated the Notice of the Ministry of Information Industry on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Services, or the MII Notice, which reiterates certain requirements of the FITE Regulations and strengthens the administration by the MII. Under the MII Notice, if a foreign investor intends to invest in PRC value-added telecommunications business, the FITE must be established to apply for the relevant telecommunications business licenses. In addition, a domestic company that holds a license for the provision of value-added telecommunications services is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used in the provision of value-added telecommunications services must be owned by the license holder or its shareholders. The MII Notice also requires that each value-added telecommunications services license holder have appropriate facilities for its approved business operations and to maintain such facilities in the business regions covered by its license. The value-added telecommunications services license holder shall perfect relevant measures for safeguarding the network and information, establish relevant administrative system for information safety, set up the procedures for handling emergencies of network and information safety and implement the liabilities of information safety.

Telecommunications Regulations

The Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, promulgated on September 25, 2000 and amended on July 29, 2014, February 6, 2016 and June 6, 2019 respectively, are the primary PRC laws governing telecommunications services, and set out the general framework for the provision of telecommunications services by domestic PRC companies. The Telecom Regulations require that telecommunications service providers shall obtain operating licenses prior to commencing operations. The Telecom Regulations draw a distinction between basic telecommunications services and value-added telecommunications services. The Telecom Catalogue, promulgated by the MII on February 21, 2003 and amended by the MIIT on December 28, 2015 and issued as an attachment to the Telecom Regulations, identifies Internet information services and online data processing and transaction processing as value-added telecommunications services.

 

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On July 3, 2017, the MIIT issued the revised Administrative Measures for the Licensing of Telecommunications Business, or the Telecom License Measures, which became effective in September 1, 2017, to supplement the Telecom Regulations. The Telecom License Measures require that an operator of value-added telecommunications services obtain a value-added telecommunications business operating license from the MIIT or its provincial level counterparts. The term of a value-added telecommunications business license is five years and subject to annual inspection.

Internet Information Services

On September 25, 2000, the State Council promulgated the Measures for the Administration of Internet Information Services, or the ICP Measures, as amended on January 8, 2011. Under the ICP Measures, the internet information service is categorized into commercial internet information services and non-commercial internet services. The operators of non-commercial internet information services must file with relevant governmental authorities and operators of commercial internet information services in China must obtain a license for internet information provision, or the ICP License, from the relevant governmental authorities, and the provision of particular information services, such as news, publishing, education, healthcare, medicine and medical device, and must also comply with relevant laws and regulations and obtain the approval from competent governmental authorities.

Internet information service providers are required to monitor their websites. They may not post or disseminate any content that falls within prohibited categories provided by laws or administrative regulations and must stop providing any such content on their websites. The PRC government may order ICP License holders that violate the content restrictions to correct those violations and revoke their ICP Licenses under serious conditions.

The MIIT released the Circular on Regulating the Use of Domain Names in Internet Information Services on November 27, 2017, effective from January 1, 2018, which provides that the domain names used by the Internet information service provider in providing Internet information services shall be registered and owned by such Internet information service provider, and if the Internet information service provider is a legal entity, the domain name registrant shall be the legal entity (or any of its shareholders), or its principal or senior manager.

Mobile Internet Applications Information Services

On June 28, 2016, the Cyberspace Administration of China, or the CAC, promulgated the Administrative Provisions on Mobile Internet Applications Information Services, or the APP Provisions, which became effective on August 1, 2016. Under the APP Provisions, mobile application providers are prohibited from engaging in any activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties, and may not produce, copy, issue or disseminate through internet mobile applications any content prohibited by laws and regulations. The APP Provisions also require application providers to procure relevant qualifications required by laws and regulations to provide services through such applications.

Regulations Relating to Medical Devices Operation and Service

Medical Devices Operation

According to the Regulations on the Supervision and Administration of Medical Devices, which was promulgated by the State Council on January 4, 2000 and amended on March 7, 2014 and May 4, 2017, respectively, and the Measures on the Supervision and Administration of the Business Operations of Medical Devices, which was promulgated by the State Food and Drug Administration, or the SFDA, the predecessor of the China Food and Drug Administration, or the CFDA, on July 30, 2014 and amended on November 17, 2017 and other relevant laws and regulations, business operations of medical devices are regulated based on the degree of risks involving the medical devices, which are divided into three categories. Operation of Class I medical

 

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devices does not require a license or record-filing, while operations of Class II medical devices and Class III medical devices are subject to record-filing and licensing requirements, respectively. An entity engaging in the operation of medical devices shall meet certain requirements with respect to its management system, personnel, facilities etc., and shall apply for approval to operate Class III medical devices and make record-filing with relevant governmental authority to operate Class II medical devices. The valid term of medical devices operation permit is five years.

Regulations Relating to Online Operation of Drugs and Medical Devices

Internet Drug Information Service

The Administrative Measures for Internet Drug Information Service, or the Internet Drug Measures, was promulgated by the SFDA on July 8, 2004 and amended by the CFDA on November 17, 2017, pursuant to which the internet drug information service means service activities of providing online users with drug (including medical device) information via Internet and is divided into commercial internet drug information services and non-commercial internet drug information services. The website operator that provides drugs (including medical devices) information services must obtain an Internet Drug Information Service Qualification Certificate from the competent counterpart of the CFDA. The valid term for an Internet Drug Information Service Qualification Certificate is five years and may be renewed at least six months prior to its expiration date upon a re-examination by the relevant governmental authorities.

Furthermore, as requested by Internet Drug Measures, the information relating to drugs shall be accurate and scientific in nature, and its provision shall comply with the relevant laws and regulations. No product information of narcotic drugs, psychotropic drugs, medicinal toxic drugs, radiopharmaceutical, detoxification drugs and pharmaceutics made by medical institutes shall be published on the website. In addition, advertisements relating to drugs (including medical devices) shall be approved by the CFDA or its competent counterparts.

Online Sales of Medical Device

Under PRC laws and regulations, the medical devices are allowed to be sold online in general.

On December 20, 2017, the CFDA promulgated the Measures for the Administration and Supervision of Online Sales of Medical Devices, or the Online Medical Devices Sales Measures, which became effective on March 1, 2018. According to the Online Medical Devices Sales Measures, enterprises engaged in online sales of medical devices must be medical device manufacture and operation enterprises that have obtained a medical devices production license or operation license or have been filed for record, unless such licenses or record-filing is not required by laws and regulations, and the third-party platform for provision of online medical devices transaction services shall obtain an Internet Drug Information Service Qualification Certificate. Enterprises engaged in online sales of medical devices and providers of third-party platforms providing online trading service for medical devices shall take technical measures to ensure that the data and materials of online sales of medical devices are authentic, complete and traceable, for example the records of sales information of medical devices shall be kept for two years after the lifetime of the medical devices, and for no less than five years in case of no lifetime limit, or be kept permanently in case of implanted medical devices.

Regulations Relating to Online Trading and E-Commerce

On January 26, 2014, the State Administration for Industry and Commerce, or the SAIC, the predecessor of the General Office of the State Administration for Market Regulation) promulgated the Administrative Measures for Online Trading, or the Online Trading Measures, which became effective on March 15, 2014, to regulate all operating activities for product sales and services provision via the internet (including mobile internet). It stipulates the obligations of online products operators and services providers and certain special requirements

 

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applicable to third-party platform operators. Furthermore, the MOFCOM promulgated the Provisions on the Procedures for Formulating Transaction Rules of Third-Party Online Retail Platforms (Trial) on December 24, 2014, which became effective on April 1, 2015, to guide and regulate the formulation, revision and enforcement of transaction rules by online retail third-party platforms operators. These measures impose more stringent requirements and obligations on third-party platform operators. For example, third-party platform operators are obligated to make public and file their transaction rules with MOFCOM or their respective provincial counterparts, examine and register the legal status of each third-party merchant selling products or services on their platforms and display on a prominent location on a merchant’s webpage the information stated in the merchant’s business license or a link to its business license. Where third-party platform operators also conduct self-operation of products or services on the platform, these third-party platform operators must make a clear distinction between their online direct sales and sales of third-party merchant products on their third-party platforms to avoid misleading the consumers.

After the issuance of Online Trading Measures, the SAIC has issued a number of guidelines and implementing rules aimed at adding greater specificity to these regulations and continues to consider and issue guidelines and implementing rules in this industry. For example, the Ministry of Finance, or the MOF, the General Administration of Customs, or the GAC, and the SAT issued the Circular on Tax Policy for Cross-Border E-commerce Retail Imports on March 24, 2016, which became effective on April 8, 2016 and the Circular on Improving Tax Policies for Cross-Border E-commerce Retail Imports on November 29, 2018, which became effective on January 1, 2019, to regulate cross-border e-commerce trading and introduced the concept of the List of Imported Commodities Retailed through Cross-Border E-commerce, or the Cross-Border E-Commerce Goods List, which has been issued and updated by the three authorities together with other relevant authorities from time to time. The Cross-Border E-Commerce Goods List has been recently updated in November 2018 and the Circular on Improving the Regulation of Cross-border E-commerce Retail Imports issued by the MOFCOM, the NDRC, the MOF, the GAC, the SAT and the SAIC in November 2018 to further implement the rules and pursuant to which, qualified retail imported goods on cross-border e-commerce platforms shall be treated as personal items which are not subject to stricter regulations and higher tax rates applicable to normal imported goods in 37 cross-border e-commerce trial cities.

On August 31, 2018, the SCNPC promulgated the E-Commerce Law of the People’s Republic of China, or the E-Commerce Law, which took effect on January 1, 2019. The promulgation of the E-Commerce Law established the basic legal framework for the development of China’s E-Commerce business and clarified the obligations of the operators of E-Commerce platforms and the possible legal consequences if operators of E-commerce platforms are found to be in violation of legally prescribed obligations. For example, pursuant to the E-Commerce Law, an operator of an E-commerce platform shall give appropriate reminders to and provide convenience for the operators on its platform who have not completed the formalities for the registration of market entities to complete such formalities. Also, an operator of an E-commerce platform is legally obligated to verify and register the information of the business operators on its platform, prepare emergency plans in response to possible cyber security incidents, keep the transaction information for no less than three years from the date on which the transaction has been completed, establish rules on the protection of intellectual property rights and conform to the principle of openness, fairness and justice. Violation of the provisions of the E-Commerce Law may entail being ordered to make corrections within a prescribed period of time, confiscation of gains illegally obtained, fines, suspension of business, inclusion of such violations in the credit records and possible civil liabilities.

Regulations Relating to Food Business

The Food Safety Law of the People’s Republic of China, which was effective as from June 1, 2009 and amended by the SCNPC on April 24, 2015, December 29, 2018, and became effective on the same date, and the Implementation Regulations of the Food Safety Law of the People’s Republic of China, which took effect as from July 20, 2009 and were amended by the State Council on February 6, 2016, regulate food safety and set up a system of the supervision and administration of food safety and adopt food safety standards. The State Council

 

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implements a licensing system for the food production and transaction. To engage in food production, sale or catering services, the business operator shall obtain a license in accordance with the laws. Furthermore, the State Council implements strict supervision and administration for special categories of foods such as healthcare foods, formula foods for special medical purposes and infant formula foods.

The Administrative Measures for Food Operation Licensing, promulgated by the CFDA on August 31, 2015 and amended on November 17, 2017 regulates the food business licensing activities, strengthens the supervision and management of food business and ensures food safety. Food business operators shall obtain one Food Business License for one business venue where they engage in food business activities. The valid term of a food business license is five years.

According to the Administration Measures of Health-care Food Products issued by the Ministry of Health, or the MOH, on March 15, 1996, any food claimed to have the effect of health-care must be identified by the MOH.

Regulations Relating to Product Quality and Consumers Protection

According to the Product Quality Law of the People’s Republic of China, which was effective as from September 1, 1993 and amended by the SCNPC on July 8, 2000, August 27, 2009 and December 29, 2018 respectively, products for sale must satisfy relevant safety standards and sellers shall adopt measures to maintain the quality of products for sale. Sellers may not mix impurities or imitations into products, or pass counterfeit goods off as genuine ones, or defective products as good ones or substandard products as standard ones. For sellers, any violation of state or industrial standards for health and safety or other requirements may result in civil liabilities and administrative penalties, such as compensation for damages, fines, confiscation of products illegally manufactured or sold and the proceeds from the sales of such products illegally manufactured or sold and even revoking business license; in addition, severe violations may subject the responsible individual or enterprise to criminal liabilities.

According to the Consumers Rights and Interests Protection Law of the People’s Republic of China, or the Consumers Rights and Interests Protection Law, which became effective on January 1, 1994 and was amended by the SCNPC on August 27, 2009 and October 25, 2013 respectively, business operators should guarantee that the products and services they provide satisfy the requirements for personal or property safety, and provide consumers with authentic information about the quality, function, usage and term of validity of the products or services. The consumers whose interests have been damaged due to the products or services that they purchase or accept on the internet trading platforms may claim damages to sellers or service providers. Where the operators of the online trading platforms are unable to provide the real names, addresses and valid contact details of the sellers or service providers, the consumers may also claim damages to the operators of the online trading platforms. Operators of online trading platforms that clearly knew or should have known that sellers or service providers use their platforms to infringe upon the legitimate rights and interests of consumers but fail to take necessary measures must bear joint and several liabilities with the sellers or service providers. Moreover, if business operators deceive consumers or knowingly sell substandard or defective products, they should not only compensate consumers for their losses, but also pay additional damages equal to three times the price of the goods or services.

On January 6, 2017, the SAIC issued the Interim Measures for Seven-day Unconditional Return of Online Purchased Goods, which became effective on March 15, 2017, further clarifying the scope of consumers’ rights to make returns without a reason, including exceptions, return procedures and online trading platform operators’ responsibility to formulate seven-day unconditional return rules and related consumer protection systems, and supervise the merchants for compliance with these rules.

Regulations Relating to Pricing

In China, the prices of a very small number of products and services are guided or fixed by the government. According to the Pricing Law of the People’s Republic of China, or the Pricing Law, promulgated by the SCNPC

 

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on December 29, 1997 and became effective on May 1, 1998, business operators must, as required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, origin of production, specifications and other related particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. Business operators must not commit the specified unlawful pricing activities, such as colluding with others to manipulate the market price, using false or misleading prices to deceive consumers to transact, or conducting price discrimination against other business operators. Failure to comply with the Pricing Law may subject business operators to administrative sanctions such as warning, ceasing unlawful activities, compensation, confiscating illegal gains and fines. The business operators may be ordered to suspend business for rectification or have their business licenses revoked under severe circumstances.

Regulations Relating to Management of Importing Goods

According to the Customs Law of the People’s Republic of China, promulgated by the SCNPC on January 22, 1987, amended on July 8, 2000, June 29, 2013, December 28, 2013, November 7, 2016 and November 4, 2017, and became effective as from November 5, 2017, unless otherwise provided for, the declaration of import or export commodities and the payment of duties may be made by the consignees or consigners themselves, and such formalities may also be completed by their entrusted customs brokers that have registered with the Customs. The consignees and consignors for imported or exported commodities and the customs brokers engaged in customs declaration shall register with the Customs for their declaration activities in accordance with the laws. The declaration of inward and outward articles and payment of duties on them may be made by the owners of the articles themselves or by the persons they have entrusted with the work.

According to the Foreign Trade Law of the People’s Republic of China, promulgated by the SCNPC on May 12, 1994, amended on April 6, 2004 and November 7, 2016, and effective as from November 7, 2016, and the Measures for the Archival Filing and Registration of Foreign Trade Business Operators, promulgated by the MOFCOM on June 25, 2004 and became effective on July 1, 2004 and further revised on August 18, 2016, foreign trade operators engaged in goods or technology import and export shall go through the registration for record formalities with the MOFCOM or its entrusted institutions, except for those that are exempted from the registration for record formalities in accordance with the laws, administrative regulations and the rules of the MOFCOM. Customs will decline to carry out customs clearance and inspection procedures for the import and export of goods for operators that fail to go through the registration for record formalities.

Pursuant to the Notice of the Ministry of Commerce on Relevant Issues Concerning the Filing and Registration of Right to Foreign Trade of Foreign-invested Enterprises issued by the MOFCOM on August 17, 2004 and effective as of the same date, any FIEs established after July 1, 2004 that engages in import or export of self-use or self-produced goods and technologies of this enterprise need not go through the registration for record formalities for foreign trade operators.

The principal regulations on the inspection of import and export of commodities are set out in the Import and Export Commodity Inspection Law of the People’s Republic of China promulgated by the SCNPC on February 21, 1989 and amended on April 28, 2002, June 29, 2013, April 27, 2018 and December 29, 2018 and its implementation rules. According to the aforesaid laws and regulations, the imported and exported commodities that are subject to compulsory inspection listed in the catalogue compiled by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC shall be inspected by the commodity inspection authorities, and the imported and exported commodities that are not subject to statutory inspection shall be subject to random inspection. Consignees and consignors or their entrusted agents may apply for inspection to the commodity inspection authorities.

Pursuant to the Administrative Measures for the Import and Export of Goods of the People’s Republic of China which were issued by the State Council on December 10, 2001 and became effective on January 1, 2002, the PRC government implements a unified administrative system for the import and export of goods, which

 

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allows free import and export of goods and maintains the fairness and orderliness of the import and export of goods according to law. Unless clearly provided in laws and administrative regulations that the import or export of goods is forbidden or restricted, no entity or individual may establish or maintain prohibitive or restrictive measures over the import and export of goods.

Regulations Relating to Leasing

Pursuant to the Law on Administration of Urban Real Estate of the People’s Republic of China promulgated by the SCNPC on July 5, 1994 and amended on August 30, 2007 and August 27, 2009, when leasing premises, the lessor and lessee are required to enter into a written lease contract, containing such provisions as the leasing term, use of the premises, rental and repair liabilities, and other rights and obligations of both parties. Both lessor and lessee are also required to register the lease with the real estate administration department. If the lessor and lessee fail to go through the registration procedures, both lessor and lessee may be subject to fines.

According to the Contract Law of the People’s Republic of China, the lessee may sublease the leased premises to a third party, subject to the consent of the lessor. Where the lessee subleases the premises, the lease contract between the lessee and the lessor remains valid. The lessor is entitled to terminate the lease contract if the lessee subleases the premises without the consent of the lessor. In addition, if the lessor transfers the premises, the lease contract between the lessee and the lessor will still remain valid.

Pursuant to the Property Law of the People’s Republic of China, if a mortgagor leases the mortgaged property before the mortgage contract is executed, the previously established leasehold interest will not be affected by the subsequent mortgage; and where a mortgagor leases the mortgaged property after the creation and registration of the mortgage interest, the leasehold interest will be subordinated to the registered mortgage.

Regulations Relating to Advertising

In 1994, the SCNPC promulgated the Advertising Law of the People’s Republic of China, or the Advertising Law, which was recently revised on April 24, 2015, October 26, 2018 and became effective on the same date. The Advertising Law regulates commercial advertising activities in the PRC and sets out the obligations of advertisers, advertising operators, advertising publishers and advertisement endorser, and prohibits any advertisement from containing any obscenity, pornography, gambling, superstition, terrorism or violence-related content. Any advertiser in violation of such requirements on advertisement content will be ordered to cease publishing such advertisements and imposed a fine ranging from RMB200,000 to RMB1,000,000; in severe circumstances, the business license of such advertiser may be revoked, and the relevant authorities may revoke the approval document for advertisement examination and refuse to accept applications submitted by such advertiser for one year. In addition, any advertising operator or advertising publisher in violation of such requirements will be imposed a fine ranging from RMB200,000 to RMB1,000,000, and the advertisement fee received will be confiscated; in severe circumstances, the business license of such advertising operator or advertising publisher may be revoked.

The Interim Measures for the Administration of Internet Advertising, or the Internet Advertising Measures, regulating the internet-based advertising activities were adopted by the SAIC on July 4, 2016 and became effective on September 1, 2016. According to the Internet Advertising Measures, internet advertisers are responsible for the authenticity of the advertisements content and all online advertisements must be marked “Advertisement” so that viewers can easily identify them as such. Publishing and circulating advertisements through the Internet shall not affect the normal use of the Internet by users. It is not allowed to induce users to click on the content of advertisements by any fraudulent means, or to attach advertisements or advertising links in the emails without permission.

The Measures for the Examination of Medical Device Advertisements were released by the MOH, the SAIC and the SFDA on April 7, 2009, and stipulates that advertisements for medical devices shall be examined and

 

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approved by drug administrative authority at provincial level, and advertisements shall be submitted to the SFDA by the examination authority for record-filing.

The Provisional Regulation on the Release of Food Advertisements released by the SAIC on December 30, 1996 and amended on December 3, 1998, stipulates that it is prohibited for advertisers to expressly or impliedly indicate the health-care effects of ordinary foods. It is also prohibited to compare the effects of the health-care food with other health-care food or medicines. And the contents of a health-care food advertisement shall follow the specification and the label approved by the health administrative department of the State Council, and it is prohibited to expand the scope arbitrarily.

Regulations relating to Internet Information Security and Privacy Protection

PRC government authorities have enacted laws and regulations with respect to internet information security and protection of personal information from any abuse or unauthorized disclosure, and which includes the Decision of the Standing Committee of the National People’s Congress on Internet Security Protection enacted and amended by the SCNPC on December 28, 2000 and August 27, 2009, respectively, the Provisions on the Technical Measures for Internet Security Protection issued by the Ministry of Public Security on December 13, 2005 and took effect on March 1, 2006, the Decision of the Standing Committee of the National People’s Congress on Strengthening Network Information Protection promulgated by the SCNPC on December 28, 2012, the Several Provisions on Regulating the Market Order of Internet Information Services promulgated by the MIIT on December 29, 2011, and the Provisions on Protection of Personal Information of Telecommunication and Internet Users released by the MIIT on July 16, 2013. Internet information in China is regulated and restricted from a national security standpoint.

The Provisions on Protection of Personal Information of Telecommunication and Internet Users regulate the collection and use of users’ personal information in the provision of telecommunications services and Internet information services in the PRC. Telecommunication business operators and Internet service providers are required to institute and disclose their own rules for the collecting and use of users’ information. Telecommunication business operators and Internet service providers must specify the purposes, manners and scopes of information collection and uses, obtain consent of the relevant citizens, and keep the collected personal information confidential. Telecommunication business operators and Internet service providers are prohibited from disclosing, tampering with, damaging, selling or illegally providing others with, collected personal information. Telecommunication business operators and Internet service providers are required to take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage or loss. Once users terminate the use of telecommunications services or Internet information services, telecommunications business operators and Internet information service providers shall stop the collection and use of the personal information of users and provide the users with services for deregistering their account numbers.

The Provisions on Protecting Personal Information of Telecommunication and Internet Users further define the personal information of user to include user name, birth date, identification number, address, phone number, account number, passcode, and other information that may be used to identify the user independently or in combination with other information and the timing, places, etc. of the use of services by the users. Furthermore, according to the Interpretations on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information, or the Interpretations, issued by the Supreme People’s Court and the Supreme People’s Procuratorate on May 8, 2017 and took effect on June 1, 2017, personal information means various information recorded electronically or through other manners, which may be used to identify individuals or activities of individuals, including but not limited to the name, identification number, contact information, address, user account number and passcode, property ownership and whereabouts.

On November 1, 2015, the Ninth Amendment to the Criminal Law of the People’s Republic of China issued by the SCNPC became effective, pursuant to which, any internet service provider that fails to comply with

 

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obligations related to internet information security administration as required by applicable laws and refuses to rectify upon order is subject to criminal penalty for (i) any large-scale dissemination of illegal information; (ii) any severe consequences due to the leakage of the user information; (iii) any serious loss of criminal evidence; or (iv) other severe circumstances. Furthermore, any individual or entity that (i) sells or distributes personal information in a manner which violates relevant regulations, or (ii) steals or illegally obtain any personal information is subject to criminal penalty in severe circumstances.

On June 1, 2017, the Cyber Security Law of the People’s Republic of China, or the Cyber Security Law, promulgated by SCNPC took effect, which is formulated to maintain the network security, safeguard the cyberspace sovereignty, national security and public interests, protect the lawful rights and interests of citizens, legal persons and other organizations, and requires that a network operator, which includes, among others, internet information services providers, take technical measures and other necessary measures to safeguard the safe and stable operation of the networks, effectively respond to the network security incidents, prevent illegal and criminal activities, and maintain the integrity, confidentiality and availability of network data. The Cyber Security Law reaffirms the basic principles 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 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. After the release of the Cyber Security Law, on May 2, 2017, the CAC issued the Measures for Security Reviews of Network Products and Services (Trial), or the Review Measures, which become effective on June 1, 2017. The Review Measures establish the basic framework and principle for national security reviews of network products and services.

Regulations Relating to Intellectual Property

China has adopted comprehensive legislation governing intellectual property rights, including copyrights, trademarks, patents and domain names. China is a signatory to the primary international conventions on intellectual property rights and has been a member of the Agreement on Trade Related Aspects of Intellectual Property Rights since its accession to the World Trade Organization in December 2001.

Copyright

On September 7, 1990, the SCNPC promulgated the Copyright Law of the People’s Republic of China, or the Copyright Law, effective on June 1, 1991 and amended on October 27, 2001 and February 26, 2010, respectively. The amended Copyright Law extends copyright protection to internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the Copyright Protection Centre of China.

Under the Regulations on the Protection of the Right to Network Dissemination of Information that took effect on July 1, 2006 and was amended on January 30, 2013, it is further provided that an Internet information service provider may be held liable under various situations, including that if it knows or should reasonably have known a copyright infringement through the Internet and the service provider fails to take measures to remove or block or disconnect links to the relevant content, or, although not aware of the infringement, the Internet information service provider fails to take such measures upon receipt of the copyright holder’s notice of such infringement.

In order to further implement the Regulations on Computer Software Protection, promulgated by the State Council on December 20, 2001 and amended on January 8, 2011 and January 30, 2013, respectively, the National

 

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Copyright Administration issued the Measures for the Registration of Computer Software Copyright on February 20, 2002, which specify detailed procedures and requirements with respect to the registration of software copyrights.

Trademark

According to the Trademark Law of the People’s Republic of China promulgated by the SCNPC on August 23, 1982, and amended on February 22, 1993, October 27, 2001, August 30, 2013 and April 23, 2019, respectively, the Trademark Office of the SAIC is responsible for the registration and administration of trademarks in China. The SAIC under the State Council has established a Trademark Review and Adjudication Board for resolving trademark disputes. Registered trademarks are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six additional months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for ten years. On April 29, 2014, the State Council issued the revised the Implementing Regulations of the Trademark Law of the People’s Republic of China, which specified the requirements of applying for trademark registration and renewal.

Patent

According to the Patent Law of the People’s Republic of China, or the Patent Law, promulgated by the SCNPC on March 12, 1984 and amended on September 4, 1992, August 25, 2000 and December 27, 2008, respectively, and the Implementation Rules of the Patent Law of the People’s Republic of China, or the Implementation Rules of the Patent Law, promulgated by the State Council on June 15, 2001 and revised on December 28, 2002 and January 9, 2010, the patent administrative department under the State Council is responsible for the administration of patent-related work nationwide and the patent administration departments of provincial or autonomous regions or municipal governments are responsible for administering patents within their respective administrative areas. The Patent Law and Implementation Rules of the Patent Law provide for three types of patents, namely “inventions”, “utility models” and “designs”. Invention patents are valid for twenty years, while utility model patents and design patents are valid for ten years, from the date of application. The Chinese patent system adopts a “first come, first file” principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who files the application first. An invention or a utility model must possess novelty, inventiveness and practical applicability to be patentable. Third Parties must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the unauthorized use constitutes an infringement on the patent rights.

Domain Names

On May 28, 2012, the China Internet Network Information Center, or the CNNIC, issued the Implementing Rules for Domain Name Registration which took effect on May 29, 2012 setting forth the detailed rules for registration of domain names. On August 24, 2017, the MIIT promulgated the Administrative Measures for Internet Domain Names, or the Domain Name Measures, which became effective on November 1, 2017. The Domain Name Measures regulate the registration of domain names, such as the China’s national top-level domain name “.CN”. The CNNIC issued the Measures of the China Internet Network Information Center for the Resolution of Country Code Top-Level Domain Name Disputes on September 9, 2014, which took effect on November 21, 2014, pursuant to which domain name disputes shall be accepted and resolved by the dispute resolution service providers as accredited by the CNNIC.

Regulations Relating to Foreign Exchange

The principal regulations governing foreign currency exchange in China are the Administrative Regulations on Foreign Exchange of the People’s Republic of China, or the Foreign Exchange Administrative Regulation,

 

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which was promulgated by the State Council on January 29, 1996, which became effective on April 1, 1996 and was subsequently amended on January 14, 1997 and August 5, 2008 and the Administrative Regulations on Foreign Exchange Settlement, Sales and Payment which was promulgated by the People’s Bank of China, or the PBOC, on June 20, 1996 and became effective on July 1, 1996. Under these regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from State Foreign Exchange Administration of the People’s Republic of China, or the SAFE, by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items such as the repayment of foreign currency-denominated loans, direct investment overseas and investments in securities or derivative products outside of the PRC. FIEs are permitted to convert their after tax dividends into foreign exchange and to remit such foreign exchange out of their foreign exchange bank accounts in the PRC.

On March 30, 2015, SAFE promulgated the Notice on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or the SAFE Circular 19, which took effect on June 1, 2015. According to SAFE Circular 19, the foreign currency capital contribution to an FIE in its capital account may be converted into RMB on a discretional basis.

On June 9, 2016, the SAFE promulgated the Circular on Reforming and Regulating Policies on the Management of the Settlement of Foreign Exchange of Capital Accounts, or the SAFE Circular 16. The SAFE Circular 16 unifies the discretional foreign exchange settlement for all the domestic institutions. The Discretional Foreign Exchange Settlement refers to the foreign exchange capital in the capital account which has been confirmed by the relevant policies subject to the discretional foreign exchange settlement (including foreign exchange capital, foreign loans and funds remitted from the proceeds from the overseas listing) can be settled at the banks based on the actual operational needs of the domestic institutions. The proportion of Discretional Foreign Exchange Settlement of the foreign exchange capital is temporarily determined as 100%. Violations of SAFE Circular 19 or SAFE Circular 16 could result in administrative penalties in accordance with the Foreign Exchange Administrative Regulation and relevant provisions.

Furthermore, SAFE Circular 16 stipulates that the use of foreign exchange incomes of capital accounts by FIEs shall follow the principles of authenticity and self-use within the business scope of the enterprises. The foreign exchange incomes of capital accounts and capital in RMB obtained by the FIE from foreign exchange settlement shall not be used for the following purposes: (i) directly or indirectly used for the 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 financial schemes other than bank guaranteed products unless otherwise provided by relevant laws and regulations; (iii) used for granting loans to non-affiliated enterprises, unless otherwise permitted by its business scope; and (iv) used for the construction or purchase of real estate that is not for self-use (except for the real estate enterprises).

Regulations Relating to Dividend Distributions

The principal regulations governing distribution of dividends of wholly foreign-owned enterprise, or the WFOE, include the Wholly Foreign-owned Enterprise Law of the People’s Republic of China, which was promulgated on April 12, 1986 and amended on October 31, 2000 and September 3, 2016 respectively, and the Implementing Rules for the Wholly Foreign-owned Enterprise Law of the People’s Republic of China, which was promulgated on December 12, 1990 and amended on April 12, 2001 and February 19, 2014, respectively. Under these regulations, WFOEs in China may pay dividends only out of their accumulated profits, if any, determined in accordance with the PRC accounting standards and regulations. In addition, foreign investment enterprises in the PRC are required to allocate at least 10% of their accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.

 

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Regulations Relating to Offshore Special Purpose Companies Held by PRC Residents

SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents on May 10, 2013, which became effective on May 13, 2013 and which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.

SAFE promulgated Notice on Issues Relating to Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or the SAFE Circular 37, on July 4, 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and term of operation), capital increase or capital reduction, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purposes Vehicles.

SAFE further enacted the Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment, or the SAFE Circular 13, which allows PRC residents or entities to register with qualified banks in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. However, remedial registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37 continue to fall under the jurisdiction of the relevant local branch of SAFE. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from distributing profits to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary.

On January 26, 2017, SAFE issued the Notice on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange Control, or the SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.

Regulations Relating to Stock Incentive Plans

According to the Notice of the State Administration of Foreign Exchange on Issues Relating to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company, or the Share Incentive Rules, which was issued on February 15, 2012 and other regulations, directors, supervisors, senior management and other employees participating in any share incentive plan of an overseas publicly-listed company who are PRC citizens or non-PRC citizens residing in China for a continuous period of not less than one year, subject to certain exceptions, are required to register with the SAFE. All such participants need to authorize a qualified PRC agent, such as a PRC subsidiary of the overseas publicly-listed company to register with the SAFE and handle foreign exchange matters such as opening accounts, transferring and settlement of the relevant proceeds. The Share Incentive Rules further require an offshore agent to be designated

 

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to handle matters in connection with the exercise of share options and sales of proceeds for the participants of the share incentive plans. Failure to complete the said SAFE registrations may subject our participating directors, supervisors, senior management and other employees to fines and legal sanctions.

Regulations Relating to Taxation

Income tax

According to the Enterprise Income Tax Law of the People’s Republic of China, or the EIT Law, which was promulgated on March 16, 2007, became effective as from January 1, 2008 and amended on February 24, 2017 and December 29, 2018, an enterprise established outside the PRC with de facto management bodies within the PRC is considered as a resident enterprise for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. The Implementing Rules of the Enterprise Income Law of the People’s Republic of China, or the Implementing Rules of the EIT Law, defines a de facto management body as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Non-PRC resident enterprises without any branches in the PRC pay an enterprise income tax in connection with their income originating from the PRC at the tax rate of 10%.

On February 3, 2015, the PRC State Administration of Taxation, or the SAT, issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Transfer of Assets by Non-Resident Enterprises, or the SAT Circular 7. The SAT Circular 7 repeals certain provisions in the Notice of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax on Income from Equity Transfer by Non-Resident Enterprises, or the SAT Circular 698, issued by SAT on December 10, 2009 and the Announcement on Several Issues Relating to the Administration of Income Tax on Non-resident Enterprises issued by SAT on March 28, 2011 and clarifies certain provisions in the SAT Circular 698. The SAT Circular 7 provides comprehensive guidelines relating to, and heightening the Chinese tax authorities’ scrutiny on, indirect transfers by a non-resident enterprise of assets (including assets of organizations and premises in PRC, immovable property in the PRC, equity investments in PRC resident enterprises), or the PRC Taxable Assets. For instance, when a non-resident enterprise transfers equity interests in an overseas holding company that directly or indirectly holds certain PRC Taxable Assets and if the transfer is believed by the Chinese tax authorities to have no reasonable commercial purpose other than to evade enterprise income tax, the SAT Circular 7 allows the Chinese tax authorities to reclassify the indirect transfer of PRC Taxable Assets into a direct transfer and therefore impose a 10% rate of PRC enterprise income tax on the non-resident enterprise. The SAT Circular 7 lists several factors to be taken into consideration by tax authorities in determining if an indirect transfer has a reasonable commercial purpose. However, regardless of these factors, the overall arrangements in relation to an indirect transfer satisfying all the following criteria will be deemed to lack a reasonable commercial purpose: (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly or indirectly from PRC Taxable Assets; (ii) at any time during the one year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or during the one year period before the indirect transfer, 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries and branches that directly or indirectly hold the PRC Taxable Assets are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC Taxable Assets is lower than the potential PRC tax on the direct transfer of those assets. On the other hand, indirect transfers falling into the scope of the safe harbors under the SAT Circular 7 will not be subject to PRC tax under the SAT Circular 7. The safe harbors include qualified group restructurings, public market trades and exemptions under tax treaties or arrangements.

On October 17, 2017, SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Circular 37, which took effect on December 1, 2017. According to the SAT Circular 37, the balance after deducting the equity net value from the equity transfer income shall be the

 

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taxable income amount for equity transfer income. Equity transfer income shall mean the consideration collected by the equity transferor from the equity transfer, including various income in monetary form and non-monetary form. Equity net value shall mean the tax computation basis for obtaining the said equity. The tax computation basis for equity shall be: (i) the capital contribution costs actually paid by the equity transferor to a Chinese resident enterprise at the time of investment and equity participation, or (ii) the equity transfer costs actually paid at the time of acquisition of such equity to the original transferor of the said equity. Where there is reduction or appreciation of value during the equity holding period, and the gains or losses may be confirmed pursuant to the rules of the finance and tax authorities of the State Council, the equity net value shall be adjusted accordingly. When an enterprise computes equity transfer income, it shall not deduct the amount in the shareholders’ retained earnings such as undistributed profits etc. of the investee enterprise, which may be distributed in accordance with the said equity. In the event of partial transfer of equity under multiple investments or acquisitions, the enterprise shall determine the costs corresponding to the transferred equity in accordance with the transfer ratio, out of all costs of the equity.

Under the SAT Circular 7 and the Law of the People’s Republic of China on the Administration of Tax Collection promulgated by the SCNPC on September 4, 1992 and newly amended on April 24, 2015, in the case of an indirect transfer, entities or individuals obligated to pay the transfer price to the transferor shall act as withholding agents. If they fail to make withholding or withhold the full amount of tax payable, the transferor of equity shall declare and pay tax to the relevant tax authorities within seven days from the occurrence of tax payment obligation. Where the withholding agent does not make the withholding, and the transferor of the equity does not pay the tax payable amount, the tax authority may impose late payment interest on the transferor. In addition, the tax authority may also hold the withholding agents liable and impose a penalty of ranging from 50% to 300% of the unpaid tax on them. The penalty imposed on the withholding agents may be reduced or waived if the withholding agents have submitted the relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with the SAT Circular 7.

Withholding tax on dividend distribution

The EIT Law prescribes a standard withholding tax rate of 20% on dividends and other China-sourced income of non-PRC resident enterprises which have no establishment or place of business in the PRC, or if established, the relevant dividends or other China-sourced income are in fact not associated with such establishment or place of business in the PRC. However, the Implementing Rules of the EIT Law which reduced the rate from 20% to 10%, became effective from January 1, 2008. However, a lower withholding tax rate might be applied if there is a tax treaty between China and the jurisdiction of the foreign holding companies, for example, pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under the Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends that the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5% upon receiving approval from the tax authority in charge.

Based on the Notice on Relevant Issues Relating to the Enforcement of Dividend Provisions in Tax Treaties issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, at their discretion, that a company benefits from such reduced income tax rate due to a structure or an arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment; and based on the Notice on the Interpretation and Recognition of Beneficial Owners in Tax Treaties, issued on October 27, 2009 by the SAT, and the Announcement on the Recognition of Beneficial Owners in Tax Treaties issued on June 29, 2012 by the SAT, conduit companies, which are established for the purpose of evading or reducing tax, or transferring or accumulating profits, shall not be recognized as beneficial owners and thus are not entitled to the above-mentioned reduced income tax rate of 5% under the Double Tax Avoidance Arrangement.

 

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Value-added tax

Pursuant to the Interim Regulations on Value-Added Tax of the People’s Republic of China, which was promulgated by the State Council on December 13, 1993 and amended on November 10, 2008, February 6, 2016 and November 19, 2017, and the Implementation Rules for the Interim Regulations on Value-Added Tax of the People’s Republic of China, which was promulgated by the MOF on December 25, 1993 and amended on December 15, 2008 and October 28, 2011, entities or individuals engaging in sale of goods, provision of processing services, repairs and replacement services or import of goods within the territory of the PRC shall pay value-added tax, or the VAT. Unless provided otherwise, the rate of VAT is 17% on sales and 6% on the services. On April 4, 2018, MOF and SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration of Taxation on Adjustment of Value-Added Tax Rates, or the Circular 32, according to which (i) for VAT taxable sales acts or import of goods originally subject to VAT rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%, respectively; (ii) for purchase of agricultural products originally subject to tax rate of 11%, such tax rate shall be adjusted to 10%; (iii) for purchase of agricultural products for the purpose of production and sales or consigned processing of goods subject to tax rate of 16%, such tax shall be calculated at the tax rate of 12%; (iv) for exported goods originally subject to tax rate of 17% and export tax refund rate of 17%, the export tax refund rate shall be adjusted to 16%; and (v) for exported goods and cross-border taxable acts originally subject to tax rate of 11% and export tax refund rate of 11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on May 1, 2018 and shall supersede existing provisions which are inconsistent with Circular 32.

Since January 1, 2012, the MOF and the SAT have implemented the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax, or the VAT Pilot Plan, which imposes VAT in lieu of business tax for certain “modern service industries” in certain regions and eventually expanded to nation-wide application in 2013. According to the Implementation Rules for the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax released by the MOF and the SAT on the VAT Pilot Program, the “modern service industries” include research, development and technology services, information technology services, cultural innovation services, logistics support, lease of corporeal properties, attestation and consulting services. The Notice on Comprehensively promoting the Pilot Plan of the Conversion of Business Tax to Value-Added Tax, which was promulgated on March 23, 2016, became effective on May 1, 2016 and amended on July 11, 2017, sets out that VAT in lieu of business tax be collected in all regions and industries.

On March 20, 2019, MOF, SAT and GAC jointly promulgated the Announcement on Relevant Policies for Deepening Value-Added Tax Reform, which became effective on April 1, 2019 and provides that (i) with respect to VAT taxable sales acts or import of goods originally subject to VAT rates of 16% and 10% respectively, such tax rates shall be adjusted to 13% and 9%, respectively; (ii) with respect to purchase of agricultural products originally subject to tax rate of 10%, such tax rate shall be adjusted to 9%; (iii) with respect to purchase of agricultural products for the purpose of production or consigned processing of goods subject to tax rate of 13%, such tax shall be calculated at the tax rate of 10%; (iv) with respect to export of goods and services originally subject to tax rate of 16% and export tax refund rate of 16%, the export tax refund rate shall be adjusted to 13%; and (v) with respect to export of goods and cross-border taxable acts originally subject to tax rate of 10% and export tax refund rate of 10%, the export tax refund rate shall be adjusted to 9%.

Regulations Relating to Employment

The Labor Contract Law of the People’s Republic of China, or the Labor Contract Law, and its implementation rules provide requirements concerning employment contracts between an employer and its employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. The Labor

 

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Contract Law and its implementation rules also require compensation to be paid upon certain terminations. In addition, if an employer intends to enforce a non-compete provision in an employment contract or non-competition agreement with an employee, it has to compensate the employee on a monthly basis during the term of the restriction period after the termination or expiry of the labor contract. Employers in most cases are also required to provide severance payment to their employees after their employment relationships are terminated.

Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located.

On December 28, 2012, the Labor Contract Law was amended to impose more stringent requirements on labor dispatch which became effective on July 1, 2013. Pursuant to the amended Labor Contract Law, the dispatched contract workers shall be entitled to equal pay for equal work as a fulltime employee of an employer, and they shall only be engaged to perform temporary, ancillary or substitute works, and an employer shall strictly control the number of dispatched contract workers so that they do not exceed certain percentage of total number of employees. “Temporary work” means a position with a term of less than six months; “auxiliary work” means a non-core business position that provides services for the core business of the employer; and “substitute worker” means a position that can be temporarily replaced with a dispatched contract worker for the period that a regular employee is away from work for vacation, study or for other reasons. According to the Interim Provisions on Labor Dispatch, or the Labor Dispatch Provisions, promulgated by the MOHRSS on January 24, 2014, which became effective on March 1, 2014, (i) the number of dispatched contract workers hired by an employer should not exceed 10% of the total number of its employees (including both directly hired employees and dispatched contract workers); (ii) in the case that the number of dispatched contract workers exceeds 10% of the total number of its employees at the time when the Labor Dispatch Provisions became effective (i.e., March 1, 2014), the employer shall formulate a plan to reduce the number of its dispatched contract workers to below the statutory cap prior to March 1, 2016, and (iii) such plan shall be filed with the local bureau of human resources and social security. Nevertheless, the Labor Dispatch Provisions do not invalidate the labor contracts and dispatch agreements entered into prior to December 28, 2012. In addition, the employer shall not hire any new dispatched contract worker before the number of its dispatched contract workers is reduced to below 10% of the total number of its employees.

Regulations Relating to Overseas Listing and M&A

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Rules on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and were amended on June 22, 2009. The M&A Rules, among other things, require offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC domestic enterprises or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC. Although (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to the M&A Rules; (ii) when we set up our offshore holding structure, ECMOHO Shanghai, currently our major PRC subsidiary, was a then existing foreign-invested entity and not a PRC domestic company as defined under the M&A Rules, and the acquisition by ECMOHO (Hong Kong) Health Technology Limited of the equity in ECMOHO Shanghai was not subject to the M&A Rules; and (iii) no provision in the M&A Rules clearly classifies contractual arrangements as a type of transaction subject to the M&A Rules, the interpretation and application of the regulations remain unclear, and this offering may

 

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ultimately require approval from the CSRC. 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.

The M&A Rules, and other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand.

In addition, according to the Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by the General Office of the State Council on February 3, 2011 and which became effective on March 4, 2011, the Rules on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors issued by the MOFCOM on August 25, 2011 and which became effective on September 1, 2011, 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 the MOFCOM, and the regulations prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual control arrangement.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information concerning our directors and executive officers.

 

Name

   Age   

Position

Zoe Wang    38    Co-Founder, Chairman & Chief Executive Officer, Director
Leo Zeng    43    Co-Founder & Chief Operating Officer, Director
Richard Wei    56    Chief Financial Officer
Greg Ye    49    Director
Rachel Sang    41    Director
Daniel Wang    32    General Manager – New Business, Director
Guangbin You    44    General Manager – XG Health

Zoe Wang currently serves as our Chairman and Chief Executive Officer. Prior to taking on this role, Ms. Wang had 18 years’ experience in marketing and e-commerce retail management with companies such as Shanghai Pingchengjingjie Advertising Co. Ltd. and Shanghai Yiheng Advertising Co. Ltd. Ms. Wang holds an associate degree in traditional Chinese medicine from Wuhu College of Traditional Chinese Medicine and a business qualification from Changjiang Business School. Ms. Wang is the spouse of Mr. Leo Zeng and the sister of Mr. Daniel Wang.

Leo Zeng currently serves as our Chief Operating Officer. Mr. Zeng has extensive experience in sales and marketing over 15 years in multiple industries. Mr. Zeng also has broad managerial skills, gained from his time as a co-founder and general manager of Hydrotech Marine & Offshore Technology Co. Ltd. Mr. Zeng holds a bachelor of marine engineering management degree from Dalian Maritime University, and a master of business administration degree from Fudan University. Mr. Zeng is the spouse of Ms. Zoe Wang and the brother-in-law of Mr. Daniel Wang.

Richard Wei currently serves as our Chief Financial Officer. Prior to joining us, Mr. Wei gained extensive experience as a chief financial officer, having worked in this position for over 15 years at companies such as Shanda Games, Spreadtrum Communications, Silicon Motion Technology Corporation, Kong Zhong Corporation and ASE Test Limited. Mr. Wei also held various roles at companies such as IBM, Morgan Stanley and Lehman Brothers. Mr. Wei holds a bachelor of science degree from the Massachusetts Institute of Technology and a master of business administration degree from Cornell University.

Daniel Wang currently serves as our General Manager – New Business. Mr. Wang has served in various leadership roles since our beginning. He is currently in charge of our health supplements and food division, household healthcare equipment division, global business development and the management of new business. Mr. Wang has over nine years of experience in e-commerce and retail operations, and over seven years of experience in e-commerce management. Mr. Wang holds a bachelor degree in engineering management from Tongling University.

Greg Ye currently serves as a Non-Executive Director on our board of directors. Mr. Ye brings almost 20 years of experience in private equity, executive management, start-up and consulting to our board of directors, and is one of the founders and the managing partner of Delta Capital, a position he has held since 2010. Mr. Ye also previously held managerial or executive roles at Shanghai NewMargin Ventures Co. Ltd, Cadence Design Systems, Inc. and PricewaterhouseCoopers. Mr. Ye holds a bachelor degree in electrical engineering and industrial engineering from Shanghai Jiaotong University, a master of accounting degree from Missouri State University and a master of business administration degree from Harvard Business School. In addition, Mr. Ye is a U.S. Certified Public Accountant and Certified Management Accountant.

 

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Dr. Rachel Sang currently serves as a Non-Executive Director on our board of directors. Dr. Sang is currently a partner at the CID Group Ltd. where she is responsible for the CID Research Institute and investments in mainland China and focusses on sectors such as e-commerce and healthcare. Prior to becoming a partner, Dr. Sang served as a Vice President and Director at the CID Group Ltd. Dr. Sang holds a bachelor of science degree in international trade from Zhengzhou University, a master of science degree in economics from Zhengzhou University, and a Ph.D. in management from Shanghai Jiaotong University.

Guangbin You currently serves as our General Manager – XG Health and is responsible for the development of our offline business strategy. Mr. You has extensive sales, marketing and management experience. Prior to joining us, Mr. You worked for Wuhan Jiangmin Pharmaceutical Group for nearly 20 years, including nine years as National Sales Director and two years as General Manager – Marketing. Mr. You holds a bachelor of commerce degree in economy and trade from the Zhongnan University of Economics and Law.

Board of Directors

Our board of directors will consist of five directors upon the SEC’s declaration of effectiveness of our registration statement on Form F-1, of which this prospectus is a part. A director is not required to hold any shares in our company by way of qualification. A director who is not a shareholder of our company shall nevertheless be entitled to attend and speak at general meetings of shareholders. A director may vote with respect to any contract or transaction or proposed contract or transaction in which he is interested provided (i) such director, if his such interest is material, has declared the nature of his interest at a meeting of the board and (ii) his vote is not otherwise disqualified by the chairman of the relevant board meeting, pursuant to any applicable rules and regulations as a result of listing of our ADSs or shares on any stock exchange in the United States or pursuant to other corporate governance requirements adopted by the board from time to time. The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof, or to otherwise provide for a security interest to be taken in such undertaking, property or uncalled capital, and to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party. Pursuant to the service contracts between our company and our directors, neither we nor our subsidiaries provide benefits to non-executive directors upon termination of service.

Committees of the Board of Directors

We will establish three committees under the board of directors immediately upon the effectiveness of our registration statement on Form F-1, of which this prospectus is a part: an audit committee, a compensation committee and a nominating and corporate governance committee. As a foreign private issuer, we are permitted under the NASDAQ Stock Market Rules to follow home country corporate governance practices. We rely on these exemptions provided by the NASDAQ Stock Market Rules to foreign private issuers. For example, we do not (i) have a majority of the board be independent; (ii) have a compensation committee or a nominations or corporate governance committee consisting entirely of independent directors; or (iii) have an audit committee be comprised of at least three members.

We will adopt a charter for each of the three committees. Each committee’s members and functions are described below.

Audit Committee. Our audit committee will consist of Mr. Greg Ye, who will also be the Chair, and Dr. Rachel Sang. Both Mr. Ye and Dr. Sang will satisfy the “independence” requirements of Section 303A of the Nasdaq Stock Market Rules and meet the independence standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended.

 

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We have determined that Mr. Ye qualifies as an “audit committee financial expert.” The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:

 

   

appointing the independent registered public accounting firm, pre-approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm and reviewing the performance of the independent registered public accounting firm;

 

   

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

 

   

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

 

   

reviewing major issues as to the adequacy and effectiveness of our internal controls and any special audit steps adopted in light of material control deficiencies;

 

   

annually reviewing and reassessing the adequacy of our audit committee charter and recommend any proposed changes to the board for approval;

 

   

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

 

   

monitoring compliance with our code of business conduct;

 

   

reviewing and approving all proposed related party transactions; and

 

   

reporting regularly to the board.

Compensation Committee. Our compensation committee will consist of Ms. Zoe Wang, who will also act as the Chair of the committee, Mr. Leo Zeng and Dr. Rachel Sang. Dr. Sang will satisfy the “independence” requirements of Section 303A of the Nasdaq Stock Market Rules. The compensation committee will assist the board in reviewing and approving the company’s compensation and employee benefit plans and practices, including its executive compensation plans. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:

 

   

reviewing and approving the compensation for our executive officers;

 

   

reviewing the compensation of our non-employee directors;

 

   

periodically reviewing and approving any general compensation and employee benefit plans, and making recommendation to the board as necessary.

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee will consist of Dr. Rachel Sang, who will also act as the Chair of the committee, Mr. Greg Ye, Ms. Zoe Wang and Mr. Leo Zeng. Both Dr. Sang and Mr. Ye will satisfy the “independence” requirements of Section 303A of the Nasdaq Stock Market Rules. The nominating and corporate governance committee will assist the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee will be responsible for, among other things:

 

   

identifying, recruiting and, if appropriate, interviewing candidates to fill positions on our board of directors;

 

   

reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, experience, skills, expertise and diversity;

 

   

making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and

 

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advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken.

Code of Ethics and Corporate Governance

We have adopted a code of ethics, which is applicable to all of our directors, executive officers and employees. We will make our code of ethics publicly available on our website.

In addition, our board of directors has adopted a set of corporate governance guidelines covering a variety of matters, including approval of related party transactions. Our corporate governance guidelines also provide that any adoption of a new stock incentive plan and any material amendments to such plans will be subject to the approval of our non-executive directors. The guidelines reflect certain guiding principles with respect to our board’s structure, procedures and committees. The guidelines are not intended to change or interpret any applicable law, rule or regulation or our amended articles of association.

Qualification

There is no requirement for our directors to own any shares in our company in order for them to qualify as directors.

Duties of Directors

Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. Our company has the right to seek damages if a duty owed by our directors is breached. You should refer to “Description of Share CapitalDifferences in Corporate Law” for additional information on our standard of corporate governance under Cayman Islands law.

Termination of Directors

Pursuant to our memorandum and articles of association as we expect them to be amended and become effective immediately prior to the completion of this offering, our directors are not subject to a term of office and hold office until their resignation, death or removal in accordance with our memorandum and articles of association.

A director will be removed from office if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found to be or becomes of unsound mind; or (iii) is prohibited by any applicable law or designated stock exchange rules from being a director. Our directors may be appointed, in the event of filling a vacancy or adding any director to the existing board, by the affirmative vote of a majority of the directors then in office or the sole remaining director, or by the affirmative vote of at least a majority of the total voting power of the outstanding shares of our company entitled to vote in any annual election of directors or class of directors, voting together as a single class. In other circumstances, our directors may be appointed by our shareholders through ordinary resolutions. See “Description of Share Capital — Differences in Corporate Law — Appointment of Directors” and “Description of Share Capital — Differences in Corporate Law — Removal of Directors” for additional information regarding removal and appointment of directors.

 

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Compensation of Directors, Officers

In 2018, the aggregate cash compensation to our executive officers and directors was US$387,000. Each of the officers and directors is entitled to reimbursement for all necessary and reasonable expenses properly incurred in the course of employment.

Employment Agreements and Indemnification Agreements

We plan to enter into employment agreements with our senior executive officers. Pursuant to these agreements, we are entitled to terminate a senior executive officer’s employment for cause at any time without remuneration for certain acts of the officer, such as being convicted of any criminal conduct, any act of gross or willful misconduct or any serious, willful, grossly negligent or persistent breach of any employment agreement provision, or engaging in any conduct which may make the continued employment of such officer detrimental to our company. Neither we nor our subsidiaries provide benefits to senior executive officers upon termination of service.

In connection with the employment agreements, each senior executive officer agrees to hold all information, know-how and records in any way connected with the products of our company, including, without limitation, all software and computer formulas, designs, specifications, drawings, data, manuals and instructions and all customer and supplier lists, sales and financial information, business plans and forecasts, all technical solutions and the trade secrets of our company, in strict confidence perpetually. Each officer also agrees that we shall own all the intellectual property developed by such officer during his or her employment.

We plan to enter into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to indemnify them against certain liabilities and to reimburse them for expenses in connection with claims made by reason of their being a director or officer of our company. More on our indemnification policy, see “Description of Share Capital – Differences in Corporate Law – Indemnification of Directors and Executive Officers and Limitation of Liability.”

Share Incentive Plan

On September 30, 2018, we adopted our 2018 Omnibus Incentive Plan, or the 2018 Plan, to promote our success and the interests of our shareholders by providing a means through which we may grant equity-based incentives to attract, motivate, retain and reward certain officers, employees, directors, consultants and other eligible persons to further link the interests of recipients with those of our shareholders generally. We granted share options under the 2018 Plan to our employees and directors.

The following paragraphs summarize the terms of the 2018 Plan.

Types of Awards. The 2018 Plan permits the grant of restricted shares, restricted share units, options and stock appreciation rights.

Plan Administration. The 2018 Plan will be administered by our board of directors or by a committee designated by our board of directors. The committee or the full board of directors, as applicable, will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and conditions of each award grant.

Award Agreement. Generally, awards granted under the 2018 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which must be consistent with the plan.

Exercise Price. The plan administrator determines the exercise price for each award, which is stated in the award agreement.

 

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Eligibility. We may grant awards only to those persons that the plan administrator determines to be eligible persons, which may include our employees, directors and consultants.

Term of the Awards. The term of each award granted under the 2018 Plan may not exceed ten years from the date of the grant.

Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement.

Acceleration of Awards upon Change in Control. The plan administrator may determine, at the time of grant or thereafter, that an award will become vested and exercisable, in full or in part, in the event that a change in control of our company occurs.

Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as otherwise provided by the plan administrator.

Termination. The 2018 Plan is valid and effective for a term of 10 years commencing from its adoption.

Under the 2018 Plan, a total of 11,386,410 Class A Ordinary Shares were initially reserved for issuance. As of the date of this prospectus, restricted share units representing a total of 3,971,453 Class A Ordinary Shares were issued to our officers and employees and remain outstanding under the 2018 Plan.

 

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PRINCIPAL SHAREHOLDERS

The table below sets forth information regarding ownership of our shares as of the date of this prospectus, assuming conversion of all of our Class A-1, Class A-2 and Series A preferred shares into Class A ordinary shares, by:

 

   

each of our directors and executive officers; and

 

   

each person known to us who beneficially owns more than 5% of any class of our ordinary shares.

The total number of ordinary shares outstanding on an as-converted basis as of the date of this prospectus is            , including Class A ordinary shares issuable upon conversion of all outstanding Series A preferred shares, Class A-1 ordinary shares and Class A-2 ordinary shares immediately upon the completion of this offering. The total number of ordinary shares outstanding after the completion of this offering will be                  , assuming the underwriters do not exercise their right to purchase additional shares.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.

 

    Ordinary Shares Beneficially Owned
Prior to This Offering
    Ordinary Shares Beneficially
Owned
After This Offering
    Voting
Power
After
This
Offering
 
    Class A
Ordinary Shares
(as converted
basis)
    Class B Ordinary
Shares
    Class A Ordinary
Shares
    Class B
Ordinary
Shares
       

Shareholder

  Number     %*     Number     %*     Number     %     Number     %*     %**  

Directors and Executive Officers

                 

Zoe Wang(1)

    638,106       0.5     37,575,200       30.9          

Leo Zeng(2)

    —         —         37,575,200       30.9            

Richard Wei

    —         —         —         —              

Weigang Greg Ye

    —         —         —         —              

Rachel Sang

    —         —         —         —              

Daniel Wang

    —         —         —         —              

Guangbin You

    —         —         —         —