F-1 1 d150619df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on June 25, 2021

Registration No. 333-            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MANYCORE TECH INC.

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   7372   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Floor 11, Building 1, Matrix International

No. 515 Yuhangtang Road

Gongshu District, Hangzhou, 310000

People’s Republic of China

+86 571 8993-6057

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

 

 

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

+1 800-221-0102

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

 

 

Copies to:

 

Will H. Cai, Esq.

Michael X. Yu, Esq.

Jie Zhang, Esq.

Cooley LLP

c/o Suites 3501-3505, 35/F

Two Exchange Square

8 Connaught Place

Central, Hong Kong

+852 3758-1200

 

Jon C. Avina

Seth Gottlieb

Cooley LLP

3175 Hanover Street

Palo Alto, CA 94304- 1130

+1 650 843-5000

 

Li He, Esq.

Davis Polk & Wardwell LLP

c/o 18th Floor
The Hong Kong Club Building

3A Chater Road, Central

Hong Kong

+852 2533-3300

 

 

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

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

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

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

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

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

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

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Proposed Maximum
Aggregate
Offering Price (2)(3)
  Amount of
Registration Fee

Class A ordinary shares, par value US$0.000025 per share (1)

  US$100,000,000   US$10,910

 

 

 

(1)

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

(2)

Includes the aggregate offering price of additional Class A ordinary shares represented by ADSs that the underwriters have the option to purchase. Also 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. 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, as amended.

 

 

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary 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.

 

PRELIMINARY PROSPECTUS

(Subject to Completion) Issued     , 2021

AMERICAN DEPOSITARY SHARES

LOGO

MANYCORE TECH INC.

Representing                  Class A Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of Manycore Tech Inc.

We are offering                ADSs. Each ADS represents                  Class A ordinary shares, US$0.000025 par value per share. We anticipate the initial public offering price per ADS will be between US$                and US$                .

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. We will apply to list the ADSs on the Nasdaq Global Select Market, or Nasdaq, under the symbol “KOOL.”

Immediately prior to the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Our three co-founders, including Xiaohuang Huang, our chairman of the board of directors, Hang Chen, our director and chief executive officer, and Hao Zhu, our director and chief technology officer, will beneficially own all of our then issued and outstanding Class B ordinary shares and will be able to exercise             % of the total voting power of our issued and outstanding share capital immediately following the completion of this offering assuming the underwriters do not exercise their over-allotment option, or             % of the total voting power of our issued and outstanding share capital immediately following the completion of this offering if the underwriters exercise their over-allotment option in full. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 15 votes and is convertible into one Class A ordinary share. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof or a change of ultimate beneficial ownership of any Class B ordinary share to any person other than our three co-founders and their respective affiliates, such Class B ordinary shares are automatically and immediately converted into the same number of Class A ordinary shares.

We are an “emerging growth company” and a “foreign private issuer” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company” and “Prospectus Summary—Implications of Being a Foreign Private Issuer” for additional information.

 

 

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 23.

 

 

 

      

Per ADS

      

Total

 

Public offering price

       US$                          US$                  

Underwriting discounts and commissions(1)

       US$                          US$                  

Proceeds, before expenses, to Manycore Tech Inc.

       US$                          US$                  

 

(1)

See “Underwriting” for additional disclosure regarding compensation payable by us to the underwriters.

We have granted the underwriters the right to purchase up to an aggregate of additional                 ADSs at the initial public offering price, less underwriting discounts and commissions.

Neither the Securities and Exchange Commission nor any other state securities commission 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.

The underwriters expect to deliver the ADSs to purchasers on or about                 , 2021 through the book-entry facilities of The Depository Trust Company.

 

 

 

MORGAN STANLEY    J.P.MORGAN    CICC

 

China Securities International    FUTU

            , 2021


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LOGO

Realizing Imagination


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LOGO

31MM    1.5MM Monthly Active Visitors (1) Average MAUs (2) 20,806130% Enterprise Customers (3) NRR Rate amongst Key Accounts (4) 7.7BN2.1MM API Calls per Day (5)Renderings per Day (6) 90%80MM Household Floor PlanDesign Elements Coverage in China (7)    World’s Largest Platform for 3D Interior Design, Decoration and Construction(8)    Notes: 1. In March 2021 2. In the first quarter of 2021 3. As of March 31, 2021 4. As of December 31, 2020 5. We processed an average of over 7.7 billion API calls every day in May 2021 6. Our platform executed an average of 2.1 million renderings every day from March 2021 to May 2021 7. We covered over 90% of household floor plans for new residential buildings in China in the past five years, according to statistics from Fang.com 8. In terms of the number of average monthly active users in the first quarter of 2021, according to iResearch


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LOGO

World’s Largest Platform for 3D Interior Design, Decoration and Construction* * in terms of the number of average monthly active users in the first quarter of 2021, according to iResearch


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TABLE OF CONTENTS

 

     Page  

INDUSTRY

     124  

BUSINESS

     131  

REGULATION

     162  

MANAGEMENT

     176  

PRINCIPAL SHAREHOLDERS

     184  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     187  

DESCRIPTION OF SHARE CAPITAL

     188  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     199  

SHARES AND ADSS ELIGIBLE FOR FUTURE SALE

     215  

TAXATION

     217  

UNDERWRITING

     224  

EXPENSES RELATED TO THIS OFFERING

     236  

LEGAL MATTERS

     237  

EXPERTS

     238  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     239  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  
 

 

 

No dealer, salesperson or other person is authorized to give any information or to represent as to anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell, and we are seeking offers to buy, only the ADSs offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of the ADSs.

Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where other action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any free writing prospectus filed with the U.S. Securities and Exchange Commission, or the SEC, 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 of the United States.

Until                , 2021 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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LETTER FROM CO-FOUNDER

Dear Investors:

Manycore is not just a traditional software company specializing in 3D design, nor simply an online design community. Manycore was founded ten years ago with a clear mission: Realizing Imagination.

We are a high-tech SaaS company dedicated to empowering the creation, sharing and implementation of design ideas, bringing people closer to their dream spaces and products.

For as long as humans have been around, we have expressed ideas through sketches and drawings; until ten years ago, only well-trained design professionals were able to utilize computer software to draw their designs. We founded Manycore with the belief that the new age of high-performance parallel computing, high-speed internet and artificial intelligence can usher in a new generation of design tools. A new generation where everyone, with or without professional training, can visualize and actualize their ideas without barrier.

We are proud of our achievements of the last ten years, but this is only the beginning. We are inviting you to join us as we lead the journey into the future.

We realize imagination by bridging the virtual and physical world

In many fairy tales, magical objects turn your imagination into reality.

While this may only exist in fairy tales, we believe new technology is in the process of making this magic a reality one day.

With the computing power available these days, people can create almost anything in the digital virtual world or even in the metaverse. This procedure, however, is still very complex.

The ultimate solution is a brain-computer interface which can read and write one’s imagination directly to a computer system.

While such a concept still remains science fiction for the moment, we are making it easier to visualize design ideas in virtual settings. We have created a user-friendly system that employs artificial intelligence to help designers and consumers easily see their ideas come to life digitally. They can visualize their imagination and designs to communicate with others.

Manycore’s mission, however, does not end here. We are not satisfied with simply helping to visualize imagination in the virtual world. We want to see these ideas and designs come to life physically.

Technology like 3D printing and other industry 4.0 trends can produce products on demand, but legacy tools largely remain complex and unavailable to the masses. We have taken significant steps in simplifying the process of turning imagination into reality, having taken the concept of “what you see is what you get” and transforming what’s possible within the interior design, decoration and construction industry. Innumerable pieces of furniture are manufactured from idea to physical product automatically via our platform every day.

But this is all still just the beginning of the revolution. The bridge between imagination and the physical world is not yet complete. Tremendous efforts are needed to catapult us into the future, and Manycore will be at the forefront of these efforts.

 

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Interior design is only the beginning; every design system needs a revolution

Nowadays, traditional design systems are almost as complex as rocket science. To turn ideas into reality easier, the most common need is for domain-driven design, such as interior design or architectural design.

We have defined a new generation design system to see what is possible with cloud-native infrastructure and AI that is smart enough to learn from people and implement automation.

Modernizing the interior design system is only the first step we take, and it is not the only domain we will revolutionize. We believe almost every design system is worth renovating with cloud computing, AI and other new technologies.

We believe we have just started to harvest what’s possible with the newest technologies. Manycore is dedicated to disrupting and redefining all design systems.

We are here to stay

Our mission is grand and we do not expect that our journey will be easy. From the moment Manycore was born, we knew we had a great undertaking that would take many years to fulfill, with milestones and challenges along the way.

We have attracted talents all across the world to join our journey and we have invested aggressively into continuous R&D. I believe that we have the best and the most persistent team to work on our mission.

All of our three co-founders are from a software engineering background with a deeply engrained belief that the key to success in today’s tech world is to create a superb product while fostering a culture of innovation.

In building Manycore Tech, we came up with three key elements that embody the company culture: SIMPLE, FOCUS, and OPEN. These three words are the core makeup of our DNA and are proudly displayed all over our offices in large fonts.

As we embark on this path to achieve our mission, we are confident that Manycore Tech will become a great company that will change the world with our technology and vision.

We have the passion and patience to invest in long-term opportunities, and we look forward to joining forces with our future investors.

Xiaohuang (Victor) Huang

on behalf of Manycore Tech

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ADSs. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “we,” “us,” “our,” “our company,” and “Manycore” refer to Manycore Tech, Inc. This prospectus contains information from a commissioned report by iResearch, an independent market research firm, that provides information on the industry we operate in and our market position in China.

MANYCORE TECH INC.

Overview

Our mission is realizing imagination. Every day, our platform empowers the creation, sharing and implementation of millions of design ideas, bringing people closer to their dream homes and spaces.

Manycore is a fast-growing, disruptive design software platform. Being cloud-native, mobile-friendly and smart, our platform pioneers the interior design, decoration and construction industry for residential, commercial and industrial spaces. We integrate and deliver computer-aided design and building information modeling capabilities on a SaaS model, empowering businesses to deliver superior user experience and achieve operational excellence. With our mission-critical offerings and end-to-end coverage, we have become the central hub of an ecosystem connecting millions of designers, enterprises and end customers.

We are the world’s largest platform for 3D interior design, decoration and construction by the number of average monthly active users, or MAUs, in the first quarter of 2021, according to iResearch. We had approximately 1.5 million average MAUs in the first quarter of 2021, consisting mainly of designers and enterprise users. We make free version of our products available to everyone, providing low-friction entry points and building a thriving, large user base. Every day, our platform executes millions of renderings and processes billions of API calls on cloud. From March 2021 to May 2021, our platform executed an average of 2.1 million renderings on a daily basis and processed an average of over 7.7 billion API calls per day in May 2021 alone. As our users increase their usage of our products, many of them choose to upgrade to paid and higher-tiered subscriptions and become our customers. As of March 31, 2021, we had 20,806 enterprise customers across different industry verticals, representing a 69% year-over-year growth. These enterprise customers contributed substantially all of our revenues. In addition, we also served over 240,000 and 89,000 paying individual customers during the year ended December 31, 2020 and during the first quarter of 2021, respectively, which we believe reflects our growing popularity among designers. We are the largest interior design, decoration and construction software provider in China, as measured by gross billings in 2020, taking approximately 10.3% market share, according to iResearch.

We endeavor to provide a comprehensive Manycore experience spanning design, visualization, implementation and digital asset management. Our flagship product, Kujiale, is a 3D design software of choice for the industry in China. We believe Kujiale has the most comprehensive and an ever-expanding 3D interior design content library, covering over 90% of household floor plans for new residential buildings in China in the past five years, according to statistics from Fang.com, a leading real estate Internet portal in China, as well as over 80 million 3D design models and authentic textures. To meet growing user needs, we have launched additional products, including Coohom, an international edition that delivers the Manycore experience across the globe. To date, Coohom serves users and customers in over 200 countries and regions.

Technology and innovation are at the core of our business. We are a frontrunner in transforming design experiences with cloud-based solutions, providing users with the long-desired speed and convenience that legacy



 

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software could not offer. Empowered by our proprietary hybrid cloud infrastructure and extensive AI capabilities, we deliver high-quality results to users with enhanced efficiency. Our users can access the works they create across devices and seamlessly share them through numerous social media channels anytime, anywhere.

We operate a pure play SaaS model with strong customer land-and-expand. We have adopted a freemium go-to-market model for most of our products, offering free version to capture the mindshare of designers and end customers. We also offer paid, subscription-based premium versions to enrich the experience of our enterprise customers and professional designers. We relentlessly focus on customer success support to help customers achieve their own business success. We have high visibility in our revenue as we generate substantially all of our revenue on a subscription basis with a strong track record in renewal and upsell. As of December 31, 2020, our net revenue retention rate for key accounts and advanced customers reached 130% and 95%, respectively, and our deferred revenue amounted to RMB387.5 million (US$59.4 million).

We have experienced strong growth in recent years. Our revenues grew by 25% from RMB282.3 million in 2019 to RMB353.4 million (US$54.2 million) in 2020 despite the impact of COVID-19 and increased by 33% from RMB75.7 million in the three months ended March 31, 2020 to RMB100.9 million (US$15.4 million) in the three months ended March 31, 2021. Our gross margins were 69%, 68% and 66% in 2019, 2020 and the three months ended March 31, 2021, respectively. We had a net loss of RMB260.6 million, RMB296.6 million (US$45.5 million) and RMB117.0 million (US$17.9 million) in 2019, 2020 and the three months ended March 31, 2021, respectively. Our gross billings increased by 16% from RMB366.0 million in 2019 to RMB425.2 million (US$65.2 million) in 2020, and increased by 72% from RMB58.5 million in the three months ended March 31, 2020 to RMB100.4 million (US$15.3 million) in the three months ended March 31, 2021. Gross billings is a non-GAAP measure and for a description of how we calculate gross billings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Industry Trends and Challenges

We are at an inflection point with evolving technology in the interior design, decoration and construction industry, or the interior DDC industry. As millennials and the younger generation become first time homeowners, their needs and preferences for interior DDC are inadequately served by traditional industry practices. Designers need to present customized solutions that meet both aesthetic and functional requirements at a faster pace. This generation of end customers demand designs that can be easily visualized and shared as they are highly participative in the design process. This need can only be served through digitalization with innovative software technologies. Technology advancements, such as proliferation of mobile devices, advancement of AI technologies and development of stable cloud connectivity, have paved way for the software transformation of space planning and design.

However, participants in the interior DDC industry still face tremendous challenges in delivering such software experience:

 

   

Lack of web/mobile solutions. Legacy design software has yet to catch up with the trend to move to the cloud. They are often installed on premise, trapping users at their local workstations. Today’s designers and businesses desire a ubiquitous experience that allows them to review and share work on the go.

 

   

Low productivity. With legacy software, designers often have to start a project from scratch with limited precedents or pre-set models to leverage on, manually assemble models and textures, and wait for long runtime to process rendering or computation, hindering overall productivity and running the risk of missing client deadlines.

 

   

High requirement for hardware. Most legacy design software products require local devices with high-end configurations to perform smoothly, making them costly for the enterprises and designers.



 

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Users today desire a software solution that runs on the cloud and minimizes requirement on local devices.

 

   

Difficulty in use. Legacy design software products are normally not customized for specific industry use cases, such as interior DDC, and therefore, fail to offer purpose-built functionalities. With common features buried in unfriendly interfaces, their cumbersome functionalities are often too complex for users to navigate and operate.

 

   

Dispersed digital assets. Traditionally, work of different business units and employees, such as design and engineering drawings, are processed and stored separately, creating dispersed digital assets that are hard to manage centrally, which becomes more pronounced as business volume grows. In the absence of a uniform collaboration platform, business units work on different systems, resulting in workflow redundancies and difficulty in collaboration.

Facing evolving consumer demands and the existing industry pain points, designers and businesses desire a cost-effective, flexible and fully integrated solution to deliver a differentiated software experience.

The Manycore Solution

We have created a future-proof platform that brings all mission-critical features of 3D design software to the cloud.

 

LOGO

Our platform consists of three main layers:

 

   

Infrastructure. Our hybrid cloud infrastructure with proprietary private computing clusters and public cloud ensures cost-effective computing power, reliable services and high accessibility.

 

   

Technology Engines. Our cloud-native and modular technology engines, combining proprietary technology and extensive data assets, are capable of providing smooth 3D design experience for a single space as large as 40,000 square feet. The modular architecture of our technology further allows scalable expansion into different product offerings to meet various business needs.



 

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Product Offerings. We have a suite of products with purpose-built functionalities on top of our infrastructure backbone and technology engines:

 

   

Design. Our 3D design platform is easy to use and offers plug-and-play models that cover all aspects in interior DDC, such as furniture, lighting, kitchen and bath items, and home decoration accessories. Our library covers over 90% of household floor plans for new residential buildings in China in the past five years, according to statistics from Fang.com.

 

   

Visualization. Our rendering services offer photorealistic viewings within seconds, enabling immersive sharing of design ideas. Our products can also generate short videos, which can be seamlessly shared via social media, to promote efficient marketing campaign.

 

   

Implementation. Our building information modeling, or BIM, system automatically generates engineering drawings and material takeoff and costing schedules based on 3D designs, which helps customers coordinate workflows in rough-in and interior finishes stages. In addition, our computer-aided manufacturing, or CAM, integration capability is compatible with the majority of software used in the custom furniture industry, enabling manufacturers to produce bespoke furniture orders straight from the 3D design data generated from our software.

 

   

Digital Asset Management. With a centralized management system on the cloud, our digital asset management, or DAM, capabilities offer different stakeholders ubiquitous and real-time access to data and facilitate efficient collaboration among different business units of our enterprise customers, such as design, sales and marketing, procurement and construction.

We bring enormous benefits to our customers:

 

   

Web-based and mobile-friendly use. Leveraging our cloud-native architecture, our products target web and mobile users from day one. We provide web-based and mobile-friendly solutions to users, who can generate and view designs on their preferred devices and share content with others instantly, improving customer experiences and boosting efficiency.

 

   

High productivity. Our technology engines accelerate time-consuming computation through cloud-based solutions that are supported by a large number of servers running in parallel with highly optimized algorithms. A significant amount of repetitive design tasks can be automated with our proprietary AI and data analytics tools. In addition, our public library, comprised of rich user-generated content, allows designers to browse for inspirations and to implement off-the-shelf design elements or full design plans within clicks. With these disruptive product features, designers can significantly improve productivity.

 

   

Hardware agnostic. Our platform processes most of the computation-intensive tasks on the cloud. Our products run smoothly on a wide array of personal and mobile devices. Our solutions enable users to work with lower hardware configuration requirement, saving upfront investment and maximizing flexibility.

 

   

Better user experience. Tailored for interior DDC, our platform features a clear and simple interface aiming to provide user-friendly experience, eliminating the need for extensive training. Businesses that adopt our products can free up resources in talent investment. Further, our solutions redefine the way designers communicate with their customers as they are now able to provide instant previews of creative ideas to their customers, which significantly improves efficiency in customer interactions, boosting business volume.

 

   

Efficient asset management and collaboration. Enterprise customers can use our web-based backend to manage digital content created by employees and stored on the DAM system. Any update in creative work is available to the entire team immediately, and multiple team members can collaborate on the



 

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same project simultaneously, which significantly streamlines workflows, reduces repetitive work and improves teamwork efficiency.

Our Market Opportunity

According to iResearch, the architecture, engineering and construction, or the AEC, industry consists of two market segments, namely (i) the building industry which covers both the interior DDC and the architectural design and construction of residential, commercial and industrial buildings, and (ii) the civil engineering industry which covers the design and construction of roads, bridges, tunnels and other public infrastructures. Our primary target market is defined as the interior DDC software market, which is a subsegment of the building software market. In China, we are the largest residential interior DDC cloud-based software provider, with approximately 56.5% market share, and the largest interior DDC software provider, with approximately 10.3% market share, in each case as measured by gross billings in 2020. According to iResearch, the Chinese interior DDC software market, as measured by gross billings, is expected to grow from RMB3.9 billion in 2020 to RMB14.5 billion by 2025, representing a CAGR of 30.1%.

We believe our cloud-based platform will benefit from the growing popularity of cloud-based software solutions in the Chinese interior DDC industry. According to iResearch, the cloud-based software penetration rate in China is expected to grow from 29.8% in 2020 to 80.3% in 2025. Cloud-based software will take over on-premise software to become mainstream for the Chinese interior DDC industry by 2025, according to iResearch.

Our core design and engineering competencies and sector know-how can be applied into other adjacent verticals such as architectural design and construction within the building industry as well as civil and infrastructure engineering within the broader AEC industry. We believe we are able to enhance our penetration in the AEC software market in the long term. According to iResearch, the Chinese building software market, as measured by gross billings, is expected to grow from RMB11.9 billion in 2020 to RMB35.5 billion in 2025, representing a CAGR of 24.5%. The Chinese AEC software market, as measured by gross billings, is expected to grow from RMB14.7 billion in 2020 to RMB44.8 billion in 2025, representing a CAGR of 25.0%.

In addition to our strong presence in China, we seek to capture attractive market opportunities worldwide and have been actively expanding our global footprints, where we have achieved initial market success. To date, we have served enterprise customers from the United States, South Korea, Japan and Southeast Asia. According to iResearch, the worldwide interior DDC software market is expected to reach US$19.9 billion in 2025, as measured by gross billings.

Our Strengths

 

   

Next generation design software platform. We build our platform to be cloud-native, mobile-friendly and smart. Our hybrid cloud infrastructure, integrating proprietary private computing clusters with public cloud, optimizes computing power distribution and ensures high availability and performance that scale along the fast expansion of our platform. Our products and their outputs run across all mainstream mobile and desktop browsers and operating systems, breaking barriers of sharing of design ideas. While our platform features a clear and simple interface, our products are not simplistic. Embedded data-driven algorithms, our platform is able to learn user behavior patterns and optimize user interfaces with recommended design ideas and visualization configurations for the future use.

 

   

Proven industry leadership as ecosystem central hub. We are the world’s largest platform for 3D interior DDC with 1.5 million average MAUs in the first quarter of 2021, according to iResearch. Taking design as a critical entry point, we go beyond design and expand our business along the value chain, facilitating the collaboration between designers, suppliers and end customers. By enabling



 

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customers to leverage and manage their data across multiple workflows, we become an essential system of record for the interior DDC industry. We opened Kujiale Academy, an online advanced career development center, to promote the digital transformation and help define the best practice across our industry.

 

   

Effective go-to-market strategy with powerful network effects. The network effects on our platform are multi-fold. We offer a freemium model to quickly land new users and capture the mindshare of designers, who play a central role in influencing business decisions. The more designers and enterprises we serve, the more design models and materials they create on our platform, which help inspire more creativity and attract more users to our platform. The larger our user base grows, the more we penetrate end consumers, who increasingly request designers and enterprises to adopt our products to realize their ideas. As we provide more post-design features across the interior DDC value chain, enterprises have greater incentive to stay on our platform for their different business units to enjoy the benefits of seamless collaboration and digital asset management.

 

   

Cutting-edge technologies and scalable infrastructure. We have designed our products with high performance and cost-efficiency, thanks to our unique software-hardware integrated infrastructure. Supported by our cloud native platform, our users only need a web browser page or a mobile application to use our products. We assemble computing power optimized specifically for our platform capabilities, which enables us to lower our unit cost on computation. Building on top of our technology engines, we have further enhanced our product capabilities by developing AI-enabled applications such as floor plan analysis, automated design and EUE. Leveraging our proprietary hybrid cloud infrastructure and modular technology engines, we are able to easily scale and expand into different product offerings to serve various customer use cases.

 

   

Unwavering focus on customer success. Customer satisfaction is at the heart of our business. We offer 24/7/365 customer success support as well as customized onboarding, modeling, training, implementation and operational solutions. We have established a proprietary, data-driven operation support system to record and analyze customer service information and enforce service standards. Insights from our client communication continue to feed into the system, and are in turn used to analyze customer profiles and improve our offerings for business management. We typically conduct customer surveys on a quarterly basis, based on which we continue to optimize product functionality and improve customer experience. In 2020, we achieved an average quarterly customer satisfaction score of 8.9 out of 10 from our enterprise customer respondents.

 

   

Experienced management team and a focused culture. We have a pioneering and experienced management team. Prior to founding Manycore, our founders have years of experience as software engineers at renowned technology institutions with deep expertise in computer graphics and parallel computing. We believe our operational excellence is sustained by our unique corporate culture—simple, focused and open. At the forefront of the rapidly evolving interior DDC software industry, we always stay open-minded to embrace changes and challenges.

Our Growth Strategies

Key elements of our strategy include:

 

   

continue to service and expand our customer base;

 

   

continue to enhance our product offerings for the full design value chain;

 

   

continue to tap into new industry verticals to provide solutions for all spaces;

 

   

continue international expansion;



 

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continue to invest in technology as well as research and development; and

 

   

selectively pursue strategic investments and acquisitions to enrich our ecosystem.

Summary of Risk Factors

Our business is subject to numerous risks and uncertainties that you should be aware of before making a decision to invest in our ADSs. These risks are more fully described in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

Risks Related to Our Business and Industry

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

 

   

Our historical growth may not be indicative of our future growth and we may fail to properly manage future growth.

 

   

We have a history of losses and we may not be able to achieve or sustain profitability in the future.

 

   

Our revenue may decrease if the market for cloud-native solutions develops more slowly than we expect or declines.

 

   

We may lose customers if we fail to improve and enhance our products and solutions to suit our customers’ evolving needs.

 

   

Our ability to continue innovating and keeping pace with technological developments has significant impact on our business.

 

   

Our initiatives to develop new products, new solutions and introduce new technologies may not succeed.

 

   

A downturn or any adverse developments in China’s interior design, decoration and construction industry may decrease the demand for our software solutions.

 

   

We operate in a highly competitive market and may not be able to compete effectively.

 

   

We may be subject to increased business, regulatory, and economic risks as we continue to expand our operations outside the PRC.

 

   

Our expansion into new verticals may not be successful.

 

   

Salesforce efficiency has significant impact on our business.

 

   

We may fail to provide high-quality customer services.

 

   

Experience of our users depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control.

 

   

We may fail to effectively maintain, promote and enhance our brands.

 

   

We may be required to obtain or maintain all required licenses, permits and approvals to operate our business.

 

   

We may fail to implement and maintain effective internal controls to remediate our material weakness over financial reporting, which could impair our ability to produce accurate financial statements on a timely basis.

 

   

We may in the future become involved in disputes relating to alleged infringement of intellectual property rights.



 

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Risks Related to Our Corporate Structure

We are also subject to risks and uncertainties related to our corporate structure, including, but not limited to, the following:

 

   

If the PRC government deems that the contractual arrangements in relation to our VIE do not comply with PRC regulatory restrictions on foreign investment in 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.

 

   

We rely on contractual arrangements with our VIE and its shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and could adversely affect our business, operating results and financial condition.

 

   

Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law.

Risks Related to Doing Business in China

We face risks and uncertainties related to doing business in China in general, including, but not limited to, the following:

 

   

Changes in the political and economic policies of the PRC government could adversely affect our business, operating results and financial condition.

 

   

We may be adversely affected by the complexity, uncertainties and changes in PRC laws, rules and regulation, particularly of internet businesses.

 

   

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

 

   

The inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

 

   

If additional remedial measures are imposed on the “big four” PRC-based accounting firms, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

 

   

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

Risks Related to Our ADSs and This Offering

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

 

   

An active trading market for our Ordinary Shares or the ADSs may not develop and the trading price of the ADSs may fluctuate significantly.

 

   

The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.

 

   

Our proposed 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.

 

   

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

Corporate History and Structure

In November 2011, we commenced operations through Hangzhou QunHe Information Technology Co., Ltd., a company incorporated in the PRC.



 

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In July 2013, we incorporated Manycore Tech Inc. (then known as Exacloud Limited) under the laws of the Cayman Islands as our offshore holding company. In August 2013, we incorporated Exacloud (Hong Kong) Limited as a wholly owned subsidiary of Manycore Tech Inc. in Hong Kong.

In November 2013, we incorporated Hangzhou Yunjiazhuang Network Technology Co., Ltd., or Hangzhou Yunjiazhuang, as a wholly owned subsidiary of Exacloud (Hong Kong) Limited in the PRC.

Hangzhou Yunjiazhuang entered into a series of contractual arrangements, as amended and restated, with Hangzhou QunHe Information Technology Co., Ltd., or Hangzhou QunHe, which enable us to obtain control over Hangzhou QunHe to operate value-added telecommunication services. As a result, we are regarded as the primary beneficiary of Hangzhou QunHe. We treat it as our consolidated affiliated entity under U.S. GAAP and have consolidated its financial results in our consolidated financial statements in accordance with U.S. GAAP. We refer to Hangzhou Yunjiazhuang as our wholly foreign owned entity, or WFOE, and to Hangzhou QunHe as our variable interest entity, or our VIE, in this prospectus. For more details and risks related to our VIE structure, please see “Corporate History and Structure—Contractual Arrangements with Our VIE and Its Shareholders” and “Risk Factors—Risks Related to Our Corporate Structure.”

In May 2019, we incorporated Coohom Inc., a California corporation, as a wholly owned subsidiary of Exacloud (Hong Kong) Limited, to operate Coohom’s business in the United States, Europe and other regions. In October 2019, we incorporated Coohom (Hong Kong) Limited, or Coohom Hong Kong, in Hong Kong as a wholly owned subsidiary of Exacloud (Hong Kong) Limited, to operate Coohom’s business in Asia. See “—Corporate Structure.”

In February 2020, we acquired Modelo to expand our offerings coverages to DAM capabilities. As a result of the acquisition, Modelo Inc., a Delaware corporation, became a wholly owned subsidiary of Exacloud (Hong Kong) Limited, and Shanghai Modai Network Technology Co., Ltd., or Shanghai Modai, a PRC company became a wholly owned subsidiary of Hangzhou QunHe. In July 2020, we incorporated Guangdong Kujiale Network Technology Co., Ltd. or Guangdong Kujiale, as a wholly owned subsidiary of Hangzhou Yunjiazhuang in the PRC.

In January 2021, we acquired Hangzhou Meijian Technology Co., Ltd., or Hangzhou Meijian, a PRC company, to further increase our 2D design capabilities. After the acquisition, Hangzhou Meijian became a wholly owned subsidiary of Hangzhou QunHe.



 

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The following diagram illustrates our corporate structure upon the completion of this offering, including our significant subsidiaries, our VIE and other entities that are material to our business:

 

LOGO

 

Note:

(1)

Shareholders of Hangzhou QunHe are Mr. Xiaohuang Huang, Mr. Hang Chen and Mr. Hao Zhu, holding 50.0%, 39.2%, and 10.8%, respectively, of the equity interest in Hangzhou QunHe. Mr. Xiaohuang Huang is our co-founder and chairman of the Board. Mr. Hang Chen is our co-founder, Director and chief executive officer. Mr. Hao Zhu is our co-founder, Director and chief technology officer.

Corporate Information

Our principal executive offices are located at Floor 11, Building 1, Matrix Center, No. 515 Yuhangtang Road, Gongshu District, Hangzhou, People’s Republic of China. Our telephone number at this address is +86 517 8993-6057. Our registered office in the Cayman Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices.

Our main websites are www.kujiale.com and www.coohom.com. The information contained on this website is not a part of this prospectus. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.



 

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This prospectus includes our trademarks, trade names and service marks, such as “Kujiale,” “Coohom,” “美间” and “Manycore” logo, which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to such trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

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

Implications of Being a Foreign Private Issuer

Upon completion of this offering, we will report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

 

   

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

 

   

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

 

   

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events.

Both foreign private issuers and emerging growth companies are also exempt from certain more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.



 

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Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires:

 

   

“ADRs” refer to the American depositary receipts that evidence the ADSs.

 

   

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

 

   

“Advanced customers” refer to enterprise customers who subscribe to at least five registered accounts.

 

   

“AEC” refers to architecture, engineering, and construction.

 

   

“AI” refers to artificial intelligence, which is the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions.

 

   

“AR” refers to augmented reality.

 

   

“ARR” or “annual recurring revenue” with respect to one customer refers to the annualized value of the revenue from the subscription of our products and solutions by such customer as of a given date. ARR from more than one customer equals the sum of the ARR from each of such customers.

 

   

“BIM” refers to building information modeling, which is an intelligent 3D model-based process that gives AEC professionals the insight and tools to more efficiently plan, design, construct, and manage buildings and infrastructure.

 

   

“CAD” refers to computer-aided design, which is the use of software to aid in the creation, modification, analysis, or optimization of a design.

 

   

“CAM” refers to computer-aided manufacturing, which is the use of software and computer-controlled machinery to automate a manufacturing process.

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan; “Greater China” does not exclude Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan.

 

   

“Class A ordinary shares” refer to our Class A ordinary shares, par value US$0.000025 per share.

 

   

“Class B ordinary shares” refer to our Class B ordinary shares, par value US$0.000025 per share.

 

   

“CPU” refers to central processing unit.

 

   

“Customer” or “paying customer” refers to a registered user that subscribed to our paid versions for at least one month during the relevant period.

 

   

“DAM” refers to digital asset management, which is the use of software to help store, organize and share digital assets such as images, graphics and other digital files.

 

   

“Enterprise customers” as of a given date refer to entities that were subscribers to our paid versions on such date. The subscription terms of enterprise customers typically range from one to three years. Each enterprise customer may have more than one registered account.

 

   

“EUE” refers to environment understanding engine.

 

   

“GPU” refers to graphics processing unit.

 

   

“Individual customers” for a given period refer to individuals who subscribed to our paid versions during such period. The subscription terms of individual customers typically range from 30 to 180 days.

 

   

“Interior DDC industry” refers to interior design, decoration and construction industry.

 

   

“Key account” refers to an advanced customer whose annual recurring revenue reached RMB200,000.

 

   

“MAUs” refer to monthly active users, which are our registered users who logged in and accessed Kujiale, Coohom, Modelo or Meijian through our websites, mobile websites, desktop or mobile applications during a given calendar month. MAUs include both free and paying users. “Average MAUs” for a quarter refers to the average of MAUs for each month during the quarter. The numbers of our MAUs



 

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are calculated using internal company data that have not been independently verified, and we treat each user account as a separate user for purposes of calculating MAUs, although it is possible that some individuals and organizations may have set up more than one user account and some user accounts set up by organizations are used by multiple individuals within such organization.

 

   

“MES” refers to manufacturing execution system, which is a system used in manufacturing to track and document the transformation of raw materials to finished goods.

 

   

“Monthly active visitors” refer to persons who visit Kujiale, Coohom, Modelo or Meijian through our websites, mobile websites, desktop or mobile applications during a given calendar month, who are either registered users, or unregistered visitors viewing the design works across our websites or applications. “Average monthly active visitors” for a quarter or a year refers to the average of monthly active visitors for each month during the quarter or the year, respectively. The numbers of our monthly active visitors are calculated using internal company data that have not been independently verified, and we treat each visitor from one device as a separate visitor for purposes of calculation, although it is possible that some persons may visit our platform through more than one device and some devices may be used by multiple persons.

 

   

“NRR rate” or “net revenue retention rate” as of a given date, or the benchmark date, is a percentage calculated by using (i) the total ARR from a group of customers on the date 12 months prior to the benchmark date as the denominator, and (ii) the ARR from the same group of customers on the benchmark date as the numerator.

 

   

“Ordinary shares” prior to the completion of this offering refer to ordinary shares of our company, par value US$0.000025 per share, and upon and after the completion of this offering refer to our Class A ordinary shares and Class B ordinary shares.

 

 

   

“Registered account” refers to an user account that has been registered with and logged onto our platform at least once since the initial registration. Each customer may have more than one registered account, and consequently, the number of registered accounts we present in this prospectus may not equal to the number of users.

 

   

“Renminbi” or “RMB” refers to the legal currency of the PRC.

 

   

“U.S. GAAP” refers to the accounting principles generally accepted in the United States of America.

 

   

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

 

   

“Variable interest entity” or “VIE” refers to Hangzhou QunHe Information Technology Co., Ltd., the PRC entity of which we have power to control the management, and financial and operating policies and have the right to recognize and receive substantially all the economic benefits and in which we have an exclusive option to purchase all or part of the equity interests at the minimum price possible to the extent permitted by PRC law.

 

   

“VR” refers to virtual reality.

 

   

“WFOE” refers to Hangzhou Yunjiazhuang Network Technology Co., Ltd., a wholly owned subsidiary of Exacloud (Hong Kong) Limited in the PRC.

Our reporting currency is Renminbi. This prospectus contains translations of certain Renminbi amounts into U.S. dollars solely for the convenience of readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at the end of the applicable period, that is, a rate of RMB6.5250 to US$1.00, the noon buying rate on December 31, 2020 set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System, or RMB6.5518 to US$1.00, the noon buying rate on March 31, 2021 set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. On May 28, 2021, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.3674 to US$1.00.



 

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THE OFFERING

 

ADSs offered by us

                   ADSs.

Over-allotment option

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

ADSs outstanding immediately after this
offering

  


                ADSs (or                 ADSs if the underwriters exercise their over-allotment option in full).

Ordinary shares outstanding immediately after
this offering

  


             Class A ordinary shares (or              Class A ordinary shares if the underwriters exercise their option to purchase additional ADSs in full) and 432,787,280 Class B ordinary shares, excluding ordinary shares issuable upon the exercise of options outstanding under our 2014 Equity Incentive Plan. Assuming that our co-founders exercise the options granted to them under our 2014 Equity Incentive Plan to acquire an aggregate of 40,212,720 Class B ordinary shares upon the completion of this offering, the total ordinary shares outstanding immediately after this offering will consist of              Class A ordinary shares (or              Class A ordinary shares if the underwriters exercise their option to purchase additional ADSs in full) and 473,000,000 Class B ordinary shares.

Ordinary shares

  

We will issue Class A ordinary shares represented by the ADSs in this offering. Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. In respect of all matters subject to a shareholder vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to fifteen votes, voting together as one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof or a change of ultimate beneficial ownership of any Class B ordinary share to any person other than our three co-founders and their respective affiliates, such Class B ordinary shares shall be automatically and immediately converted into Class A ordinary shares of the same number.

 

Other than options granted to our co-founders, which will entitle them to Class B ordinary shares, all share-based compensation awards, regardless of grant dates, will entitle holders to the equivalent number of Class A ordinary shares


 

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once the vesting and exercising conditions on such share-based compensation awards are met.

  

See “Description of Share Capital.”

The ADSs

  

Each ADS represents              Class A ordinary shares.

 

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

 

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

 

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

 

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

 

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

Use of proceeds

  

We expect that we will receive net proceeds of approximately US$             million from the sale of ADSs in this offering, assuming an initial public offering price of US$             per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering to enhance our research and product development capabilities and invest in technology; to invest in sales, marketing and branding; and for working capital and general corporate purposes. See “Use of Proceeds” for additional information.

Lock-up

   [We, our directors and officers, all of our existing shareholders and certain of our option holders] 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, subject to certain exceptions. See “Shares and ADSs Eligible for Future Sale” and “Underwriting.”

Directed Share Program

   At our request, the underwriters have reserved up to 5% of the ADSs being offered by this prospectus (assuming the

 

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   underwriters exercise their over-allotment option to purchase additional ADSs in full) for sale at the initial public offering price to our directors, executive officers, employees, business associates and members of their families. The directed share program will be administered by Futu Inc. We do not know if these individuals will choose to purchase all or any portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs that are available to the general public. Any reserved ADSs that are not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs offered by this prospectus. Certain participants may be subject to the lock-up agreements as described in “Underwriting—Directed Share Program” elsewhere in this prospectus.

Risk Factors

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

Listing

   We intend to apply to have the ADSs listed on The Nasdaq Global Select Market. The ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

Nasdaq trading symbol

   KOOL

Payment and settlement

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

Depository

   JPMorgan Chase Bank, N.A.

The total of              ordinary shares that will be issued and outstanding immediately after this offering is based on 1,203,790,528 ordinary shares outstanding immediately prior to this offering, which consists of (i) 432,787,280 ordinary shares beneficially owned by our co-founders, which will be re-designated to the same number of Class B ordinary shares on a one-for-one basis immediately prior to the competition of this offering, (ii) 19,659,560 ordinary share beneficially owned by persons other than our co-founders, which will be re-designated to the same number of Class A ordinary shares on a one-for-one basis immediately prior to the competition of this offering, and (iii) 751,343,688 preferred shares, which will be re-designated to the same number of Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, and excludes:

 

   

40,212,720 Class B ordinary shares issuable to our co-founders after the completion of this offering assuming the exercise of the options granted to them under our 2014 Equity Incentive Plan, with the exercise price of US$0.0376 per share;

 

   

169,458,727 Class A ordinary shares issuable upon the exercise of share options outstanding as of the date of this prospectus, with a weighted average exercise price of US$                per share;

 

   

3,305,160 Class A ordinary shares available for future issuance under our 2014 Equity Incentive Plan; and

 

   

the Class A ordinary shares reserved for future issuance under our 2021 Share Incentive Plan.

Except as otherwise indicated, all information in this prospectus reflects and assumes:

 

   

no exercise of the outstanding share options described above;



 

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no exercise of the underwriters’ over-allotment option to purchase additional ADSs representing Class A ordinary shares; and

 

   

the effectiveness of our Eighth Amended and Restated Memorandum and Articles of Association, which will occur immediately prior to the completion of this offering.



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of comprehensive loss data for the years ended December 31, 2019 and 2020, summary consolidated balance sheet data as of December 31, 2019 and 2020 and summary consolidated cash flow data for the years ended December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of comprehensive loss data for the three months ended March 31, 2020 and 2021, summary consolidated balance sheet data as of March 31, 2021 and summary consolidated cash flow data for the three months ended March 31, 2020 and 2021 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated interim financial data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of results expected for future periods. You should read this 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.

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

 

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

Summary Consolidated Statements of Comprehensive Loss Data:

           

Revenues

    282,295       353,418       54,164       75,675       100,889       15,399  

Cost of revenues

    (88,002     (114,669     (17,574     (22,057     (33,943     (5,181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    194,293       238,749       36,590       53,618       66,946       10,218  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Research and development expenses

    (191,768     (270,714     (41,489     (54,054     (98,897     (15,095

Sales and marketing expenses

    (197,339     (219,136     (33,584     (39,765     (70,882     (10,819

General and administrative expenses(1)

    (84,478     (67,377     (10,326     (13,241     (18,165     (2,773
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (473,585     (557,227     (85,399     (107,060     (187,944     (28,687

Other operating income, net

    5,455       9,003       1,380       2,807       1,381       211  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (273,837     (309,475     (47,429     (50,635     (119,617     (18,258

Interest income

    11,296       9,058       1,388       1,931       2,656       405  

Foreign exchange (losses)/gains

    (883     586       90       (75     (36     (5

Investment income

    2,867       3,222       494       33       22       3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expenses

    (260,557     (296,609     (45,457     (48,746     (116,975     (17,855
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

    (260,557     (296,609     (45,457     (48,746     (116,975     (17,855


 

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

Accretion to convertible redeemable preferred shares redemption value

    (88,386     (133,409     (20,446     (28,293     (45,315     (6,916

Deemed dividend to convertible redeemable preferred shareholders

    (61,769                              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

    (410,712     (430,018     (65,903     (77,039     (162,290     (24,771
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (260,557     (296,609     (45,457     (48,746     (116,975     (17,855
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

           

Foreign currency translation adjustment, net of nil tax

    2,242       (18,716     (2,868     2,432       2,456       375  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

    (258,315     (315,325     (48,325     (46,314     (114,519     (17,480
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders

           

—Basic and diluted:

    (1.08     (1.02     (0.16     (0.19     (0.38     (0.06

Weighted average number of ordinary shares

           

—Basic and diluted:

    380,699,517       419,988,526       419,988,526       411,142,826       429,976,558       429,976,558  

 

Note:

(1)

General and administrative expenses included share-based compensation of RMB38.5 million, RMB11.5 million (US$1.8 million), RMB3.7 million and RMB1.7 million (US$0.3 million) in 2019, 2020 and the three months ended March 31, 2020 and 2021, respectively, which resulted from the vesting of restricted shares of our co-founders.



 

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The following table sets forth the unaudited pro forma basic and diluted net loss per share giving effect to (i) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares on one-for-one basis as of January 1, 2020, irrespective of when these convertible redeemable preferred shares were issued; (ii) the recording of unrecognized share-based compensation expense for share options exercisable upon the consummation of this offering as if the IPO performance condition for these share options had been achieved; (iii) the issuance of 40,212,720 Class B ordinary shares to our co-founders as if the IPO performance condition had been achieved as of January 1, 2020 and our co-founders had exercised the options granted to them; and (iv) weighted average number effects of ordinary shares related to share options exercisable at a minimal exercise price considered as contingently issuable shares since January 1, 2020 when IPO performance condition was satisfied and the service condition continued to be satisfied during the year ended December 31, 2020 and three months ended March 31, 2021.

 

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

Numerator:

       

Net loss attributable to ordinary shareholders

    (430,018     (65,903     (162,290     (24,771

Pro forma adjustment of conversion of convertible redeemable preferred shares

    133,409       20,446       45,315       6,916  

Pro forma adjustment of share-based compensation

    (102,104     (15,648     (2,062     (314
 

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for pro forma basic and diluted net loss per share

    (398,713     (61,105     (119,037     (18,169
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Weighted average number of ordinary shares outstanding

    419,988,526       419,988,526       429,976,558       429,976,558  

Pro forma effect of conversion of convertible redeemable preferred shares

    751,343,688       751,343,688       751,343,688       751,343,688  

Pro forma effect of the issuance of ordinary shares to the co-founders for the exercise of the options granted

    40,212,720       40,212,720       40,212,720       40,212,720  

Pro forma effect of contingently issuable shares

    45,017,730       45,017,730       46,562,002       46,562,002  
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator for pro forma basic and diluted net loss per share

    1,256,562,664       1,256,562,664       1,268,094,968       1,268,094,968  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted net loss per ordinary share:

    (0.32     (0.05     (0.09     (0.01
 

 

 

   

 

 

   

 

 

   

 

 

 


 

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

 

    As of December 31,     As of March 31,  
    2019     2020     2021  
    Actual     Actual     Actual     Pro Forma
(Unaudited)(1)
 
    RMB     RMB     US$     RMB     US$     RMB     US$  
    (in thousands)  

Summary Consolidated Balance Sheets Data:

             

Cash and cash equivalents

    503,093       846,459       129,726       674,377       102,930       684,283       104,442  

Restricted cash

    1,467       1,242       190       530       81       530       81  

Short-term investments

    16,546       4,989       765       1,864       285       1,864       285  

Time deposits

          28,128       4,311       28,328       4,324       28,328       4,324  

Property and equipment, net

    35,890       42,105       6,453       43,624       6,658       43,624       6,658  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    582,389       959,590       147,064       816,009       124,549       825,915       126,061  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities:

             

Deferred revenue

    217,525       270,863       41,512       279,885       42,719       279,885       42,719  

Total current liabilities

    316,710       424,567       65,069       403,416       61,574       403,416       61,574  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current liabilities:

             

Deferred revenue

    98,231       116,663       17,879       107,191       16,361       107,191       16,361  

Total non-current liabilities

    100,291       118,226       18,119       108,598       16,576       108,598       16,576  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    417,001       542,793       83,188       512,014       78,150       512,014       78,150  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity

    912,318       1,600,936       245,354       1,646,251       251,267              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ (deficit) equity:

             

Ordinary shares (US$0.000025 par value, 3,327,046,937, 3,248,656,312 shares and 3,248,656,312 shares authorized; 452,446,840 shares issued, 407,052,332, 428,614,723 and 432,019,311 shares outstanding as of December 31, 2019 and 2020, and March 31, 2021, respectively; 771,003,248 Class A ordinary shares and 452,572,471 Class B ordinary shares outstanding on a pro-forma basis as of March 31, 2021)

    74       74       11       74       11       204       31  

Additional paid-in capital

                                  1,760,193       268,658  

Accumulated other comprehensive income

    30,823       12,107       1,855       14,563       2,223       14,563       2,223  

Accumulated deficit

    (777,827     (1,196,320     (183,344     (1,356,893     (207,102     (1,461,059     (223,001

Total shareholders’ (deficit) equity

    (746,930     (1,184,139     (181,478     (1,342,256     (204,868     313,901       47,911  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    582,389       959,590       147,064       816,009       124,549       825,915       126,061  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

The unaudited pro forma summary consolidated balance sheet data as of March 31, 2021 assumes (i) re-designation of 412,359,751 ordinary shares beneficially owned by our three co-founders into 412,359,751 Class B ordinary shares and all the remaining ordinary shares into 19,659,560 Class A ordinary shares on a one-for-one basis; (ii) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares on one-for-one basis as of March 31, 2021; (iii) the issuance of 40,212,720 Class B ordinary shares to our co-founders assuming the exercise of the options granted to them as of March 31, 2021; and (iv) the recording of unrecognized share-based compensation expense of RMB104.2 million (US$15.9 million) for share options exercisable upon the consummation of this offering as if the IPO performance condition for these share options had been achieved as of March 31, 2021.



 

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

 

     For the Year Ended
December 31,
    For the Three Months Ended
March 31,
 
     2019     2020    

 

    2020     2021  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Summary Consolidated Cash Flow Data:

  

Net cash used in operating activities

     (89,350     (132,473     (20,302     (88,534     (147,993     (22,587

Net cash provided by/(used in) investing activities

     (39,783     (58,337     (8,941     196       (27,318     (4,170

Net cash provided by financing activities

     163,184       555,209       85,090                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     5,071       (21,258     (3,258     2,380       2,517       384  

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

     39,122       343,141       52,589       (85,958     (172,794     (26,373

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

     465,438       504,560       77,327       504,560       847,701       129,384  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     504,560       847,701       129,916       418,602       674,907       103,011  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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RISK FACTORS

Investing in our ADSs involves a high degree of risk. Before you invest in our ADSs, you should carefully consider the risks described below together with all of the other information contained in this prospectus, including our financial statements and the related notes included elsewhere in this prospectus. In particular, as we are a China-based company incorporated in the Cayman Islands, you should pay special attention to the subsection headed “Risks Relating to Doing Business in China” below. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially. In such event, the trading price of our ADSs could decline, which would cause you to lose all or part of your investment. Please also see “Special Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Industry

Our historical growth may not be indicative of our future growth. If we fail to properly manage future growth, our business, financial condition, results of operations, and prospects could be materially adversely affected.

We have experienced rapid growth in recent periods. Our revenues increased by 33% from RMB75.7 million in the three months ended March 31, 2020 to RMB100.9 million (US$15.4 million) in the three months ended March 31, 2021. Our revenue grew by 25% from RMB282.3 million in 2019 to RMB353.4 million (US$54.2 million) in 2020. Our recent growth has been primarily driven by the increases in both number of customers and subscriptions of our services. We may fail to continue our growth or maintain our historical growth rates. You should not consider our historical growth and profitability as indicative of our future financial performance.

We believe our revenue growth depends on a number of factors, including, but not limited to, our ability to:

 

   

retain our existing users and customers;

 

   

achieve widespread acceptance and use of our software solutions;

 

   

expand the features and capabilities of our software solutions;

 

   

attract new users and customers;

 

   

provide excellent user experience;

 

   

maintain the security and reliability of our software solutions;

 

   

maintain or increase our net revenue retention rate, expand usage with our software solutions, and sell premium versions of our software solutions;

 

   

convert users of our free versions into paying customers;

 

   

price our software solutions effectively so that we are able to attract and retain paying customers without compromising our profitability;

 

   

introduce our services and grow their adoption in new markets outside of the PRC;

 

   

adequately expand our sales force;

 

   

comply with existing and new applicable laws and regulations;

 

   

successfully compete against established companies and new market entrants, as well as existing software tools; and

 

   

increase awareness of our brand globally.

If we are unable to accomplish any of these goals, our revenue growth will be harmed. If our revenue growth does not increase to offset our future operating expenses, our business, results of operations, and financial

 

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condition will be harmed, and we may not be able to achieve or maintain profitability. We have also encountered in the past, and expect to encounter in the future, risks and uncertainties frequently experienced by growing companies in rapidly evolving industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our growth rates may slow and our business would suffer.

We have a history of losses and we may not be able to achieve or sustain profitability in the future.

We have sustained losses since our inception and could continue to incur net losses in the future. We incurred a net loss of RMB260.6, RMB296.6 million (US$45.5 million) and RMB117.0 million (US$17.9 million) for 2019, 2020 and three months ended March 31, 2021, respectively. Such losses were primarily attributable to the substantial investment in product development, technology support and marketing of our products as we continued to drive the rapid and long-term growth of our business. We intend to continue investing in expanding our business, upgrading our technology, increasing our sales and marketing efforts, and expanding into new geographical markets. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenues enough to offset our increasing costs and expenses. If we are unable to achieve and sustain profitability, the value of our business and securities may significantly decrease. Furthermore, it is difficult to predict the growth rate of our market, customer demands for our products and retention rate and competitiveness of our products in the future. As a result, our business may not become or remain profitable, and our business, financial conditions, results of operations and prospects could be materially and adversely affected and our share price may decrease significantly.

Our success depends on the growth in market acceptance for our cloud-based software solutions. If the market for cloud-based solutions develops more slowly than we expect or declines, our revenues could decrease and our business could be adversely affected.

Our success depends on the willingness of our existing and potential customers, such as interior design and construction companies, furniture manufacturers and retailers, custom furniture manufacturers, real estate developers and interior DDC material providers, to use third-party software solutions. The acceptance for our software solutions is closely associated with the overall acceptance of software solutions in the interior DDC industry. The market acceptance depends on a number of factors, including the performance, the cost to customers, perceived value associated with cloud computing and the ability of service providers to address security and privacy concerns. If we or other major service providers experience any material security incidents, loss of customer data, disruptions in delivery or other problems, the market for software solutions to our industry as a whole, including our products and services, may be negatively affected. If cloud-based software services do not achieve widespread adoption, or there is a reduction in demand for such services caused by a lack of market acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, the market for our software solutions may not develop and our business, financial conditions, results of operations and prospect could be materially and adversely affected.

If we fail to improve and enhance the functions, performance, reliability, design, security, and scalability of our software solutions to suit our customers’ evolving needs, we may lose our customers.

The market for software solutions to the interior DDC industry in which we operate and compete is constantly changing with technology and product innovations. Our success has been based on our dedication to the development of software solutions for the interior DDC industry and our ability to identify and meet the business needs of our customers. For further information on our software solutions, see “Business – Our Products.” To achieve the sustainable growth of our business, we must continually dedicate our efforts to attracting new customers, retaining existing customers and increasing their incremental spending on our products and services. This requires thorough understanding of our customers’ evolving needs in their changing businesses and launching new products and improving our existing products in a timely manner to keep our customers engaged.

 

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We cannot assure you that our existing and future products or solutions will sustain the current level of popularity. Our customers may also demand features and capabilities that our current solutions do not have, or that our current platform cannot support, and we may need to invest significantly in research and development to build these features and capabilities. We may experience difficulties in developing new technologies and solutions as it is costly and time consuming, which in turn could delay or prevent the development, introduction or implementation of new solutions, services and enhancements. In addition, when we expand into new verticals, our existing solutions may not address the business demand of customers from the new verticals effectively. If we fail to correctly identify our customers’ demands or continuously provide them with solutions that add value to their businesses, our customers may be reluctant to increase their spending on our solutions, or may cease to use our products and turn to superior and more customer-friendly solutions offered by our competitors. As a result, the growth of our business may be stalled, which may, in turn, materially and adversely affect our business, results of operations, financial condition and prospects.

If we fail to continue innovating and keeping pace with technological developments, our business may be materially and adversely affected.

The industry we operate in is characterized by fast changing technologies and customer demands, as well as rapid development and continued enhancement of software solutions. Although we have been successful in capturing the market opportunities created by the cloud transformation in the interior design, decoration and construction industry in China, to remain competitive, we must continue to stay abreast of the continuously evolving industry trends and rapid technological developments. We have invested and intend to continue investing significant resources in our cutting-edges technology engines, such as 3D graphics, high-speed rendering, parametric design, geometric modeling, simulation and digital twin, to enhance our products in different business scenarios. Nevertheless, we may not be able to leverage new technologies effectively or adapt our products to meet customers’ needs or emerging industry standards. In addition, while we have invested a significant amount of time and money in software development to date, we may not have sufficient resources to continue to invest at the same level going forward. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions, whether for technical, legal, financial or other reasons, our business may be materially and adversely affected. Moreover, our success will depend partially on our ability to continuously identify, develop, acquire, protect or license advanced and new technologies that are valuable to our products and services. Failure to do so could render our existing products and services obsolete and unappealing, thereby adversely affecting our business prospects.

In addition, because our services are designed to operate over various networks, across numerous mobile devices, operating systems, and computer hardware and software platforms using a standard browser, we will need to continuously modify and enhance our services to keep pace with changes in internet-related hardware, software, communication, browser, application software development platform and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to the market in a timely manner. Moreover, uncertainties regarding the timing and nature of the development in network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development or service delivery expenses. Any failure of our services to operate effectively with future network platforms and technologies could reduce the demand for our products and services, result in customer dissatisfaction, and adversely affect our business, financial condition, results of operations and prospects.

Our initiatives to develop new products, new solutions and introduce new technologies may not succeed, which may limit our future growth.

We have invested and plan to continue investing heavily in research and development of new products, solutions and technologies. However, positive research results may not lead to commercially successful products. The new products we develop may not be commercially viable and may not reach the industry standards or meet customers’ needs. As a result, we cannot assure you that our efforts in research and development will translate into commercial success.

 

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In addition, radical technological changes may not be well received by the market or lead to a long-term success. We first introduced our cloud-native computer-aided design, or CAD, solutions in 2013, which has enabled us to capture market opportunities, and improve deployment and operational efficiency. Despite our belief that cloud-native CAD solutions are a superior alternative to the traditional CAD solutions, our customers, such as interior design and construction companies, furniture manufacturers and retailer, custom furniture manufacturers and real estate developers, may not be willing to undertake such technological changes, and as a result we may suffer a lag in customer adoption. New products or features may initially suffer from performance and quality issues that may negatively impact our ability to market and sell such products to new and existing customers. There is no assurance that any enhancements to our platform or new products, features, or capabilities will be compelling to our customers or gain market acceptance. Additionally, we may experience difficulties with software development, or marketing that could delay or prevent our development, introduction, or implementation of new products, features, or capabilities. Any delays in releasing new products, features, or capabilities could result in adverse publicity, loss of revenue or market acceptance, or claims by customers brought against us, all of which could harm our business.

A downturn or any adverse developments in China’s interior DDC industry may decrease the demand for our software solutions.

In 2019 and 2020, customers from China contributed approximately 99.7% and 96.0% of our total revenues. We expect that a substantial majority of our revenues will continue to come from our business operation in China. Our operational and financial performances are subject to upturns and downturns of the interior DDC industry in China. China’s interior DDC industry may be affected by various factors including the economy in China, demand and supply for real properties, seasonality, availability of alternative investments, inflation, and any macroeconomic control measures implemented by the PRC government. These factors are beyond our control. A downturn or any adverse developments in China’s interior DDC market may decrease the demand for our software solutions and diminish our ability to generate profits.

We operate in a competitive market and may not be able to compete successfully against our existing and future competitors.

The software solution market for the interior DDC industry is relatively new, rapidly evolving and competitive. We face competition in various aspects of our business, including research and development capabilities, customer services and retention, talents, brand awareness, commercial relationships and financial, technical, marketing and other resources. Currently, we primarily face competition from international on-premise 3D CAD software providers and domestic interior DDC industry incumbents that also provide 3D design services, many of which have competitive advantages over us, such as better name recognition, longer operating histories, larger marketing budgets, existing or more established relationships, greater third-party integration, access to larger customer bases, and better financial, technical, pricing and marketing strategies, and other resources. Some of our competitors may make acquisitions or enter into strategic relationships with third parties to offer a broader range of products than we do. These combinations may make it more difficult for us to effectively compete. In addition, the interior DDC industry exhibits massive opportunities which may attract major software companies to enter the market by adopting a similar business model, which may significantly affect our market share and sales volume. We may be subject to more competition if established companies from other market segments or geographical markets expand into our market segment or geographical market.

We expect these competitive dynamics to continue and intensify in the future as competitors attempt to strengthen or maintain their market positions and as new participants enter the market. We cannot assure you that we will be able to compete effectively or efficiently with current or future competitors. Our competitors may be able to develop products better accepted by the customers or may be able to respond more quickly and effectively to new opportunities and changing technologies, regulations and customers’ needs. In addition, some of our competitors may quickly expand their existing customer base and sales network and adopt more aggressive pricing policies and offer more attractive sales terms. This could cause us to lose potential sales or compel us to

 

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sell our products and services at lower prices to remain competitive. If we are unable to compete successfully against our current or potential competitors, our business, financial condition, and results of operations may be materially and adversely impacted.

We are continuing to expand our operations outside the PRC, where we may be subject to increased business, regulatory, and economic risks that could materially adversely affect our business, financial condition, results of operations, and prospects.

We have global operations with business outside China in the United States, Australia, Malaysia, Thailand and Vietnam to support our sales and marketing efforts in the surrounding regions. We expect to continue to expand our international operations, which may include opening offices in new jurisdictions and providing our products in additional languages. Any new markets or countries into which we attempt to sell subscriptions to access our solutions may not be receptive. For example, we may not be able to expand further in some overseas markets if we are not able to adapt our products to fit the needs of prospective customers in those markets or if we are unable to satisfy certain country- and industry-specific laws or regulations. In addition, future international expansion will also require considerable management attention and the investment of significant resources while subjecting us to new risks and increasing certain risks that we already face, including risks associated with:

 

   

recruiting and retaining talented and capable employees outside the PRC, including employees who speak multiple languages and come from a wide variety of different cultural backgrounds and customs;

 

   

maintaining our company culture across all of our global teams;

 

   

providing our products and solutions in different languages;

 

   

compliance with applicable international laws and regulations, including laws and regulations with respect to employment, construction, privacy, data protection, consumer protection, foreign investment and unsolicited email, and the risk of penalties and fines against us and individual members of management or employees if our practices are deemed to be out of compliance;

 

   

managing an employee base in jurisdictions with differing employment regulations;

 

   

operating in jurisdictions that do not protect intellectual property rights to the same extent as the PRC and navigating the practical enforcement of such intellectual property rights outside of the PRC;

 

   

changes in foreign laws that could restrict our ability to use our intellectual property outside of the foreign jurisdiction in which we developed it;

 

   

compliance by us and our partners with anti-corruption laws, competition laws, import and export control laws, tariffs, trade barriers, economic sanctions, and other regulatory limitations on our ability to provide our products or platform in certain international markets;

 

   

foreign exchange controls that might require significant lead time in setting up operations in certain geographic territories and might prevent us from repatriating cash earned outside the PRC;

 

   

political and economic instability;

 

   

changes in diplomatic and trade relationships, including the imposition of new trade restrictions, trade protection measures, import or export requirements, trade embargoes, and other trade barriers;

 

   

generally longer payment cycles and greater difficulty in collecting accounts receivable;

 

   

potentially adverse tax consequences in the United States or the international jurisdictions in which we operate; and

 

   

higher costs of doing business internationally, including increased accounting, travel, infrastructure, and legal compliance costs.

 

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Compliance with laws and regulations applicable to our global operations substantially increases our cost of doing business. We may be unable to keep current with changes in laws and regulations as they occur. Although we have implemented policies and procedures designed to support compliance with these laws and regulations, there can be no assurance that we or our employees, partners, and agents will always maintain compliance. Any violations could result in enforcement actions, fines, civil and criminal penalties, damages, injunctions, or reputational harm. If we are unable to comply with these laws and regulations or manage the complexity of our global operations successfully, we may need to relocate or cease operations in certain foreign jurisdictions, which could materially adversely impact our business, financial condition, results of operations, and prospects.

If our expansion into new verticals is not successful, our business, prospects and growth momentum may be materially and adversely affected.

Our future growth and profitability depend, in part, upon our ability to penetrate new vertical markets. While a majority of our current customers are from the interior DDC industry, we believe our cloud-based CAD platform can be applied in business scenarios across diverse end markets, expanding from residential design into more verticals such as commercial and industrial space design and decoration, architecture and infrastructure. Leveraging our unique software solutions that are developed based on our years of technology accumulation, we believe we are able to provide innovative integrated cloud solutions to address the diversified needs of our customers across different verticals. As part of our strategy to expand into new vertical markets, we look for acquisition opportunities that will allow us to increase our market penetration, technological capabilities, product offerings and sales capabilities. We may not be able to successfully identify suitable acquisition in the future, and if we do, they may not provide us with the benefits we anticipated.

Our expansion into new vertical markets also depends upon our ability to adapt our existing technology or to develop new technologies to meet the particular needs of each new vertical market. We may not have adequate financial or technological resources to develop effective and secure services or distribution channels that will satisfy the demands of these new vertical markets. Our lack of familiarity with new vertical markets may make it more difficult for us to keep pace with the evolving customer demands and preferences. In addition, there may be one or more existing market leaders in any vertical market that we decide to expand into. Such companies may be able to compete more effectively than us by leveraging their deeper industry experience and stronger brand recognition. Also, we will need to comply with new laws and regulations applicable to these businesses, the failure of which would adversely affect our reputation, business, results of operations and financial condition. In light of the foregoing factors, penetrating into these new vertical markets may prove to be more challenging or costly or take longer than we may anticipate. Expansion into any new vertical may place significant strain on our management and resources, and failure to expand into new vertical markets could have a material adverse effect on our business and prospects.

Salesforce efficiency has significant impact on our business. Failure to conduct marketing activities in a cost-effective manner could reduce our market share and materially and adversely affect our financial condition, results of operations and profitability.

Sales of subscriptions to access our products and solutions will depend to a significant extent on our ability to expand our sales and marketing capabilities. Due to the technical nature of software solutions, we mainly rely on our direct sales team to conduct marketing activities and drive sales of our software solutions. While we have adopted a freemium model to provide low-friction entry points for all users, which help users familiarize themselves with our products and solutions, we devote significant sales efforts to educate prospective customers, particularly large enterprises, about the use and benefits of our products and solutions. We expect that we will continue to require intensive sales efforts to educate prospective customers about the uses and benefits of our products and solutions. To continue and further improve customer education, we plan to continue expanding our salesforce, both domestically and internationally. We have also built a global customer success support team to foster customer loyalty and promote additional subscription from existing customers through robust 24/7/365 after-sales services. Identifying, recruiting, and training qualified sales representatives and customer success

 

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support specialists is time-consuming and resource-intensive, and they may not be fully trained and productive for a significant amount of time following their hiring, if ever. In addition, these considerable sales and marketing efforts may also increase our customer acquisition costs. Furthermore, we may have difficulty in convincing prospective customers of the value of adopting our products. Even if we are able to do so, they may decide not to purchase our products and solutions for a variety of reasons, some of which are out of our control. Our business will be harmed if our sales efforts do not generate a correspondingly significant increase in revenue. In addition to the direct sales force, we also leverage the network of our channel partners inside and outside China to reach potential customers and advertise our products and solutions at various venues, such as social media and industry trade shows.

If we fail to conduct sales and marketing activities in a cost-effective way, we may incur considerable marketing expenses, which could adversely affect our business and operating results. Additionally, our brand promotion and marketing activities may not be well received by customers and may not result in the levels of sales that we anticipate. Meanwhile, marketing approaches and tools in the market for software solutions to the interior DDC industry in China are evolving, which may further require us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and customer preferences. Failure to introduce new marketing approaches in a cost-effective manner could reduce our market share and materially and adversely affect our financial condition, results of operations and profitability.

Any failure to provide high-quality customer services may materially and adversely impact our brand, business, financial condition, and results of operations.

We believe our focus on customer success and support is critical to attracting new customers, retaining existing customers, driving their spending and growing our business. While we have designed our products to be easy-to-use, our customers depend on our customer success teams to provide customer care and support services. If we do not provide effective ongoing support, our ability to sell additional products to existing customers could be adversely affected, and our reputation with prospective customers or the industry could be damaged. If we experience increased customer demand for support, we may face increased costs that may harm our results of operations. The number of our customers has grown significantly, which has put additional pressure on our customer success teams. We cannot assure you that we will be able to maintain and improve customer satisfaction over time. If we are unable to provide efficient support services or if we need to hire additional support resources, potentially through third parties, our business, financial condition, results of operations, and prospects could be adversely affected. Additionally, our ability to acquire new customers is highly dependent on our business reputation and on positive recommendations from existing customers. Any failure to maintain high-quality support, or a market perception that we do not maintain high-quality support, for our customers and collaborators could materially adversely affect our business, financial condition, results of operations, and prospects.

The experience of our users depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control.

One of the most important features of our platform is its broad interoperability with a range of devices, web browsers, operating systems, and third-party applications. Our platform enables customers to connect other software, applications, and data to our platform. As of December 31, 2020, our products were compatible with over 40 third-party applications. Accordingly, we are dependent on the accessibility of our solutions across web browsers, operating systems, and the third-party applications that we oftentimes do not control. Third-party applications and products are constantly evolving, and we may not be able to modify our platform to assure its compatibility with those of third parties following development changes. In addition, some of our competitors may be able to disrupt the operations or compatibility of our platform with their applications that some of our customers may rely upon. If our platform has integration or operability failures with these operating systems or third-party applications, customers may not adopt our platform, which could materially adversely affect our business, financial conditions, results of operations, and prospects.

 

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Our brands are integral to our success. If we fail to effectively maintain, promote and enhance our brands, our business and competitive advantage may be harmed.

We believe that our Kujiale, Coohom, Modelo and Meijian brands are critical to maintaining and expanding our business. Maintaining and enhancing our brands depend largely on our ability to continue to provide high-quality, well-designed, useful, reliable, and innovative software solutions, which we cannot assure you we will do successfully.

We believe the importance of brand recognition will increase as competition in our market intensifies. Any unfavorable publicity or perception of our products or platform or the providers of similar software generally, could adversely affect our reputation and our ability to attract and retain customers. In addition to our ability to provide reliable and useful software solutions at competitive prices, the successful promotion of our brand will also depend on the effectiveness of our marketing efforts. We market our software solutions through our direct sales force, channels partners, and a number of free traffic sources, including customers’ word-of-mouth referrals. We have incurred significant costs and expenses with our efforts to increase our brand awareness. We cannot assure you, however, that our sales and marketing expenses will lead to increasing revenue, and even if they did, such increases in revenue might not be sufficient to offset the expenses incurred.

Interruptions, performance issues or security issues associated with our products and platform could materially and adversely affect our business, financial condition, results of operations, and prospects.

We have experienced, and may in the future experience, service interruptions and other performance issues due to a variety of factors. Our future growth depends in part on the ability of our existing and prospective customers to access our solutions and platform reliably and at any time. Certain of our customer agreements contain service level commitments, including specifications regarding the availability and performance of our platform. If we are unable to meet our stated service level commitments or if we suffer extended periods of poor performance or unavailability of our platform, we may be contractually obligated to provide affected customers with service credits against existing subscriptions or, in certain cases, refunds. Any service interruptions or other performance issues could negatively impact our renewal rates and harm our ability to attract new customers, and as a result could materially adversely affect our business, financial condition, results of operations, and prospects.

Additionally, our products and platform are inherently complex and may, from time to time, contain material defects or errors, particularly when new products or new features or capabilities are released. We have in the past found defects or errors in our products and platform and we may detect new defects or errors in the future. Any real or perceived errors, failures, vulnerabilities, or bugs in our products or platform could result in negative publicity or lead to data security, access, retention, or performance issues, all of which could harm our business and reputation. In addition, the costs incurred in correcting such defects or errors may be substantial. Any of these risks could materially adversely affect our business, financial condition, results of operations, and prospects.

We have been and may in the future be involved in disputes relating to alleged infringement of intellectual property rights, including disputes in relation to the floor plans, digital properties or other content materials in our design library, which could adversely affect our business, operating results and financial condition.

There are considerable patent, copyright and other intellectual property development activities in our industry. Our future success depends, in part, on not infringing the intellectual property rights of others. Our competitors or other third parties have in the past claimed and may in the future claim that our products, our platform and its underlying technology, or content on our platform infringe on their intellectual property rights.

We may not have complete licenses for the copyrights underlying a portion of the content offered on our platform, and therefore we may be subject to assertions by third parties of infringement or other violations by us of their copyright in connection with such content. Our comprehensive design library covered over 90% of

 

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household floor plans for new residential buildings in China in the past five years, according to statistics from Fang.com, and over 80 million design models and authentic textures. Most of these digital assets were uploaded by users to our platform before or during the use of our products. A small portion of these digital assets, such as certain design models and floor plans, are either purchased from certain paid-for-download database or collected through publicly available channels online by our employees, or re-created by third parties contracted by us based on what we believe to be publicly available information. Given the large volume of such user-generated content available on our platform, it is challenging for us to accurately identify and verify the individual users that uploaded such content, the copyright status of such content, and the appropriate copyright owners from whom copyright licenses should be obtained. While we have implemented measures to prevent infringement of intellectual property rights of third parties in compliance with applicable laws, we cannot assure you that the floor plans, design models and other digital assets on our platform would not be subject to any claim or litigation brought against us based on alleged infringement of intellectual property rights. Specifically, it is possible that the acknowledgments and agreements made by users may not be enforceable against third parties who file claims against us. In addition, individual users who upload infringing content on our platform may not have sufficient resources to fully indemnify us, if at all, for any such claims.

Any claims or litigation with respect to intellectual property infringement could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or loyalty payments, prevent us from offering our products, and require us to develop alternative non-infringing intellectual property or require that we comply with other unfavorable terms, any of which could significantly increase our operating expenses. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to modify our products or platform, which could be costly and disruptive to our operations. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business. Patent infringement, copyright infringement, trademark infringement, trade secret misappropriation and other intellectual property claims and proceedings brought against us, whether successful or not, could harm our brand, business, operating results and financial condition.

We use software licensed from third parties and our inability to maintain those licenses could materially adversely affect our business, financial condition, results of operations, and prospects.

We currently incorporate, and will in the future incorporate, certain software licensed from third parties into our products and services to offer attractive user experience and drive customer acceptance of our products and services. We cannot be certain that our licensors do not or will not infringe on the intellectual property rights of third parties or that our licensors have or will have sufficient rights to the licensed intellectual property in all jurisdictions where we may market our products. If we are unable to continue to license technology because of intellectual property infringement claims brought by third parties against our licensors or against us, or if we are unable to renew our existing license agreements or enter into new licenses on commercially reasonable terms, our ability to develop and sell products containing that technology would be limited, and our business could be harmed.

Some of our agreements with our licensors may give licensors broad discretion to change and interpret the terms of service, which may have unfavorable impact on our business. If we are unable to license or continue to license technology from third parties, we may be forced to acquire or develop alternative technology. Although we believe that commercially reasonable alternatives to the third-party software we currently use are available, this may not always be the case and it may be difficult or costly to find such alternatives. We may be required to use alternative technology of lower quality or inferior performance. This could limit or delay our ability to offer certain existing, new, or competitive products and may increase our costs. Integrating new third-party software into our existing software system may consume significant amount of our time and resources. Our products and services depend on successful operation of third-party software in conjunction with our software, so any undetected errors or defects in the third-party software could impair our products and services. As a result, our business, financial condition, and results of operations could be materially adversely affected.

 

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The COVID-19 pandemic could have an adverse impact on our business, operations, and the markets in which we, our partners, and customers operate.

Since 2020, the COVID-19 pandemic has had material and adverse economic and social impacts around the world. The Chinese government has imposed widespread lockdowns, closure of workplaces and restrictions on mobility and travel to contain the spread of the virus. During the lockdowns, we had to temporarily close certain of our office facilities, restrict employee travel, switch to online virtual meetings or even cancel meetings with partners, all of which have temporarily restrained our operating activities, including our sales efforts. While the cloud-native nature of our platform and operations helped reduce the impact of COVID-19 on us, to the extent physical meetings were required or preferred, our operations, sales and marketing activities and customer success support had been affected. While we have employed various measures to mitigate the impact of the COVID-19 pandemic on our business operations, we cannot assure you that our efforts will continue to be effective or at all.

It is uncertain as to how long and how severely the COVID-19 pandemic may continue to impact us. There continue to be significant uncertainties associated with the coronavirus, including with respect to the availability of vaccines, the duration of the pandemic, and actions that may be taken by Chinese or other governmental authorities to contain the coronavirus or to treat its impact. The full impact of the coronavirus is unknown at this time. If the pandemic continues and lasts for a prolonged period in the regions where we operate, the economy could suffer substantially from the measures and restrictions taken to combat the virus, which would in turn have adverse impact on the design, decoration and construction industry, including our business prospects. Any significant disruption resulting from this or similar epidemics on a large scale or over a prolonged period of time could cause significant disruption to our business until we would be able to resume normal business operations, negatively affecting our business, results of operations and financial condition. To the extent COVID-19 adversely affects our business, financial condition and results of operations, it may also heighten some of the other risks described in this “Risk Factors” section.

Breaches of our networks or systems, or those of our service providers, could degrade our ability to conduct our business, compromise the integrity of our products, platform and data, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.

We depend on our IT systems to conduct virtually all of our business operations, ranging from our internal operations and research and development activities to our marketing and sales efforts and communications with our customers, service providers and business partners. Individuals or entities may attempt to penetrate our network security, or that of our platform, and to cause harm to our business operations, including by misappropriating our proprietary information or that of our customers, employees, service providers and business partners or to cause interruptions of our products and platform. Because the vulnerabilities and techniques used by such individuals or entities to access, disrupt or sabotage devices, systems and networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques, and we may not become aware in a timely manner of such a security breach, which could exacerbate any damage we experience. Additionally, while we have adopted data protection policies, we depend on our employees and contractors to appropriately handle confidential and sensitive data, including customer data, and to deploy our IT resources in a safe and secure manner that does not expose our network systems to security breaches or the loss of data. Any data security incidents, including internal malfeasance by our employees, unauthorized access or usage, virus or similar breach or disruption of us or our service providers could result in loss of confidential information, damage to our reputation, loss of customers, litigation, regulatory investigations, fines, penalties and other liabilities. Accordingly, if our cybersecurity measures or those of our service providers fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks), compromise or the mishandling of data by our employees, service providers and business partners, then our reputation, business, operating results and financial condition could be adversely affected.

 

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We may not be able to maintain the pricing terms for our products and services or enhance our customer retention rates going forward.

We may need to decrease prices of our products and services to stay competitive. As the markets for our products and services mature, or as competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing model as we have adopted historically. Moreover, certain long-term customers of us, may demand greater price concessions. As a result, in the future we may be required to reduce our prices, which could materially and adversely affect our revenues, profitability, financial position, and cash flow.

In addition, our customers have no obligation to renew their subscriptions for our products and services after expiration of the initial subscription period for our software solutions on our desired terms. We have built a customer health model that helps us leverage big-data guided recommendations to retain existing customers and capture potential business opportunities. However, we may not be always successful in retaining customers. Our customers may renew for fewer number of accounts. Our historical customer retention rates may not be indicative of our customer retention rates in the future. Our customers’ retention rates may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our pricing or our products and services, and their ability to continue their operations and spending levels. In addition, over time the average term of our contracts could change based on retention rates or for other reasons. If our customers do not renew their subscriptions for our products and services on similar terms, our revenues may decline, and our business could suffer.

We may be unsuccessful in making, integrating, and maintaining acquisitions, joint ventures, and strategic investments.

Historically we have made acquisitions and investments to expand our offerings and geographic presence. We expect to continue to evaluate and consider a wide array of potential strategic transactions, including acquisitions of businesses, joint ventures, new technologies, services, products, and other assets, and making strategic investments. Such acquisitions and strategic relationships can help us to build up a robust portfolio, further increase our market share, and strengthen our global presence. Such success depends on our ability to discover high-potential acquisitions and strategic relationships that supplement and enrich our existing offerings. We may not be able to find suitable acquisition, joint venture, and strategic investment candidates, and we may not be able to complete these transactions on favorable terms, or at all. Even if we are able to complete these transactions, they may not ultimately strengthen our competitive position or achieve our strategic goals. As part of our strategy, we endeavor to nurture and preserve each brand’s distinctive identity and purpose, while leveraging the technologies and name recognition of each brand to build a portfolio that covers the entire value chain of the interior DDC industry. We may not be able to successfully manage the various brands and build up such a portfolio, and could be viewed negatively by existing or prospective customers, collaborators, third-party developers, regulators, investors, or others. Any of these transactions could be material to our business, financial condition, and operating results.

We may not realize the anticipated benefits of any or all of our acquisitions, joint ventures, or strategic investments in the time frame expected or at all. Valuations supporting our acquisitions and strategic investments could change rapidly. Following any such transaction, we could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could materially adversely affect our business, financial condition and operating results through the write-off of goodwill and other impairment charges.

We may have to pay cash, incur debt, or issue securities, including equity-based securities, to pay for acquisitions, joint ventures, or strategic investments, each of which could affect our financial condition or the value of our capital stock. The sale of equity to finance any such transaction could result in dilution to our stockholders. If we incur debt in connection with such a transaction, it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to flexibly operate our

 

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business. Any of these factors could materially adversely affect our ability to consummate a transaction, our business, financial condition, results of operations, and prospects.

Our products and platform incorporate open source software, which may subject us to unanticipated conditions, restrictions and certain requirements from the developers and could negatively affect our ability to sell our products and subject us to possible litigation.

Our products and platform incorporate open source software, and we expect to continue to incorporate open source software in our products and platform in the future. Courts have interpreted few of the licenses applicable to open source software, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products and platform. Moreover, although we have implemented policies to regulate the use and incorporation of open source software into our products and platform, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with such policies. If we or our employees fail to comply with open source licenses, we may be subject to certain requirements, including requirements that we offer our products that incorporate the open source software for no cost, that we make publicly available certain portions of our proprietary source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from generating revenues from customers using products that contained the open source software and required to comply with onerous conditions or restrictions on these products. In any of these events, we and our customers could be required to seek licenses from third parties in order to continue offering our products and platform and to re-engineer our products or platform or discontinue offering our products to customers in the event re-engineering cannot be accomplished on a timely basis. In addition, the use of open source software typically exposes us to greater risks when compared to the use of third-party commercial software because open source licensors generally do not provide warranties or controls on the functionality or origin of the software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for unauthorized users to determine how to compromise our products. Any of the foregoing could require us to devote additional research and development resources to re-engineer our products or platform, could result in customer dissatisfaction and help our competitors develop products and services that are similar to or better than ours, and may adversely affect our business, results of operations and financial condition.

Our business is subject to data security risks, and our data security measures may be inadequate to address these risks, making our systems susceptible to compromise, which could materially adversely affect our business, financial condition, results of operations, and prospects.

During the ordinary course of our business, we may collect, process, store and transmit substantial amounts of data and information, including users’ data. We have implemented measures to separate the data stored in our internet data centers and those stored with the third-party vendors. Security incidents may occur in the future, causing unauthorized access to, loss of, or unauthorized disclosure of such information, resulting in regulatory enforcement actions, litigation, indemnification obligations, and other potential liabilities, as well as negative publicity, which could materially adversely affect our business, reputation, financial condition, results of operations, and prospects. Cyberattacks, computer malware, and other compromises of information security measures or malicious internet-based activity continue to increase, and cloud-native platform providers of products and services have been targeted, resulting in breaches of their information security, and are expected to continue to be targeted. We and our third-party vendors are at risk of suffering from similar attacks and breaches.

Our products may also be subject to fraudulent usage and schemes, including third parties accessing customer accounts or viewing data from our platform without our authorization. While we undertake significant

 

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efforts to protect the security and integrity of the information we collect, process, store, and transmit, we cannot entirely mitigate these risks, and there is no guarantee that inadvertent or unauthorized use or disclosure of such information will not occur or that third-parties will not gain unauthorized access to such information despite our efforts. In addition, we rely on our third-party vendors to take appropriate measures to protect the security and integrity of the information on their information systems. We may not be able to anticipate or prevent all techniques that could be used to obtain unauthorized access or to compromise our systems because such techniques change frequently and are generally not detected until after an incident has occurred. Additionally, we cannot be certain that we will be able to address any vulnerabilities in our software that we may become aware of in the future. We expect similar issues to arise in the future as we continue to expand the features and functionality of our products and platform and introduce new products, and we expect to expend significant resources in an effort to protect against security incidents. In addition, any actual or suspected cybersecurity incident or other compromise of our security measures, or those of our third-party vendors, whether as a result of hacking efforts, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, or otherwise, could result in governmental investigations or enforcement actions, litigation, harm to our business, damage to our brand and reputation, significant costs for remediating the effects of such an incident and preventing future incidents, lost revenue due to network downtime, and a decrease in customer and user trust. Concerns regarding privacy, data protection, and information security may also cause some of our customers to stop using our products and platform and decline to renew their subscriptions, and make it harder to acquire new customers. To the extent we do not effectively address these risks, our business, financial condition, results of operations, and prospects could be materially adversely affected.

Many governments have enacted laws requiring companies to provide notice of data security incidents involving certain types of personal data. We are also contractually required to notify certain customers of certain data security breaches. To protect customers’ information, we have adopted multiple security measures that address security risks associated with data transmission, usage, storage, export and presentation. We have adopted an access control policy that requires user authentication every time there is a request to access non-public data. In addition, we have implemented an encryption program that encrypts the sensitive and confidential information stored by us. Despite our efforts, security incidents experienced by us, or by others, such as our competitors or customers, may lead to public disclosures and widespread negative publicity for us, our customers, or the construction software industry generally.

Regulatory requirements regarding the protection of personal information are constantly evolving and can be subject to differing interpretations, making the extent of our responsibilities in that regard uncertain. In the past, we have received notices from the relevant governmental authorities in China requiring us to rectify our collection of personal information in accordance with the applicable law and regulations of the PRC, without imposing any penalty on us. We currently adopt a data privacy policy with respect to how we collect, store, process and use user data and information, and we may only use such data and information to provide and improve our services, content and advertising in strict compliance with such policy. Despite the absence of any material data breach or similar incidents and our continuous efforts to comply with our privacy policy as well as all applicable laws and regulations, any failure or perceived failure to comply with these laws, regulations or policy may result in inquiries and other proceedings or actions against us by governmental authorities or others, which could cause us to lose users and business partners.

There can be no assurance that any limitations of liability provisions in our subscriptions with customers would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. The successful assertion of one or more large claims against us could materially adversely affect our business, financial condition, results of operations, and prospects.

We may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third parties from any unauthorized use of our technologies.

Our design library, trade secrets, trademarks, copyrights, patents, and other intellectual property rights are critical to our success. We rely on, and expect to continue to rely on, confidentiality agreements, non-compete

 

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agreements, invention assignment agreements and licensing agreements with our employees and third parties to protect our intellectual properties. However, events beyond our control may pose threats to our intellectual property rights and the integrity of our products and brand. Effective protection of our trademarks, copyrights, domain names, patent rights, and other intellectual property rights is expensive and challenging. While we have taken measures to protect our intellectual property rights, including implementing a set of comprehensive internal policies to establish robust management over our intellectual property rights, and deploying a special team to guide, manage, supervise and monitor our daily work regarding intellectual property rights, we cannot assure you that such efforts are adequate to guard against any potential infringement and misappropriation. In addition, our intellectual property rights may be declared invalid or unenforceable by the courts.

Similarly, to protect our unpatented proprietary information and technology, such as trade secrets, we rely on our agreements with employees and third parties that contain restrictions on the use and disclosure of such information or technology. For example, our employees and third parties are required to keep confidential of any unpatented proprietary information and technology during the contract term and after the termination of the employment agreement. In addition, the agreements with our employees and third parties explicitly provide for all rights and obligations regarding the ownership and protection of intellectual property rights. These agreements may be inadequate or may be breached, either of which could potentially result in unauthorized use or disclosure of our trade secrets and other proprietary information to third parties, including our competitors. As a result, we may lose our competitive advantages derived from such intellectual property. Significant impairments on our intellectual property rights may result in a material and adverse effect on our business.

Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our services and have a negative impact on our business.

The future success of our business depends upon the continued use of the internet as a primary medium for commerce, communication and business solutions. The PRC government has in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. As we have expanded globally, we may also be required to comply with laws or regulations regarding the use of the internet in foreign jurisdictions, such as the General Data Protection Regulation in the European Union and the California Consumer Privacy Act in the United States. Changes in these laws or regulations could require us to modify our products in order to comply with these changes. While we have implemented measures to promote compliance with applicable laws and regulations and track their developments, we cannot assure you that we will always be in compliance. In addition, the modification of our products to ensure compliance can be time-consuming, if not technically impossible. If we are unable to comply with these laws and regulations, or if we cannot modify our products in a timely fashion, our reputation, business, results of operations and financial condition could be materially adversely affected. See also “—Our business is subject to a variety of PRC, U.S. and international laws and regulations, including those regarding privacy, cybersecurity and data protection. Any failure of our platform to comply with applicable laws and regulations could harm our business, operating results and financial condition.”

In addition, government agencies may begin to impose taxes, fees or other charges for accessing the internet. These laws and changes could limit the growth of internet-related commerce or communications generally and reduce the demand for internet-based services such as ours. As our suppliers also carry out their services on the internet, such measures could increase our operating costs and we may not be able to maintain our competitive pricing as compared to the legacy software. These effects combined could adversely affect our business, results of operations and financial condition.

In addition, use of the internet as a business tool could be adversely affected. The performance of the internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our services could suffer.

 

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Negative publicity and allegations involving us, our shareholders, directors, officers, employees, associates and business partners may affect our reputation and, as a result, our business, financial condition, and results of operations may be negatively affected.

We, our shareholders, directors, officers, employees, associates and business partners may be subject to negative media coverage and publicity from time to time. Such negative coverage in the media and publicity could change market perception that we are a trustworthy service provider. In addition, to the extent our employees and business partners were incompliant with any laws or regulations, we may also suffer negative publicity or harm to our reputation. As a result, we may be required to spend significant time and incur substantial costs in response to allegations and negative publicity, and may not be able to diffuse them to the satisfaction of our investors and customers.

We are dependent on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.

Our future performance depends on the continued services and contributions of our senior management, including our co-founders, namely Mr. Huang, Mr. Chen and Mr. Zhu, to oversee and execute our business plans and identify and pursue new opportunities and product innovations. Any loss of service of our senior management or other key employees can cause a significantly delay in or prevent us from achieving our strategic business objectives, and adversely affect our business, financial condition and operating results. From time to time, there may be changes in our senior management team, resulting from the hiring or departure of executives, which could also disrupt our business. Hiring suitable replacements and integrating them into our existing teams also requires significant amount of time, training and resources, and may impact our existing corporate culture. In addition, our senior management team has limited experience in running public companies, which will require us to expend additional resources in hiring additional support staff and incur additional costs and expenses.

If we are unable to attract, retain and motivate qualified personnel, our business may be adversely affected.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel specializing in product development, sales and marketing, particularly with experience in the design, decoration and construction market in China. In addition, the success of our solutions is built on our continuous pursuit of the advanced technologies. With the rapid advancement of technology, we need people with strong technical background in information technology in order to sustain the current level of popularity of our products and solutions. In order to enhance the stability of our team, we are devoted to building a nurturing corporate culture and offered various incentives and trainings to our highly skilled personnel. Nevertheless, we cannot assure you that we can attract or retain qualified personnel. The inability to do so or delays in hiring required personnel may cause significant harm to our business, financial condition and operating results. 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, thereby materially and adversely affecting our business, financial condition, results of operations and prospects.

Meanwhile, the size and scope of our business may require us to hire and retain a wide range of effective and experienced personnel who can adapt to a dynamic, competitive and challenging business environment. Competition for talent and qualified personnel in our industry is intense, and the availability of suitable and qualified candidates in the PRC is limited. Competition for these individuals could cause us to offer higher compensation and other benefits to attract and retain them. In addition, even if we were to offer higher compensation and other benefits, we cannot assure you that these individuals would choose to join, or continue working for, us. If we fail to attract and retain personnel with suitable managerial or other expertise, or to maintain an adequate labor force on a continuous and sustained basis, our financial position and results of operations could be materially and adversely affected.

 

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If we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contribute to our success.

We believe our corporate culture fosters innovation, teamwork, openness and focus on execution and has contributed to our success. As we grow and develop our infrastructure as a public company and expand our operations, we may find it difficult to maintain our corporate culture. Any failure to preserve our culture could harm our future success, including our ability to recruit and retain qualified personnel, innovate and operate effectively, and execute on our business strategies. If we experience any of these risks in connection with future growth, it could impair our ability to attract new customers and retain existing customers and expand their use of our platform, all of which could materially adversely affect our business, financial condition, results of operations, and prospects.

We have granted share-based under our employee stock ownership plan and may continue to grant share-based awards in the future, which may result in increased share-based compensation expenses and have an adverse effect on our future profitability.

We have adopted an equity incentive plan in 2014, or the 2014 Plan, as amended. We account for compensation costs for all share-based awards using a fair-value based method and recognize expenses in our consolidated statements of comprehensive loss in accordance with U.S. GAAP. The maximum aggregate number of shares that we are authorized to issue pursuant to the 2014 plan is 212,976,607 shares. As of the date of this prospectus, options to purchase a total of 209,671,447 ordinary shares have been granted and are outstanding under the 2014 plan. In addition, each of our co-founders Messrs. Xiaohuang Huang, Hang Chen and Hao Zhu has entered into a restricted shares agreement with us and our preferred shareholders, pursuant to which a certain number of ordinary shares held by them became restricted shares subject to vesting on a monthly basis over an agreed period. As of the date of this prospectus, there were a total of 17,022,941 restricted shares subject to vesting in a period over 15 months. See “Management—Equity Incentive Plans.” In 2019, 2020 and the three months ended March 31, 2021, we recorded RMB38.5 million, RMB11.5 million (US$1.8 million) and RMB1.7 million (US$0.3 million), respectively, in share-based compensation expenses, which resulted from the vesting of these restricted shares, respectively. We would have recognized one-time share-based compensation expenses of RMB104.2 million (US$15.9 million) for share incentive awards had this offering been completed on March 31, 2021 pursuant to the IPO performance condition applicable to such awards.

In addition, our shareholders and board of directors approved the 2021 Share Incentive Plan, or the 2021 Plan, in June 2021, which will become effective immediately prior to the completion of this offering. Under the 2021 Plan, the maximum aggregate number of ordinary shares available for issuance, or the Award Pool, shall initially be 1.5% of the ordinary shares of our company outstanding immediately upon completion of this offering. The Award Pool will be increased on an annual basis for each fiscal year of our company during the term of the 2021 Plan commencing on the year following the one in which this offering occurs, by the lesser of (i) an amount equal to 1.5% of the total number of ordinary shares of our company issued and outstanding on the last day of the immediately preceding fiscal year, and (ii) such number of ordinary shares as may be determined by our board of directors.

We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based awards in the future. As a result, our expenses associated with share-based compensation will increase, which may have an adverse effect on our results of operations.

Any non-compliance with applicable anti-bribery and anti-corruption laws and other forms of illegal acts and misconduct by our employees, our business partners and their employees and other related personnel may materially and adversely affect our business operations.

Our business operations are subject to anti-bribery and anti-corruption laws and regulations in China and overseas, which prohibit companies and their intermediaries from making improper payments or other benefits to

 

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government or other parties for the purpose of obtaining or retaining business. While we have adopted and implemented internal controls and procedures to monitor both internal and external compliance with anti-bribery and anti-corruption laws, regulations and policies, we cannot guarantee that such internal controls and procedures will always be effective in preventing non-compliance and exculpating us from penalties or liabilities that may be imposed by relevant government authorities due to violations committed by our employees or our regional channel partners. If our employees or our regional channel partners are found or alleged to have violated anti-bribery or anti-corruption laws and regulations, we may face or be involved in fines, lawsuits and damage to our reputation, which could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to a variety of PRC, U.S. and international laws and regulations, including those regarding privacy, cybersecurity and data protection. Any failure of our platform to comply with applicable laws and regulations could harm our business, operating results and financial condition.

Our operations may from time to time involve cross-border transfer of data, which may subject us and our customers that use our products to privacy, cybersecurity and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of personal data, financial data, health or other similar data and general cybersecurity. Multiple jurisdictions have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of information, including personally identifiable information of individuals.

In the PRC, governmental authorities have enacted a series of laws and regulations to enhance the protection of privacy and data. The PRC Constitution, the PRC Criminal Law, the Civil Code of the PRC and the PRC Cybersecurity Law and relevant regulations require network operators, which may include us, to: (i) ensure the security and stability of the services provided via network; (ii) protect individual privacy and the security of personal data in general by requiring the consent of internet users prior to the collection, use or disclosure of their personal data; and (iii) provide assistance and support in accordance with the law for public security and national security to protect national security or assist with criminal investigations. PRC regulators, including the Ministry of Industry and Information Technology, or the MIIT and the Cyberspace Administration of China, have been increasingly focused on regulation in the areas of cybersecurity and data protection.

In the United States, the U.S. Federal Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data. We continue to see increased regulation of privacy cybersecurity and data protection, including the adoption of more stringent subject matter specific state laws in the United States. For example, in 2018, California enacted the CCPA, which took effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability, and we may be required to modify our practices and take additional steps in an effort to comply with the CCPA. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent state privacy legislation in the United States, which could increase our potential liability and adversely affect our business.

Similarly, many other countries and governmental bodies, including the EU member states, have laws and regulations concerning the collection and use of personal data obtained from individuals located in the EU or by businesses operating within their jurisdiction, which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personal data that identifies or may be used to identify an individual, such as names, telephone numbers, email addresses and, in certain circumstances, IP addresses and other online identifiers. For example, the EU has adopted the General Data Protection Regulation, or the GDPR, which took full effect on May 25, 2018. The

 

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GDPR enhances data protection obligations for businesses and requires service providers (data processors) processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to or greater of €20 million or 4% of global annual revenues. Given the breadth and depth of its obligations, working to meet the requirements of the GDPR has required significant time and resources, including a review of our technology and systems currently in use against the requirements of the GDPR. There are also additional EU laws and regulations (and member states implementations thereof) which govern the protection of consumers and of electronic communications. We have taken measures to address certain obligations under the GDPR and to make us GDPR compliant, but we may be required to take additional steps in order to comply with the GDPR. If our efforts to comply with GDPR or other applicable EU laws and regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and operating results, and our ability to conduct business in the EU could be significantly impaired.

We also continue to see jurisdictions imposing data localization laws, which require personal information, or certain subcategories of personal information to be stored in the jurisdiction of origin. These regulations may inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant additional costs.

Additionally, although we endeavor to have our products and platform comply with applicable laws and regulations, these and other obligations may be modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may conflict with one another, other regulatory requirements, contractual commitments or our practices. We expect that there will continue to be new proposed laws, rules of self-regulatory bodies, regulations and industry standards concerning privacy, data protection and information security in the PRC, United States, the EU and other jurisdictions, and we cannot yet determine the impact such future laws, rules, regulations and standards may have on our business. The uncertainty and changes in the requirements of multiple jurisdictions may increase the cost of compliance, delay or reduce demand for our services, restrict our ability to offer services in certain locations, impact our customers’ ability to deploy our products and solutions in certain jurisdictions, or subject us to claims and litigation from private actors and investigations, proceedings, and sanctions by data protection regulators, all of which could harm our business, financial condition and operating results.

We also may be bound by contractual obligations relating to our collection, use and disclosure of personal, financial and other data or may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy, cybersecurity or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection.

Any failure or perceived failure by us, our products or our platform to comply with new or existing PRC, U.S., EU or other foreign privacy, cybersecurity or data protection laws, regulations, policies, industry standards or legal obligations, any failure to bind our suppliers and contractors to appropriate agreements or to manage their practices or any systems failure or security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other data relating to customers or individuals may result in governmental investigations, inquiries, enforcement actions and prosecutions, private claims and litigation, fines and penalties, adverse publicity or potential loss of business.

We may fail to obtain or maintain all required licenses, permits and approvals to operate our business.

We are required to obtain and maintain applicable licenses, permits and approvals from different regulatory authorities in order to conduct our existing or future business. We have not obtained certain approvals, licenses and permits that may be required for some aspects of our business operations. For example, we deliver designer courses on the platform. According to the PRC Administrative Provisions on Internet Audio-Visual Program Services, entered into force in 2008, a provider of online audio-visual program service, which includes the making and editing of audio-visual programs and broadcasting to the general public online, is required to obtain a

 

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license for online transmission of audio-visual programs, or Audio-Visual Permit. We have not obtained the Audio-Visual Permit for providing internet audio-visual program services and content through our platform in China and we may not be eligible to apply for the Audio-Visual Permit as a privately-held company. As we deliver live-streaming courses on our platform, the relevant authorities may regard our platform as a live-streaming platform and may require us to complete necessary registration procedures pursuant to relevant laws and regulations. Further, as our platform allows users to search the portfolios of interior designers and communicate with them directly, the business scope of our ICP license need to include: (i) information search and query service, and (ii) information instant interactive service. Currently, the business scope of our ICP license does not cover such business and we may not be eligible to apply to cover such business in the scope of the ICP license due to policy reasons. As of the date of this prospectus, we have not been subject to any fines or other form of regulatory or administrative penalties or sanctions due to lack of any of such licenses, approvals, permits, registrations or filings. We are making efforts to obtain all licenses and permits and complete all registration procedures that are necessary to our various business activities, however, there is no assurance that we can timely obtain all such licenses, permits and complete all such registration procedures, or that we will not be subject to penalty for operating without such licenses, permits and registrations.

If the PRC governmental authorities consider that we are operating without proper approvals, licenses or permits, or new laws and regulations are promulgated that require us to obtain additional approvals or licenses or impose additional restrictions on the operation of any part of our business, the PRC governmental authorities have the power, among other things, to order timely rectification, impose 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, results of operations and financial condition.

We are subject to risks relating to litigation and disputes, which could adversely affect our business, prospects, results of operations and financial condition.

We may be subject to disputes or claims of various types brought by our competitors, employees, associates, customers or others against us relating to contractual disputes, labor disputes, intellectual property infringements, competition claims, or disputes involving mistakes or misconducts of our employees. Such claims and disputes may evolve into litigations and damage our reputation and goodwill, thereby adversely affecting our customer base. Litigation is distractive and expensive as it requires time and attention from our management team and employees. In addition, we may need to spend a significant amount to settle claims or pay damages if we lose a lawsuit, which could have a material and adverse effect on our business, financial condition, and results of operations.

We may not have sufficient insurance coverage to cover our potential liability or losses, and our business, financial conditions, results of operations and prospects may be materially and adversely affected should any such liability or losses arise.

We face various risks in connection with our business and may lack adequate insurance coverage or have no relevant insurance coverage. Insurance companies in China do not currently offer as extensive an array of insurance products as insurance companies in other more developed economies do. We have not obtained any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring against these risks, and the difficulties associated with acquiring such insurances on commercially reasonable terms render these insurances impractical for our business. However, any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our business and results of operations.

Our operating results are subject to seasonal fluctuations.

We have experienced, and expect to continue to experience, seasonal fluctuations in our revenues and results of operations. Historically, we have received a relatively lower volume of subscriptions from new and

 

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existing customers in the first quarter of each year. We believe that it results from the reduced number of transactions during the Chinese New Year holiday. As this is a factor affecting the overall business activities in China, we expect this seasonality to continue in the future. Our order volume typically ramps up starting the second quarter of a year as normal business operations accelerate after the Chinese New Year holiday season. As a result, our revenues and cash flows may vary within a fiscal year, and you may not be able to predict our annual results of operations based on a comparison of our interim results of operations.

A severe or prolonged downturn in the PRC or global economy could materially and adversely affect our business, results of operations and financial condition.

The global macroeconomic environment is facing challenges, including the economic slowdown in the Eurozone since 2014, potential impact of the United Kingdom’s exit from the European Union on January 31, 2020, and the adverse impact on the global economies and financial markets as the COVID-19 pandemic continues to evolve into a worldwide health crisis in 2020. The growth of the PRC economy has slowed down since 2012 compared to the previous decade and the trend may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa and over the conflicts involving Ukraine, Syria and North Korea. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes, and the trade disputes between the United States and China. The ongoing trade tensions between the United States and China may have tremendous negative impact on the economies of not merely the two countries concerned, but the global economy as a whole. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. We have expanded globally and have opened offices in the United States, Australia, and Southeast Asia. The successful implementation of our international expansion strategy and the building of our global presence will depend at least partially on a stable global macroeconomic environment. Our international expansion strategy will be hindered if these challenges and uncertainties persist.

Economic conditions in China are sensitive to global economic conditions, changes in domestic economic and political policies, and the expected or perceived overall economic growth rate in China. While the economy in China has grown significantly over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing in recent years. Although growth of China’s economy remained relatively stable, there is a possibility that China’s economic growth may materially decline in the near future. Since a majority of our customers are based in China and contributed a significant portion of our total revenues, any severe or prolonged slowdown in the PRC economy may materially and adversely affect our business, results of operations and financial condition.

We may be unable to obtain any additional capital required in a timely manner or on acceptable terms, or at all. Moreover, our future capital needs may require us to sell additional equity or debt securities that may dilute our shareholders’ shareholdings or subject us to covenants that may restrict our operations or our ability to pay dividends.

To grow our business and remain competitive, we may require additional capital from time to time for our daily operations. Our ability to obtain additional capital is subject to a variety of uncertainties, including:

 

   

our market position and competitiveness in the industries in which we operate;

 

   

our future profitability, overall financial condition, results of operations and cash flows;

 

   

general market conditions for capital-raising activities in China;

 

   

overall conditions of the PRC interior DDC market; and

 

   

economic, political and other conditions in China and internationally.

 

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We may be unable to obtain additional capital in a timely manner or on acceptable terms, or at all. In addition, our future capital or other business needs could require us to sell additional equity or debt securities, or to obtain a credit facility. The sale of additional equity or equity-linked securities could dilute our shareholders’ shareholdings. Any incurrence of indebtedness will also lead to increased debt service obligations, and could result in operating and financing covenants that may restrict our operations or our ability to pay dividends to our shareholders.

We may be subject to governmental export controls and economic sanctions regulations that could impair our ability to compete in international markets due to licensing requirements and could subject us to liability if we are not in compliance with applicable laws.

Certain of our products and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our products and the provision of our services must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including: the possible loss of export privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular deployment may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our products or services, or changes in applicable export or economic sanctions regulations may create delays in the introduction and deployment of our products and services in international markets, or, in some cases, prevent the export of our products or provision of our services to certain countries or end users. Any change in export or economic sanctions regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our products and services, or in our decreased ability to export our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitation on our ability to export our products and provide our services could adversely affect our business, operating results and financial condition.

Further, we incorporate encryption technology into certain of our products. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our customers’ ability to import our products into those countries. Encryption products and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of exports of encryption products, or our failure to obtain required approval for our products, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products and provision of our services, including with respect to new releases of our products and services, may create delays in the introduction of our products and services in international markets, prevent our customers with international operations from deploying our products and using our services throughout their globally-distributed systems or, in some cases, prevent the export of our products or provision of our services to some countries altogether.

If we fail to implement and maintain effective internal controls to remediate our material weakness over financial reporting, our ability to produce accurate financial statements on a timely basis could be impaired.

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures and we were never required to evaluate our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of the effectiveness of our internal control over financial reporting.

 

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In the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2019 and 2020, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2019 and 2020. As defined in the Standards established by the U.S. Public Company Accounting Oversight Board, 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 the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to our lack of competent accounting and financial reporting personnel with appropriate knowledge of U.S. GAAP and the SEC reporting requirements to properly address complex accounting issues and to prepare and review consolidated financial statements and related disclosures in accordance with U.S. GAAP and SEC financial reporting requirements. The material weakness, if not remediated timely, may lead to material misstatements in our consolidated financial statements in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.”

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 material weakness in our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of the effectiveness of our internal control over financial reporting, additional material weaknesses may have been identified.

We plan to undertake steps to strengthen our internal control over financial reporting, including: (i) hiring additional qualified resources equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for accounting and financial reporting personnel, (iii) establish clear roles and responsibilities for accounting and financial reporting staff to address complex accounting issues and to prepare and review consolidated financial statements and related disclosures under U.S. GAAP and SEC reporting requirements, and (iv) enhance our financial closing and reporting policies and procedures, and business process level internal controls relevant to the complex accounting issues to ensure that they are properly accounted for in accordance with U.S. GAAP.

In 2021 to date, we have hired additional accounting and financial reporting staff and built a team to improve our internal control system. In addition, we are in the process of establishing an audit committee. We intend to implement those remedial measures by the end of 2022. We expect that we will incur remediation costs, including but not limited to professional service fee, recruitment fee, training fee and others, of no less than US$2 million.

However, the implementation of these measures may not fully address the material weakness in our internal control over financial reporting, and we cannot conclude that they will be fully remediated in a timely manner. Our failure to correct the material weakness identified or our failure to discover and address any other deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud, expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting commencing with our second annual report on Form 20-F. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS

 

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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 an audit report with adverse opinion on the effectiveness of our internal controls over financial reporting. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In order to establish and maintain effective disclosure controls and procedures and internal controls over financial reporting, we will need to expend significant resources and provide significant management oversight. Developing, implementing and testing changes to our internal controls may require specific compliance training of our directors and employees, entail substantial costs in order to modify our existing accounting systems, take a significant period of time to complete and divert management’s attention from other business concerns. These changes may not, however, be effective in establishing and maintaining adequate internal controls.

In addition, if we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Moreover, if we are unable to meet the requirements of Section 404, we may not be able to remain listed on Nasdaq.

Our global operations and structure subject us to potentially adverse tax consequences.

We generally conduct our global operations through subsidiaries and report our taxable income in various jurisdictions worldwide based on our business operations in those jurisdictions. In particular, our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Also, our tax expense could be affected depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software licenses and related intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. The relevant revenue and taxing authorities may disagree with positions we have taken generally, or our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. The tax laws of certain countries in which we do business could also change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, operating results and financial position.

Our business is subject to the risks of earthquakes, fire, floods, pandemics and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism.

A significant natural disaster, such as an earthquake, fire, flood or pandemic, occurring at one of our headquarters, at one of our other facilities or where a business partner is located could adversely affect our business, operating results and financial condition. Further, if a natural disaster or man-made problem were to affect our service providers, this could adversely affect the ability of our customers to use our products and

 

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platform. In addition, natural disasters and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole, as is the case currently due to the COVID-19 pandemic. We also rely on our network and third-party infrastructure and enterprise applications and internal technology systems for our engineering, sales and marketing, and operations activities. Although we maintain incident management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, operating results and financial condition.

In addition, we rely on the high-performance computing power provided by our internet data centers to handle the large quantity of processing tasks, and on third-party public clouds to store the growing data sets generated by our enlarging user base. If computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks were to affect our internet data centers of the facilities of our third-party cloud providers, this could adversely affect the ability of our customers to access or use our solutions. Such incidents have become more prevalent in our industry, have occurred on our platform, have impacted some of our services providers in the past, and may occur on our platform in the future, despite our continuous efforts to enhance the safety of our facilities. Any failure to maintain performance, reliability, security, integrity and availability of our products and technical infrastructure, including third-party infrastructure and services upon which we rely, by us or by our third-party cloud providers, may give rise to litigation, consumer protection actions, or harm to our reputation, and as a result, may hinder our ability to retain existing users and attract new users.

Our market opportunity estimates and growth forecasts included in this prospectus could prove to be inaccurate, and any real or perceived inaccuracies may harm our reputation and could materially adversely affect our business, financial condition, results of operations, and prospects.

This prospectus includes our internal estimates of the addressable market for our DDC management software products. Market opportunity estimates and growth forecasts, whether obtained from third-party sources or developed internally, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, our internal estimates regarding our current and projected market opportunity, including our expectations with respect to new international markets, new products, features, and capabilities, and adoption by owners, interior designers, architects, furniture manufacturers and retailers, real estate developers, general contractors, and specialty contractors, are difficult to predict. In addition, our internal estimates of the addressable market for our products include the potential spend of substantially all owners, interior designers, architects, furniture manufacturers and retailers, real estate developers, general contractors, and specialty contractors in the market, and we cannot predict with precision our ability to address this demand or the extent of market adoption of our platform by each of these types of stakeholders. Furthermore, the DDC industry has been slow to digitize. As a result, the estimates for our addressable market may not materialize for many years, if ever, and even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, or at all. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

Risks Related to Our Corporate Structure

If the PRC government deems that the contractual arrangements in relation to our VIE do not comply with PRC regulatory restrictions on foreign investment in 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.

The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign

 

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investors are not allowed to own more than a 50% equity interest in any PRC company engaging in value-added telecommunications businesses, except for those in a few categories, such as e-commerce, domestic multiparty communication, storage-and-forward, and call center services according to the Special Administrative Measures (Negative List) for Foreign Investment Access effective on July 23, 2020, which may be amended, supplemented or otherwise modified from time to time, or the Negative List. The primary foreign investor must also have experience and a good track record in providing value-added telecommunications services, or VATS, overseas. See the section of this prospectus captioned “Regulation—Regulations Related to Foreign Investment in China.”

Because we are an exempted company incorporated in the Cayman Islands, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly foreign-owned enterprise in the PRC is a foreign-invested enterprise, or FIE. As our business operations may be regarded as a kind of VATS, while our WFOE is not eligible to operate VATS business in China according to above mentioned restrictions, we conduct our business in China through our VIE. Our WFOE has entered into a series of contractual arrangements with our VIE and our VIE’s shareholders, which enable us to (1) exercise effective control over our VIE, (2) receive all of the economic benefits of our VIE and (3) have an exclusive option to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIE and hence consolidate its financial results as our VIE under U.S. GAAP. See the section of this prospectus captioned “Corporate History and Structure—Contractual Arrangements with our VIE and Its Shareholders.”

We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, Commerce & Finance Law Offices, based on its understanding of the relevant laws and regulations currently in effect, is of the opinion that each of the contracts among our WFOE, our VIE and our VIE’s shareholders is valid, binding and enforceable in accordance with its terms. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Foreign Investment Law, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and the Telecommunications Regulations and the relevant regulatory measures concerning the telecommunications industry, there can be no assurance that the PRC government authorities, such as the Ministry of Commerce of the People’s Republic of China, or the MOFCOM, or the MIIT or other authorities that regulate internet content providers and other participants in the telecommunications industry, would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

If our corporate structure and contractual arrangements are deemed by the MIIT or the MOFCOM or other regulators having competent authority to be illegal, either in whole or in part, we may lose control of our VIE and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

 

   

revoking our business and operating licenses;

 

   

levying fines on us;

 

   

confiscating any of our income that they deem to be obtained through illegal operations;

 

   

restricting our right to collect revenue;

 

   

shutting down our services;

 

   

discontinuing or restricting our operations in China;

 

   

imposing conditions or requirements with which we may not be able to comply;

 

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requiring us to change our corporate structure and contractual arrangements;

 

   

restricting or prohibiting our use of the proceeds from overseas offering to finance our VIE’s business and operations; and

 

   

taking other regulatory or enforcement actions that could be harmful to our business.

Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. See the section of this prospectus captioned “—Substantial uncertainties exist with respect to the interpretation and implementation of the newly promulgated PRC Foreign Investment Law, and its enactment could adversely affect our business, operating results and financial condition.” Occurrence of any of these events could adversely affect our business, operating results and financial condition. In addition, if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to direct the activities of our VIE or our right to receive its economic benefits, we would no longer be able to consolidate the financial results of such VIE in our consolidated financial statements. However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly owned subsidiary in China or our VIE. See the section of this prospectus captioned “Corporate History and Structure—Contractual Arrangements with our VIE and Its Shareholders.”

We rely on contractual arrangements with our VIE and its shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and could adversely affect our business, operating results and financial condition.

We rely on contractual arrangements with our VIE and its shareholders to operate our business in the PRC. See the section of this prospectus captioned “Corporate History and Structure—Contractual Arrangements with our VIE and Its Shareholders.” 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 these contractual arrangements, our recourse to the assets held by our VIE is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in our VIE, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to the contractual arrangements or ownership by the record holder of the equity interest. In addition, though we have entered into an equity pledge agreement with the VIE’s shareholders, our remedies under the equity pledge agreement are primarily intended to help us collect debts owed to us by our VIE or the VIE’s shareholders under the contractual arrangements and may not help us in acquiring the assets or equity of our VIE.

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. Uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. 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 laws. Significant uncertainties exist regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. 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. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIE and relevant rights and licenses held by it which we require in order to operate our business,

 

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and our ability to conduct our business may be adversely affected. See the section of this prospectus captioned “—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC laws, rules and regulation, particularly of internet businesses.”

The arbitration provisions of all the agreements under these contractual arrangements have no effect on the rights of our shareholders to pursue claims against us under U.S. federal securities laws.

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

The interests of the shareholders of our VIE in their capacities as such shareholders may differ from the interests of our company as a whole, as what is in the best interests of our VIE, including matters such as whether to distribute dividends or to make other distributions to fund our offshore requirement, may not be in the best interests of our company. There can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or those conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause our VIE to breach or refuse to renew the existing contractual arrangements with us.

Currently, we do not have arrangements to address potential conflicts of interest the shareholders of our VIE may encounter, on the one hand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive option agreement to cause them to transfer all of their equity ownership in our VIE to our WFOE or an entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the then existing shareholders of our VIE as provided under the power of attorney agreements, directly appoint new directors of our VIE. We rely on the shareholders of our VIE to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith in what they consider to be in our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our VIE, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that our VIE owes additional taxes, which could adversely affect our business, operating results and financial condition.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our WFOE, our VIE and our VIE’s 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, regulations and rules, and adjust their income in the form of a transfer pricing adjustment, which could increase their PRC tax liabilities and our overall tax liabilities. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our WFOE or our VIE for PRC tax purposes, which could in turn increase their tax liabilities without reducing their tax expenses. In addition, if our WFOE requests the shareholders of our VIE to transfer their equity interests in our VIE at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject the relevant subsidiary to PRC

 

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income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our WFOE and VIE for adjusted but unpaid taxes according to applicable regulations. Our financial position could be materially and adversely affected if the tax liabilities of our WFOE and VIE increase, or if they are required to pay late payment fees and other penalties.

We may lose the ability to use the licenses, approvals, and assets held by our VIE that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

Our VIE hold substantially all of our licenses, approvals, and assets in China that are necessary for the operation of certain of our businesses, as well as equity interests in a series of our portfolio companies, to which foreign investments are typically restricted or prohibited under applicable PRC law. Under the contractual arrangements, our VIE may not and its shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior consent. However, in the event that the shareholders of our VIE breach these contractual arrangements and voluntarily liquidate our VIE, or our VIE declare bankruptcy and all or part of their assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities or otherwise benefit from the assets held by our VIE, which could adversely affect our business, operating results and financial condition. If any of our VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could adversely affect our business, operating results and financial condition.

If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.

Under PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration for Market Regulation, or the SAMR. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.

We have three major types of chops—corporate chops, contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must be approved by our finance department. The chops of our PRC subsidiaries and VIE are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiary and VIE and its subsidiaries have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.

In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiaries and VIE and its subsidiaries, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key employees or designated legal representatives could abuse their authority, for example, by binding our subsidiaries and VIE and its subsidiaries with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the

 

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apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations, and our business and operations may be materially and adversely affected.

Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, and its enactment could adversely affect our business, operating results and financial condition.

On March 15, 2019, the Standing Committee of the National People’s Congress of the PRC passed the Foreign Investment Law of the People’s Republic of China, or the Foreign Investment Law, which took effect on January 1, 2020 and replaced three existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations.

Among other things, the Foreign Investment Law contains a catch-all provision, stating that investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council shall also be deemed as foreign investments. In consideration of the above, there are significant uncertainties as to the interpretation and implementation of such new legislation and how the control status of our VIE would be determined under the enacted Foreign Investment Law. In addition, it is uncertain whether any of the businesses that we currently operate or plan to operate in the future through our VIE would be on the “negative list” updated by the governmental authority from time to time and therefore be subject to any foreign investment restrictions or prohibitions. If any of the businesses that we operate were in the “restricted” category on the to-be-issued “negative list”, such determination would materially and adversely affect the value of our ADSs. We also face uncertainties as to whether the interpretation and implementation of such new legislation or regulations promulgated in the future would mandate further actions, such as MOFCOM market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure and whether these actions can be timely completed, or at all, and our business and financial condition may be materially and adversely affected. If we are not able to obtain any approval when required, our VIE structure may be regarded as invalid and illegal, which could adversely affect our business, operating results and financial condition, for instance, we may not be able to (i) continue our business in China through our contractual arrangements with our VIE, (ii) exert effective control over our VIE or (iii) consolidate the financial results of, and receive economic benefits from our VIE under existing contractual arrangements.

In addition, our corporate governance practice may be impacted and our compliance costs could increase if our FIE was considered as a FIE under the Foreign Investment Law. For instance, the Foreign Investment Law purports to impose ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Any company found to be non-compliant with these information reporting obligations could potentially be subject to fines or administrative liabilities.

 

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Risks Related to Doing Business in China

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

A substantial part of our operations is conducted in the PRC and a significant portion of our revenue is sourced from the PRC. Accordingly, our business, operating results and financial condition 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.

While the PRC economy has experienced significant growth in the past three 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 business, operating results and financial condition 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 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 adversely affect our business, operating results and financial condition.

We may be adversely affected by the complexity, uncertainties and changes in PRC laws, rules and regulation, particularly of internet businesses.

A significant portion of our operations are conducted in the PRC and are governed by PRC laws, rules and regulations. Our WFOE and VIE 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 three 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. Moreover, any administrative and court proceedings in China may be protracted, resulting in

 

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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 adversely affect our business, operating results and financial condition.

The Chinese government heavily regulates the internet industry, including relevant market access restrictions and limitations on foreign investment, license and permit requirements for service providers in the internet industry. Since some of the laws, regulations and legal requirements with respect to the internet are relatively new and evolving, their interpretation and enforcement involve significant uncertainties. Because the Chinese legal system is based on written statutes, such that prior court decisions can only be cited for reference and have little precedential value, it is in many cases difficult to determine what actions or omissions may result in liabilities. Issues, risks and uncertainties relating to China’s government regulation of the Chinese internet sector include the following:

 

   

We operate our business in China through businesses controlled via contractual arrangements versus direct ownership due to restrictions on foreign investment in businesses related to value-added telecommunication services.

 

   

Uncertainties relating to the regulation of the internet business in China, including evolving licensing practices, give rise to the risk that some of our permits, licenses or operations may be subject to challenge, which may be disruptive to our business, subject us to sanctions or require us to increase capital, compromise the enforceability of relevant contractual arrangements, or have other adverse effects on us. For example, Chinese governmental authorities cautiously supervise on contents provided via website and mobile applications, but the numerous and often vague restrictions on acceptable content in China may subject us to potential civil liabilities and risks of temporary blockage of our products. If any content on our platform is deemed to violate PRC laws or regulations, or if improper or fraudulent activities are conducted on our platform, we may be subject to liability and certain penalties imposed by the competent authorities such as MIIT, or their respective local counterparts.

Due to the increasing popularity and use of the internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the internet or other online services covering issues such as user privacy, cybersecurity, data protection, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. The adoption of additional laws or regulations may impede the growth of the internet or other online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business. The interpretation and application of existing PRC laws, regulations and policies, the stated positions of relevant PRC government authorities and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.

On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, or the SASAC, the SAT, the State Administration for Industry and Commerce, or the SAIC, the CSRC, and the State Administration of Foreign Exchange, or the 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 that is controlled by PRC domestic companies or individuals and that has been formed for the purpose of an overseas

 

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listing of securities through acquisitions of PRC domestic companies or assets 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. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. 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 legal counsel, Commerce & Finance Law Offices, that the CSRC approval is not required in the context of this offering because (1) our WFOE was incorporated as a foreign-invested enterprise by means of foreign direct investments rather than by merger with or acquisition of any PRC domestic companies as defined under the M&A Rules and (2) there is no statutory provision that clearly classifies the contractual arrangement among our WFOE, our VIE and our VIE’s shareholders as transactions regulated by the M&A Rules. There can be no assurance that the relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal 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 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 adversely affect our business, operating results and financial condition, 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. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring us to obtain their approvals for this offering, we may be unable to obtain waivers of such approval requirements. Any uncertainties or negative publicity regarding such approval requirements could materially and adversely affect the trading price of the ADSs.

These regulations also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex. For example, the M&A rules require that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise if (1) any important industry is concerned, (2) such transaction involves factors that have or may have impact on the national economic security or (3) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. The approval from the MOFCOM shall be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Mergers, acquisitions or contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance to the MOFCOM when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council in August 2008 (as amended in September 2018) is triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from the MOFCOM or other relevant governmental authorities, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. See the section of this prospectus captioned “Regulation—Regulations Related to M&A and Overseas Listings.”

 

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PRC laws and regulations mandate complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to make acquisitions in China.

PRC laws and regulations, such as the M&A Rules, and other relevant rules, established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to a merger control security review. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System, or MOFCOM Security Review Rules, effective from September 1, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to a security review by the MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements of offshore transaction. Factors that the MOFCOM considers in its review are whether (1) an important industry is involved, (2) such transaction involves factors that have had or may have an impact on national economic security and (3) such transaction will lead to a change in control of a domestic enterprise that holds a well-known PRC trademark or a time-honored PRC brand. Moreover, the Antitrust Law promulgated by the SCNPC which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the SAMR, the successive authority of MOFCOM, before they can be completed. If a business of any target company that we plan to acquire falls into the ambit of security review, we may not be able to successfully acquire such company. Complying with the requirements of the relevant regulations to complete any such transaction could be time-consuming, and any required approval process, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business.

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

The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by the SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of the 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.” Pursuant to SAFE Circular 37, “control” refers to the act through which a PRC resident obtains the right to carry out business operation of, to gain proceeds from or to make decisions on a special purpose vehicle by means of, among others, shareholding entrustment arrangement. 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 change of shareholders of the special purpose vehicle, 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 subsidiaries. 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. According to the Notice on Further Simplifying and Improving Policies

 

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for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.

Our co-founders have completed the SAFE registration pursuant to SAFE Circular 37 in April 2021, with their respective holding companies being registered as the “special purpose vehicle.” We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, including the obligation to complete the SAFE registration and to make updates under SAFE Circular 37. Nevertheless, we may not be continuously aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange 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, our WFOE or our VIE to fines and legal sanctions. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our WFOE and our VIE and limit our WFOE’s ability to distribute dividends to our company. These risks could adversely affect our business, operating results and financial condition.

Any failure to comply with PRC regulations regarding 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 equity incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or employees of the PRC subsidiaries of the overseas 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 residents and who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes an overseas listed company. As an overseas listed company, we and our directors, executive officers and other employees who are PRC residents and who have been granted options are 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 equity incentive plans of an overseas publicly listed company who are PRC residents 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. We are making, and will make efforts to comply with these requirements, but there can be no assurance that they can successfully register with SAFE in full compliance with the rules. Failure to complete the SAFE registrations may subject relevant participants in our equity incentive plan 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 enterprise in China and limit our wholly-foreign owned enterprise’s 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.

We may rely on dividends, loans and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements. Any limitation on the ability of our PRC operating subsidiary to make payments to us could adversely affect our ability to conduct our business.

We are a holding company and may rely on dividends, loans and other distributions on equity paid by our principal operating subsidiaries and on remittances from our VIE for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders,

 

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fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our WFOE or our VIE incurs additional debt, the instruments governing the debt may restrict their ability to pay dividends, make loans or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our WFOE and our VIE permit payments of dividends only out of its retained earnings, if any, determined in accordance with applicable accounting standards and regulations.

Under PRC laws, rules and regulations, our WFOE and our VIE are required to set aside at least 10% of their net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of their registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our WFOE and our VIE are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. 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.

Limitations on the ability of our VIE to make remittance to the wholly-foreign owned enterprise and on the ability of our subsidiary 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.

The discontinuation of the preferential tax treatment available to us in China could adversely affect our business, operating results and financial condition.

Under PRC tax laws and regulations, our VIE is qualified to enjoy a certain preferential income tax benefit. The modified Enterprise Income Tax Law, effective on December 29, 2018, or the EIT Law, and its implementation rules generally impose a uniform income tax rate of 25% on all enterprises, but grant preferential treatment to “high and new technology enterprises strongly supported by the state,” or HNTEs, to enjoy a reduced enterprise tax rate of 15%. According to the relevant administrative measures, to qualify as a HNTE, our VIE must meet certain financial and non-financial criteria and complete verification procedures with the administrative authorities. Continued qualification as a HNTE is subject to a three-year review by the relevant government authorities in China, and in practice certain local tax authorities also require annual evaluation of the qualification. In the event the preferential tax treatment for our VIE is discontinued or is not verified by the local tax authorities, and the affected entity fails to obtain preferential tax treatments based on other qualifications such as Advanced Technology Service Enterprise, it will become subject to the standard tax rates and policies, including the PRC enterprise income tax rate of 25%. We cannot assure you that the tax authorities will not, in the future, discontinue our preferential tax treatment, potentially with retroactive effect.

If we are classified as a “resident enterprise” of China under the PRC Enterprise Income Tax Law, we and our non-PRC shareholders could be subject to unfavorable tax consequences, and our business, financial condition and results of operations could be materially and adversely affected.

Under the modified Enterprise Income Tax Law and its implementing rules, 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 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 or PRC enterprise groups, not those controlled by foreign enterprises or individuals, 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

 

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determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups. 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. In such case, 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.”

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

Under the modified 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 ordinary shares by such investors is subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, 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 ordinary shares, and any gain realized from the transfer of our ordinary shares or the ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC 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 ordinary shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions. If we or any of our subsidiaries established outside China are considered a PRC resident enterprise, any PRC tax liability may be reduced under applicable income tax treaties, but it is unclear whether holders of ADSs or our 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 dividends payable to our non-PRC investors, or gains from the transfer of ADSs or our ordinary shares by such investors, are deemed as income derived from sources within the PRC and thus are subject to PRC tax, the value of your investment in ADSs or our ordinary shares may decline significantly.

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.

On February 3, 2015, the SAT issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which partially replaced and supplemented previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT on December 10, 2009. Pursuant to this Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC

 

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taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immovable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange. On October 17, 2017, the SAT promulgated the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Circular 37, which was amended and became effective on June 15, 2018, and SAT Circular 698 then was repealed with effect from December 1, 2017. SAT Circular 37 also amends certain provisions in Bulletin 7, but does not touch upon other provisions of Bulletin 7, which remain in full force. SAT Circular 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident enterprises.

There is uncertainty as to the application of Bulletin 7 and SAT Circular 37. 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 or investments. If Bulletin 7 or SAT Circular 37 is deemed to be applied on any of our past or future transaction, we 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 Bulletin 7, and if we fail to perform such tax filing or withholding obligations could result in penalties. For transfer of shares in our company by investors that are non-PRC resident enterprises, our WFOE may be requested to assist in the filing under Bulletin 7. As a result, we may be required to expend valuable resources to comply with Bulletin 7 and SAT Circular 37 or to request the relevant transferors from whom we purchase taxable assets to comply with Bulletin 7 and SAT Circular 37, or to establish that our company should not be taxed under Bulletin 7 and SAT Circular 37, which could adversely affect our business, operating results and financial condition.

We are subject to restrictions on currency exchange. We face exposure to foreign currency exchange rate fluctuations, and such fluctuations could adversely affect our business, operating results and financial condition.

A substantial 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 WFOE or VIE. Currently, our WFOE may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of the 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. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities. Since a significant amount of our future revenue and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize cash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, and may limit our ability to obtain foreign currency through debt or equity financing for our WFOE and our VIE.

 

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PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of this offering to make loans to our WFOE and our VIE, or to make additional capital contributions to our WFOE.

In using the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our WFOE, which is treated as a foreign-invested enterprise under PRC laws, through loans or capital contributions. However, loans by us to our WFOE to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE and capital contributions to our WFOE is subject to the requirement of making necessary filings or registrations through enterprise registration system with relevant governmental authorities in China.

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for the issuance of Renminbi entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue Renminbi entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our WFOE and our VIE, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our VIE, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of our VIE by means of capital contributions given the potential restrictions on foreign investment in the businesses that are currently conducted by our VIE.

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

 

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Enforcement of stricter labor laws and regulations, labor shortages, increased labor costs or other factors affecting our labor force may adversely affect our business, profitability and reputation.

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

Furthermore, we engaged third-party employment agencies to dispatch contract workers. On December 28, 2012, the PRC Labor Contract Law was amended to impose more stringent requirements on labor dispatch and such amendments became effective on July 1, 2013. For example, the number of dispatched contract workers that an employer hires may not exceed a certain percentage of our total number of employees, to be decided by the Ministry of Human Resources and Social Security and the dispatched contract workers may only engage in temporary, auxiliary or substitute work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched contract workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees and dispatched contract workers). The Interim Provisions on Labor Dispatch further requires the employer that is not in compliance with the above provisions to formulate a plan to reduce the number of its dispatched contract workers to below 10% of the total number of its employees before March 1, 2016. In addition, an employer is not permitted to hire any new dispatched contract worker until the number of its dispatched contract workers has been reduced to below 10% of the total number of its employees. A fine ranging from RMB5,000 to RMB10,000 for each dispatched worker may be imposed on us for our failure to control the number of the dispatched workers in compliance with the PRC Labor Contract Law. As of the date of this prospectus, the number of our dispatched workers has exceeded 10% of the total number of our labor force. We have formulated and implemented a plan to contain the number of dispatched workers and to be compliant, but we cannot assure you that the percentage of our dispatched workers will drop and always stay below the 10% threshold. Although we aim to not assign dispatched workers on significant tasks, there is no assurance that the assignments performed by them are always temporary and ancillary in nature. If we were found to be in violation of the new rules regulating dispatched contract workers, we could be ordered to rectify within a specified period of time and could be subject to fines, which may adversely affect our business, financial condition and results of operations.

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

Failure to pay the social insurance premium and housing provident funds for and on behalf of our employees in accordance with the PRC Labor Contract Law may have an adverse impact on our financial conditions and results of operation.

The PRC governmental authorities have passed a variety of laws and regulations regarding social insurance and housing funds from time to time, including, among others, the PRC Social Insurance Law, the Regulation of Insurance for Labor Injury, the Regulation of Insurance for Unemployment, and the Provisional Insurance

 

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Measures for Maternal employees. Employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing provident funds, and employers are required, together with their employees or separately, to pay the contributions to social insurance and housing provident funds for their employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. In addition, certain of our PRC subsidiaries and consolidated affiliated entities have engaged third-party human resources agencies to make social insurance and housing fund contributions for some of our employees, and there is no assurance that such third-party agencies make such contributions in full in a timely manner, or at all. If the relevant PRC authorities challenge the adequacy as to the amount of our social insurance and housing fund contributions and determine that we shall make up for social insurance and housing fund contributions or that we are subject to fines and legal sanctions in relation to our failure to make social insurance and housing fund contributions in full for our employees, our business, financial condition and results of operations may be adversely affected.

Failure to register certain lease agreements may adversely affect our business, financial condition, results of operations, and prospects.

We lease premises in China in various locations. Under the relevant PRC laws and regulations, all lease agreements are required to be registered and filed with the relevant government authority. We have not registered any 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 to RMB10,000 for each non-registered lease if we fail to complete the registration within the prescribed timeframe.

We could be adversely affected by political tension between the United States and China.

International regulatory environment has historically been affected by competition among countries and geopolitical frictions. Changes to trade policies, treaties and tariffs, or the perception that these changes could occur, could adversely affect the financial and economic conditions in the jurisdictions in which we operate, as well as our overseas expansion, our financial condition and results of operations.

Recently, political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 pandemic, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the PRC central government and the executive orders issued by the U.S. government in August 2020 that prohibit certain transactions with certain selected leading Chinese internet companies as well as their products. Rising political tensions could reduce levels of trades, investments, technological exchanges, and other economic activities between the two major economies. Such tensions between the United States and China, and any escalation thereof, may have a negative impact on the general, economic, political, and social conditions in China and, in turn, adversely impacting our business, financial condition, and results of operations.

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

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in

 

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2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

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

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

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

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

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

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

 

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If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging such firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

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

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. 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.

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

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

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

Shareholder claims or regulatory investigation that are common in jurisdictions outside China are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration,

 

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such cooperation with the securities regulatory authorities in the United States or other jurisdictions may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigations or evidence collection activities within the PRC territory, and without the consent by the Chinese securities regulatory authorities and the other competent governmental agencies, no entity or individual may provide documents or materials related to securities business to any foreign party. While detailed interpretation of or implementation rules under the article have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigations or evidence collection activities within China and the potential obstacles for information provision may further increase difficulties faced by you in protecting your interests. See also “—Risks Relating to Our ADSs and This Offering—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law” for risks associated with investing in us as a Cayman Islands company.

Risks Related to the ADSs and this Offering

An active trading market for our Class A Ordinary Shares or the ADSs may not develop and the trading price of the ADSs may fluctuate significantly.

We will apply for listing our ADSs on the Nasdaq Global Select Market. We have no current intention to seek a listing for our Class A ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for the ADSs or our Class A ordinary shares, and we cannot assure you that a liquid public market for the ADSs will develop. If an active public market for the ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected. The initial public offering price for the ADSs will be determined by negotiation between us and the underwriters based on several factors, and the trading price of the ADSs after this offering could decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

Further, our directors, non-executive employees and customers have the opportunity to purchase up to 5% of the ADSs offered by this prospectus, at the initial public offering price, through a directed ADS program. To the extent any of our directors purchase ADSs in this offering, fewer ADSs may be actively traded in the public market because these individuals will be subject to a 180-day lock-up restriction, which would reduce the liquidity of the market for our ADSs.

The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of our ADSs is likely to be volatile and could fluctuate widely due to multiple factors, some of which are beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

variations in our revenue, earnings and cash flows;

 

   

regulatory developments affecting us, our customers, or our industry;

 

   

announcements of new products or service offerings and expansions by us or our competitors;

 

   

announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

   

changes in financial estimates by securities analysts;

 

   

changes in end-user and customer demand as end-users increase and decrease their time online due to the imposition or easing of stay-at-home, travel and other government mandates or changes in end-user or customer demand for our products in response to the COVID-19 pandemic;

 

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detrimental adverse publicity about us, our products or services or our industry;

 

   

additions or departures of key personnel;

 

   

detrimental negative publicity about us, our management or our industry;

 

   

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

   

actual or potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which the ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against companies following periods of instability in the market price of their 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 and require us to incur significant expenses to defend the suit, which could harm our operating results. 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 business, operating results and financial condition.

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

The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume of the ADSs to decline.

The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price.

Sales of substantial amounts of the ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be                 ADSs (equivalent to                  Class A ordinary shares) outstanding immediately after this offering, or                  ADSs (equivalent to                  Class A ordinary shares) if the underwriters exercise their over-allotment option in full. In connection with this offering, we, our directors and executive officers, and all of our existing shareholders have agreed not to sell any ordinary shares or ADSs for [180] days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See the sections of this prospectus captioned “Underwriting” and “Shares and ADSs Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

 

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Our proposed 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.

Immediately prior to the completion of this offering, we expect to create a dual-class share structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class B ordinary shares will be entitled to fifteen votes per share, while holders of Class A ordinary shares will be entitled to one vote per share based on our proposed dual-class share structure. 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. Upon any transfer of Class B ordinary shares by a holder thereof or a change of ultimate beneficial ownership of any Class B ordinary share to any person other than our three co-founders and their respective affiliates, such Class B ordinary shares are automatically and immediately converted into the same number of Class A ordinary shares.

Immediately prior to the completion of this offering, our three co-founders, Xiaohuang Huang, Hang Chen and Hao Zhu, will beneficially own all of our issued and outstanding Class B ordinary shares. Due to the disparate voting powers associated with our dual-class share structure, these Class B ordinary shares will constitute approximately             % 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, representing             % of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering. 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 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 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.

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

Certain shareholder advisory firms have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual-class structure of our ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.

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

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this

 

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offering. We cannot assure you that the net proceeds will be used in a manner that would improve our operating results or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

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

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

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

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

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than to receive copies of the memorandum and articles of association and special resolutions, or to inspect copies of the register of mortgages and charges, of such companies). Our directors have discretion under our post-offering memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of our board of directors or our controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a

 

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discussion of significant differences between the provisions of the Companies Act of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see the section of this prospectus captioned “Description of Share Capital—Differences in Corporate Law.”

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

We are a Cayman Islands exempted company and the majority of our assets are located outside of the United States. All of our current operations are conducted in China and the United States. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, there are significant legal and other obstacles to obtaining information needed for such actions. For example, in China, according to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties. See also “—Risks Related to the ADSs and this Offering—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.” Furthermore, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see the section of this prospectus captioned “Enforceability of Civil Liabilities.”

Our amended and restated articles of association to be in effect prior to the completion of this offering designate the federal district courts of the United States or the courts in Cayman Islands as the exclusive forum for certain litigation that may be initiated by the holders of our ordinary shares, ADSs or other securities, which could limit their ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated articles of association to be in effect prior to the completion of this offering include exclusive forum selection clauses. Our amended and restated articles of association provide that unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by relevant law, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, regardless of whether such legal suit, action, or proceeding also involves parties other than the Company. Our articles further provide that unless we consent in writing to the selection of an alternative forum, the courts of the Cayman Islands shall have exclusive jurisdiction to hear, settle and/or determine any dispute, controversy or claim (including any non-contractual dispute, controversy or claim) whether arising out of or in connection with our articles or otherwise, including any questions regarding their existence, validity, formation or termination. The Cayman exclusive forum provision does not apply to claims or causes of action brought to enforce a duty or liability created by the Securities Act or the Securities Exchange, or any other claim based on securities laws for which claim the federal district courts of the United States have exclusive jurisdiction. In addition, our amended and restated articles of association provide that any person or entity purchasing or otherwise acquiring any shares or other securities in us, or purchasing or otherwise acquiring ADSs issued pursuant to the deposit agreements is deemed to have notice of and consented to the Cayman Forum Provision and the Federal Forum Provision. Notwithstanding the above, holders of our ordinary shares, ADSs or other securities cannot and will not be deemed to have waived our compliance with the U.S. federal securities laws and the rules and regulations thereunder.

We recognize that exclusive forum selection clauses in our amended and restated articles of association may impose additional litigation costs on holders of our ordinary shares, ADSs or other securities in pursuing their claims, particularly if the holders do not reside in or near the Cayman Islands or the United States. Additionally, the forum selection clauses in our amended and restated articles of association may limit the holders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers or

 

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employees, which may discourage the filing of lawsuits against us and our directors, officers and employees, even though an action, if successful, might benefit holders of our securities. In addition, while the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court were “facially valid” under Delaware law and the California Supreme Court made a similar ruling under the California law, there is uncertainty as to whether other courts will enforce our exclusive forum selection clauses If our exclusive forum selection clauses are found to be unenforceable, we may incur additional costs associated with resolving such matters. The exclusive forum selection clauses may also impose additional litigation costs on holders of our securities who assert that the provisions are not enforceable or invalid.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct how the Class A Ordinary Shares which are represented by your ADSs are voted.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of the ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Where any matter is to be put to a vote at a general meeting, then upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinary shares which are represented by your ADSs in accordance with your instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you cancel and withdraw such shares and become the registered holder of such shares prior to the record date for the general meeting.

Under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering, the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting will be ten calendar days. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the underlying Class A Ordinary Shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering articles of association that will become effective prior to the completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying Class A ordinary shares represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, upon our instruction, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs.

In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the underlying Class A ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested.

 

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The depositary for the ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

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

 

   

we have timely provided the depositary with notice of meeting and related voting materials;

 

   

we have instructed the depositary that we wish a discretionary proxy to be given;

 

   

we have informed the depositary that there is no substantial opposition as to a matter to be voted on at the meeting; and

 

   

a matter to be voted on at the meeting would not have a material adverse impact on shareholders.

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

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

The depositary of the ADSs has agreed to distribute, subject to the terms of the deposit agreement, the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that 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 under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property. Additionally, the value of certain distributions may be less than the cost of distribution. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, Class A ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class A ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive 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 cause a material decline in the value of the ADSs.

You may experience dilution of your holdings due to inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

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

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate

 

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events, such as a rights offering, or “for record date or processing purposes” in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is 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.

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

The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS holders, including those who purchase our ADSs in a secondary transaction, waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

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

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and the depositary. If a lawsuit is brought against either or both of us and the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including results that could be less favorable to the plaintiffs in any such action.

Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

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

Because we are 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 of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;

 

   

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

 

   

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

 

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

We will, however, 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 through press releases, distributed pursuant to the rules and regulations of the Nasdaq Stock Market. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information which would be made available to you were you investing in a U.S. domestic issuer.

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

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from 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 for so long as we remain 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 for so long as a registrant qualifies as an emerging growth company it does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. Pursuant to the JOBS Act, we have elected to take advantage of the benefits of this extended transition period for complying with new or revised accounting standards as 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 incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

As a result of becoming a public company, we expect to incur significant legal, accounting and other expenses that we did not incur as a private company prior to this offering. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, impose various requirements on the corporate governance practices of public companies. 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. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We will rely on such exemption provided by the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with public company effective dates.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we cease to be 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. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs

 

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associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

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

As a Cayman Islands exempted company that will be listed on the Nasdaq Global Select Market, we are subject to the Nasdaq Stock Market corporate governance rules. However, Nasdaq Stock Market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq Stock Market corporate governance standards. If we choose to follow home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq Stock Market corporate governance standards applicable to U.S. domestic issuers.

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

In general, a non-U.S. corporation is a PFIC for U.S. federal income tax purposes for any taxable year in which either (i) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the production of, passive income, or (ii) 75% or more of its gross income consists of passive income. For purposes of the above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another corporation is generally treated as if it directly held its proportionate share of the assets of the other corporation and directly earned its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash and cash-equivalents are generally passive assets for these purposes. Goodwill is generally characterized as an active asset to the extent it is associated with business activities that produce active income.

Based on our current and expected income, assets, activities, operations, and value of our assets, including goodwill, which is based, in part, on the expected price of the ADSs in this offering, we do not expect to be a PFIC for our current taxable year. The determination as to whether we are a PFIC for any taxable year, however, is fact-intensive and will depend on, among other factors, the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by reference to the market price of our ADSs, which could be volatile). Because we will hold a substantial amount of cash and cash-equivalents following this offering, our PFIC status for any taxable year may also depend on how, and how quickly, we use our liquid assets and the cash. If our market capitalization declines significantly while we continue to hold a substantial amount of cash and cash-equivalents for any taxable year, we could be a PFIC for that year. Moreover, it is not entirely clear how the contractual arrangements between us and our VIE will be treated for purposes of the PFIC rules, and we may be or become a PFIC if our VIE is not treated as owned by us for these purposes. The determination as to whether we are a PFIC for any taxable year must also be made on an annual basis applying principles and methodologies that are in some circumstances unclear. Accordingly, there can be no assurance that we will not be a PFIC for our current or any future taxable year, and our U.S. counsel expresses no opinion with respect to our expectations regarding our PFIC status for any taxable year. If we are a PFIC for any taxable year during which a U.S. taxpayer owns our ADSs or ordinary shares, the U.S. taxpayer will generally be subject to adverse U.S. federal income tax consequences, including increased tax liability on disposition gains and “excess distributions” and additional reporting requirements. See “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

   

our mission and strategies;

 

   

our ability to effectively manage our growth;

 

   

the market acceptance of our cloud-native software solutions and the overall growth of the market for software solution to the design, decoration and construction value chain;

 

   

our ability to maintain and grow our customer base, keep our customers engaged through our products and services, and expand our business;

 

   

our ability to improve and enhance the functions, performance, reliability, design, security, and scalability of our software solutions to suit our customers’ evolving needs;

 

   

our ability to conduct marketing activities in a cost-effective manner;

 

   

our ability to expand our operations outside the PRC;

 

   

our ability to continue innovating and keep pace with technological developments;

 

   

our ability to develop new products, new solutions and introduce new technologies;

 

   

our ability to expand into new verticals other than interior design, decoration and construction;

 

   

our ability to operate in a competitive market and to compete successfully against our existing and future competitors;

 

   

future acquisitions, joint ventures, or investments;

 

   

our ability to comply or remain in compliance with laws and regulations that currently apply or become applicable to our global operations;

 

   

our reliance on key personnel and our ability to attract, maintain, and retain management and skilled personnel;

 

   

the effects of COVID-19 or other public health crises;

 

   

the increased expenses associated with being a public company;

 

   

the future trading prices of our ADSs; and

 

   

our anticipated use of the net proceeds from this offering.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward- looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in

 

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“Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and other sections in this prospectus. You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains estimates, projections and other information concerning our industry, our business and the markets for our product candidates, including data regarding the estimated size of such markets and the incidence of certain medical conditions. We obtained the industry, market and similar data set forth in this prospectus from our internal estimates and research and from academic and industry research, publications, surveys and studies conducted by third parties, including governmental agencies. In some cases, we do not expressly refer to the sources from which this data is derived. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. While we believe that the data we use from third parties are reliable, we have not separately verified this data. Further, while we believe that our internal research is reliable, such research has not been verified by any third party. You are cautioned not to give undue weight to any such information, projections and estimates.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$             million (or approximately US$             million if the underwriters exercise their option to purchase additional ADSs in full), after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$             per ADS, which is the midpoint of the price range shown on the front page of this prospectus.

A US$1.00 increase or decrease in the assumed initial public offering price of US$             per ADS would increase or decrease, as applicable, the net proceeds to us from this offering by US$             million, assuming the number of ADSs offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of              million in the number of ADSs we are offering would increase or decrease, as applicable, the net proceeds to us from this offering by US$             million, assuming the assumed initial public offering price of US$             per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, establish a public market for our ADSs and facilitate our future access to the public capital markets. We intend to use the net proceeds from this offering for the following purposes:

 

   

approximately US$             million for business expansion to interior design, decoration and construction for commercial and industrial spaces;

 

   

approximately US$             million for implementing our international expansion strategy;

 

   

approximately US$             million for enhancing our research and product development capabilities and investing in technology;

 

   

approximately US$             million for investing in sales, marketing and branding;

 

   

the balance for working capital and general corporate purposes, including funding potential investments and acquisitions of complementary businesses, assets and technologies. Currently, we do not have any plans, commitments or understandings to acquire complementary businesses, assets and technologies.

Our expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above. We believe that opportunities may exist from time to time to expand our current business through acquisitions of, or investments in, complementary businesses, products or technologies. While we have no current agreements, commitments or understandings for any specific acquisition or investments at this time, we may use a portion of the net proceeds for these purposes. We expect a substantial portion of the net proceeds from this offering to be used in the PRC will be in the form of RMB and, therefore, our PRC subsidiaries and VIE will need to convert any capital contributions or loans from U.S. dollars into Renminbi in accordance with applicable PRC laws and regulations. All of the net proceeds from this offering would be available for investment in our operations in the PRC, subject to the foregoing statutory limits on the amount of loans provided to our PRC subsidiaries and VIE in the PRC and the laws and regulations on the conversion from U.S. dollars into Renminbi.

Our management will have broad discretion over the use of the net proceeds from this offering. The amounts and timing of our expenditures will depend upon numerous factors, including our ability to obtain additional financing, the amount of cash obtained through our existing collaborations and future collaborations, if any, and any unforeseen cash needs.

 

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Pending any use described above, we intend to invest the net proceeds of this offering in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

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

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

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

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

 

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CAPITALIZATION

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

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (i) re-designation of 412,359,751 ordinary shares beneficially owned by our three co-founders, Xiaohuang Huang, Hang Chen and Haozhu, into 412,359,751 Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the re-designation of all the remaining ordinary shares into 19,659,560 Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (iii) the automatic conversion of all of our outstanding convertible redeemable 751,343,688 preferred shares into Class A ordinary shares on one-for one basis immediately prior to the completion of this offering, (iv) the issuance of 40,212,720 Class B ordinary shares to our co-founders assuming the exercise of the options granted to them immediately prior to the completion of this offering, and (v) the recording of unrecognized share-based compensation expense of RMB104.2 million (US$15.9 million) for share options exercisable upon the consummation of this offering as if the IPO performance condition for these share options had been achieved as of March 31, 2021.

 

   

on a pro forma as adjusted basis to reflect (i) re-designation of 412,359,751 ordinary shares beneficially owned by our three co-founders, Xiaohuang Huang, Hang Chen and Haozhu, into 412,359,751 Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the re-designation of all the remaining ordinary shares into 19,659,560 Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (iii) the automatic conversion of all of our outstanding convertible redeemable 751,343,688 preferred shares into Class A ordinary shares on one-for one basis immediately prior to the completion of this offering, (iv) the issuance of 40,212,720 Class B ordinary shares to our co-founders assuming the exercise of the options granted to them immediately prior to the completion of this offering, (v) the recording of unrecognized share-based compensation expense of RMB104.2 million (US$15.9 million) for share options exercisable upon the consummation of this offering as if the IPO performance condition for these share options had been achieved as of March 31, 2021, and (vi) the sale of                 ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$             per ADS, which is the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise their option to purchase additional ADSs.

With each round of financing, the co-founders entered into a Restricted Share Agreement with the Company and investors such that a portion of their ordinary shares of the Company (“Restricted Shares”) became restricted or continued to be restricted and will be released according to a vesting schedule with the co-founders continuous employment or otherwise subject to our repurchase right. The Restricted Shares have been reflected retrospectively similar to a reverse stock split and presented in the balance sheet and statement of shareholders’ deficit as a reduction of the numbers of outstanding ordinary shares. Accordingly, as of March 31, 2021, a total of 20,427,529 Class B ordinary shares underlying such unvested Restricted Shares were not outstanding on an actual, pro forma or pro forma as adjusted basis from an accounting perspective.

 

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The pro forma as adjusted information set forth below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our financial statements and the related notes appearing elsewhere in this prospectus, as well as the sections of this prospectus titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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

Mezzanine equity:

             

Series A convertible redeemable preferred shares (US$0.000025 par value, 171,063,840 shares authorized, issued and outstanding; and none outstanding on a pro-forma basis)

     26,059       3,977                   

Series B convertible redeemable preferred shares (US$0.000025 par value, 202,975,732 shares authorized, issued and outstanding; and none outstanding on a pro-forma basis)

     102,587       15,658                   

Series C convertible redeemable preferred shares (US$0.000025 par value, 57,581,200 shares authorized, issued and outstanding; and none outstanding on a pro-forma basis)

     87,305       13,325                   

Series D convertible redeemable preferred shares (US$0.000025 par value, 178,037,002 shares authorized, issued and outstanding; and none outstanding on a pro-forma basis)

     545,998       83,336                   

Series D+ convertible redeemable preferred shares (US$0.000025 par value, 63,295,289 shares authorized, issued and outstanding; and none outstanding on a pro-forma basis)

     296,382       45,237                   

Series E convertible redeemable preferred shares (US$0.000025 par value, nil and 78,390,625 shares authorized, issued and outstanding; and none outstanding on a pro-forma basis)

     587,920       89,734                   

Total mezzanine equity

     1,646,251       251,267                   

Shareholders’ (deficit) equity:

             

Ordinary shares (US$0.000025 par value, 3,248,656,312 shares authorized, 452,446,840 shares issued, 432,019,311 shares outstanding on an actual basis; 771,003,248 Class A ordinary shares and 452,572,471 Class B ordinary shares outstanding on a pro-forma basis)

     74       11       204       31       

Additional paid-in capital

                 1,760,193       268,658       

Accumulated other comprehensive income

     14,563       2,223       14,563       2,223       

Accumulated deficit

     (1,356,893     (207,102     (1,461,059     (223,001     

Total shareholders’ (deficit) equity

     (1,342,256     (204,868     313,901       47,911       

Total capitalization

     816,009       124,549       825,915       126,061       

 

Notes:

(1)

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

(2)

A US$1.00 increase (decrease) in the assumed initial public offering price of US$                 per ADS, the mid-point of the estimated range of the initial public offering price shown on the cover page of this prospectus, would increase (decrease) each of total deficit and total capitalization by US$                 million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable 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 and holders of our preferred shares which will automatically convert into our ordinary shares upon the completion of this offering.

Our net tangible book value as of March 31, 2021 was approximately US$                 per ordinary share and US$                 per ADS. Net tangible book value per ordinary share represents the amount of total consolidated tangible assets, minus the amount of total consolidated liabilities, divided by the total number of ordinary shares outstanding as of March 31, 2021. Pro forma net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all of our outstanding preferred shares. Dilution is determined by subtracting pro forma net tangible book value per ordinary share from the assumed public offering price per ordinary share.

Without taking into account any other changes in such net tangible book value after March 31, 2021, other than to give effect to our issuance and sale of                ADSs in this offering at an assumed initial public offering price of US$                per ADS, the midpoint of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us (assuming the over-allotment option is not exercised), our pro forma as adjusted net tangible book value as of March 31, 2021 would have been US$                per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, or US$                per ADS. This represents an immediate increase in net tangible book value of US$                per ordinary share, or US$                per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$                per ordinary share, or US$                per ADS, to purchasers of ADSs in this offering. The following table illustrates such dilution:

 

Assumed initial public offering price per ordinary share

   US$                

Net tangible book value per ordinary share

   US$                

Pro forma net tangible book value per ordinary share after giving effect to the automatic conversion of all of our outstanding preferred shares, as of March 31, 2021

   US$    

Pro forma as adjusted net tangible book value per ordinary share as adjusted to give effect to the automatic conversion of all of our outstanding preferred shares and this offering, as of March 31, 2021

   US$    

Amount of dilution in net tangible book value per ordinary share to new investors in the offering

   US$    

Amount of dilution in net tangible book value per ADS to new investors in the offering

   US$    

A US$1.00 change in the assumed public offering price of US$                per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease our pro forma as adjusted net tangible book value after giving effect to the offering by US$                million, the pro forma as adjusted 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 as adjusted 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 change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. 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.

The following table summarizes, on a pro forma basis as of March 31, 2021, the differences between our shareholders as of March 31, 2021 and the new investors with respect to the number of ordinary shares

 

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purchased from us, the total consideration paid and the average price per ordinary share paid at an assumed initial public offering price of US$                per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

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

Existing shareholders

                

New investors

                
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

                                                     100%                                         
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

A US$1.00 change in the assumed public offering price of US$                per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease total consideration paid by new investors, total consideration paid by all shareholders, average price per ordinary share and average price per ADS paid by all shareholders by US$                , US$                , US$                and US$                , respectively, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The discussion and tables above also assume no exercise of any outstanding stock options outstanding as of the date of this prospectus. As of the date of this prospectus, there are                ordinary shares issuable upon exercise of outstanding stock options at a weighted average exercise price of US$                per ordinary share, and there were                ordinary shares available for future issuance upon exercise of future grants under our equity incentive plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

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

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

tax neutrality;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

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

 

   

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

 

   

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

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

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

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

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

Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands would recognize as a valid judgement, a final and conclusive judgement in personam obtained in federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature, a fine or a penalty or similar fiscal or revenue obligations) or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that: (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of the natural justice of Cayman Islands; (c) such judgment was not obtained by fraud; (d) such judgment 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; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the

 

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Cayman Islands.. However, the Cayman Islands courts are unlikely to enforce a punitive judgment of a United States court predicated upon the civil liability provisions of the federal securities laws in the United States without retrial on the merits if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that may be regarded as fines, penalties or punitive in nature.

Commerce & Finance Law Offices, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of the PRC would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, and (ii) 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. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law and other applicable laws and regulations based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments as the date of this prospectus. 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 would be highly unlikely that a PRC court would enforce judgments rendered by U.S. courts.

 

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CORPORATE HISTORY AND STRUCTURE

Our Corporate History

In November 2011, we commenced operations through Hangzhou QunHe Information Technology Co., Ltd., a company incorporated in the PRC.

In July 2013, we incorporated Manycore Tech Inc. (then known as Exacloud Limited) under the laws of the Cayman Islands as our offshore holding company. In August 2013, we incorporated Exacloud (Hong Kong) Limited as a wholly owned subsidiary of Manycore Tech Inc. in Hong Kong.

In November 2013, we incorporated Hangzhou Yunjiazhuang Network Technology Co., Ltd., or Hangzhou Yunjiazhuang, as a wholly owned subsidiary of Exacloud (Hong Kong) Limited in the PRC.

Hangzhou Yunjiazhuang entered into a series of contractual arrangements, as amended and restated, with Hangzhou QunHe Information Technology Co., Ltd., or Hangzhou QunHe, which enable us to obtain control over Hangzhou QunHe to operate value-added telecommunication services. As a result, we are regarded as the primary beneficiary of Hangzhou QunHe. We treat it as our consolidated affiliated entity under U.S. GAAP and have consolidated the financial results of this entity in our consolidated financial statements in accordance with U.S. GAAP. We refer to Hangzhou Yunjiazhuang as our wholly foreign owned entity, or WFOE, and to Hangzhou QunHe and its subsidiaries as our variable interest entities, or our VIE, in this prospectus. For more details and risks related to our VIE structure, please see “—Contractual Arrangements with Our VIE and Its Shareholders” and “Risk Factors—Risks Related to Our Corporate Structure.”

In May 2019, we incorporated Coohom Inc., a California corporation, as a wholly owned subsidiary of Exacloud (Hong Kong) Limited, to operate Coohom’s business in the United States, Europe and other regions. In October 2019, we incorporated Coohom (Hong Kong) Limited, or Coohom Hong Kong, in Hong Kong as a wholly owned subsidiary of Exacloud (Hong Kong) Limited, to operate Coohom’s business in Asia.

In February 2020, we acquired Modelo to expand our offering coverage to DAM capabilities. As a result of the acquisition, Modelo Inc., a Delaware corporation, became a wholly owned subsidiary of Exacloud (Hong Kong) Limited, and Shanghai Modai Network Technology Co., Ltd., or Shanghai Modai, a PRC company became a wholly owned subsidiary of Hangzhou QunHe. In July 2020, we incorporated Guangdong Kujiale Network Technology Co., Ltd. or Guangdong Kujiale, as a wholly owned subsidiary of Hangzhou Yunjiazhuang in the PRC.

In January 2021, we acquired Hangzhou Meijian Technology Co., Ltd., or Hangzhou Meijian, a PRC company, to further increase our 2D design capabilities. After the acquisition, Hangzhou Meijian became a wholly owned subsidiary of Hangzhou QunHe.

 

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Corporate Structure

The following diagram illustrates our corporate structure upon the completion of this offering assuming no exercise of the underwriters’ option to purchase additional ADSs, including our significant subsidiaries, our VIE and other entities.

 

LOGO

 

Note:

(1)

Shareholders of Hangzhou QunHe are Mr. Xiaohuang Huang, Mr. Hang Chen and Mr. Hao Zhu, holding 50.0%, 39.2%, and 10.8%, respectively, of the equity interest in Hangzhou QunHe. Mr. Xiaohuang Huang is our co-founder and chairman of the Board. Mr. Hang Chen is our co-founder, Director and chief executive officer. Mr. Hao Zhu is our co-founder, Director and chief technology officer.

Contractual Arrangements with Our VIE and Its Shareholders

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services. We are a company registered in the Cayman Islands. Our PRC subsidiary, Hangzhou Yunjiazhuang, is considered a foreign-invested enterprise. To comply with PRC laws and regulations, we primarily conduct our business in China through our VIE, Hangzhou QunHe and its subsidiaries, based on a series of contractual arrangements, which enable us to (i) exercise effective control over our VIE, (ii) receive all of the economic benefits of our VIE, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we exert effective control over, and are considered the primary

 

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beneficiary of, our VIE and consolidate the operating results the VIE and its subsidiaries in our financial statements under U.S. GAAP. The following is a summary of the contractual arrangements by and among our WFOE, our VIE and the VIE’s shareholders.

Power of Attorney

Each of the VIE’s shareholders, Mr. Xiaohuang Huang, Mr. Hang Chen and Mr. Hao Zhu, issued a power of attorney on April 21, 2021, irrevocably appointing our WFOE as his sole and exclusive attorney-in-fact to exercise, on his behalf, all of his shareholders’ rights with respect to the VIE, including, but not limited to, the right to participate in shareholders’ meetings, the right to vote, the right to dispose of all or part of the shareholder’s equity interest in the VIE and the right to elect, designate and appoint the senior management in the VIE. Each power of attorney will remain effective so long as the shareholder remains as the VIE’s shareholder.

Equity Pledge Agreement

All the VIE’s shareholders entered into an amended and restated equity pledge agreement with the WFOE and the VIE on April 21, 2021. Under the equity pledge agreement, each shareholder has pledged his equity interests in the VIE to the WFOE to secure the performance of the obligations under the exclusive technology development, consultation and technical service agreement. Each shareholder has further agreed not to transfer or pledge his equity interest in the VIE without the prior written consent of the WFOE. The equity pledge agreement will remain binding until the service fees stated in the exclusive technology development, consultation and technical service agreement are fully paid and the VIE fully discharges its responsibilities under such agreement. As of the date of this prospectus, we were in the process of registering the equity pledges under the equity pledge agreement with competent PRC regulatory authority.

Exclusive Purchase Option Agreement

The WFOE, the VIE and the VIE’s shareholders have entered into an amended and restated exclusive purchase option agreement dated April 21, 2021. Under this agreement, each VIE’s shareholder has granted the WFOE or its designee an option to purchase their equity interests in the VIE at a price equal to the lower of RMB100 and the minimum amount of consideration permitted by PRC law. Each VIE’s shareholder has also granted the WFOE or its designee an option to purchase all or a portion of the assets of the VIE at a price equal to the lower of RMB100 and the minimum amount of consideration permitted by PRC law. In addition, each VIE’s shareholder has also undertaken not to supplement, modify the VIE’s articles of association, increase or decrease its registered capital, change its registered capital structure in other ways, transfer or mortgage any equity interests in or otherwise dispose of any assets or businesses of the VIE without the prior written confirmation from the WFOE or our company. This agreement has a term of ten years, which may be extended for another ten years upon the WFOE’s unilateral written confirmation prior to the expiry.

Spousal Commitment Letters

The spouses of individual shareholders of the VIE have each signed a spousal commitment letter. Under the spousal commitment letter, the signing spouse has unconditionally and irrevocably agreed that the equity interest in the VIE which is held by and registered under the name of her spouse will be disposed of pursuant to the abovementioned equity pledge agreement, exclusive purchase option agreements and the power of attorneys. In addition, the spouse has confirmed that she will not assert in the future any right, over the equity interests in the VIE held by her spouse. The spouse has further agreed that in the event she obtains any equity interest in the VIE held by her spouse for any reason, she will be bound by and sign any legal documents substantially similar to the contractual arrangements entered into by her spouse, as may be amended from time to time.

Exclusive Technology Development, Consultation and Technical Service Agreement

Under the exclusive technology development, consultation and technical service agreement dated December 13, 2013, which was amended and supplemented on August 22, 2014 and December 29, 2016, the VIE

 

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has agreed to exclusively purchase a series of services from the WFOE, including, without limitation, research and development services, software license, technical support for business operation, maintenance and troubleshooting services for network equipment, technical consultancy services, training services, customer management and after-sales services. The VIE has agreed to pay, on a quarterly basis, service fees equal to 100% of its revenues for the quarter deducting costs in the same period as agreed by both parties, and pay service fees for certain services as required by the VIE from time to time. Any adjustment of the service fees is subject to board approval of the WFOE and our company. This agreement has a term of ten years, which may be extended for another ten years upon the WFOE’s unilateral written confirmation prior to the expiry. The VIE has no right of terminate this agreement without the WFOE’s written consent while the WFOE may unilaterally terminate this agreement through a prior written notice.

Intellectual Property Transfer Agreement

Pursuant to an intellectual property transfer agreement dated August 12, 2019 by and between the WFOE and the VIE, upon receiving the board resolution of our company or the written resolution of the supermajority preferred holders of our company approving the transfer of the intellectual property rights set forth in this agreement, the VIE shall transfer the subject intellectual rights and interests related to or derived from the subject intellectual property rights to the WFOE with a total consideration of RMB1,000. This agreement has a term of ten years, which may be extended for another ten years upon the WFOE’s unilateral written confirmation prior to the expiry.

In the opinion of Commerce & Finance Law Offices, our PRC legal counsel:

 

   

the ownership structures of the WFOE and the VIE, both currently and immediately after giving effect to the offering, do not and will not violate any applicable PRC laws, regulations, or rules currently in effect;

 

   

the agreements among the WFOE, the VIE and the VIE’s shareholders, governed by PRC laws, as described above, are valid, binding and enforceable in accordance with their terms and the applicable PRC laws, rules, and regulations currently in effect, and both currently and immediately after giving effect to the offering, do not and will not violate any applicable PRC laws, regulations, or rules currently in effect.

However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. We have been advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our value-added telecommunication services and related business do not comply with PRC government restrictions on foreign investment in such businesses, we could be subject to severe penalties including being prohibited from continuing operations. For a description of the risks related to these contractual arrangements and our corporate structure, please see “Risk Factors—Risks Related to Our Corporate Structure.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of comprehensive loss data for the years ended December 31, 2019 and 2020, selected consolidated balance sheet data as of December 31, 2019 and 2020 and selected consolidated cash flow data for the years ended December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of comprehensive loss data for the three months ended March 31, 2020 and 2021, selected consolidated balance sheet data as of March 31, 2021 and selected consolidated cash flow data for the three months ended March 31, 2020 and 2021 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated interim financial data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of results expected for future periods. You should read this 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.

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

 

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

Selected Consolidated Statements of Comprehensive Loss Data:

           

Revenues

    282,295       353,418       54,164       75,675       100,889       15,399  

Cost of revenues

    (88,002     (114,669     (17,574     (22,057     (33,943     (5,181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    194,293       238,749       36,590       53,618       66,946       10,218  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Research and development expenses

    (191,768     (270,714     (41,489     (54,054     (98,897     (15,095

Sales and marketing expenses

    (197,339     (219,136     (33,584     (39,765     (70,882     (10,819

General and administrative expenses(1)

    (84,478     (67,377     (10,326     (13,241     (18,165     (2,773
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (473,585     (557,227     (85,399     (107,060     (187,944     (28,687

Other operating income, net

    5,455       9,003       1,380       2,807       1,381       211  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (273,837     (309,475     (47,429     (50,635     (119,617     (18,258

Interest income

    11,296       9,058       1,388       1,931       2,656       405  

Foreign exchange (losses)/gains

    (883     586       90       (75     (36     (5

Investment income

    2,867       3,222       494       33       22       3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expenses

    (260,557     (296,609     (45,457     (48,746     (116,975     (17,855
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

    (260,557     (296,609     (45,457     (48,746     (116,975     (17,855

 

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

Accretion to convertible redeemable preferred shares redemption value

    (88,386     (133,409     (20,446     (28,293     (45,315     (6,916

Deemed dividend to convertible redeemable preferred shareholders

    (61,769                              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

    (410,712     (430,018     (65,903     (77,039     (162,290     (24,771
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (260,557     (296,609     (45,457     (48,746     (116,975     (17,855
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

           

Foreign currency translation adjustment, net of nil tax

    2,242       (18,716     (2,868     2,432       2,456       375  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

    (258,315     (315,325     (48,325     (46,314     (114,519     (17,480
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders

           

—Basic and diluted:

    (1.08     (1.02     (0.16     (0.19     (0.38     (0.06

Weighted average number of ordinary shares

           

—Basic and diluted:

    380,699,517       419,988,526       419,988,526       411,142,826       429,976,558       429,976,558  

 

Note:

(1)

General and administrative expenses included share-based compensation of RMB38.5 million, RMB11.5 million (US$1.8 million), RMB3.7 million and RMB1.7 million (US$0.3 million) in 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively, which resulted from the vesting of restricted shares of our co-founders.

 

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

 

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

Selected Consolidated Balance Sheets Data:

          

Cash and cash equivalents

     503,093       846,459       129,726       674,377       102,930  

Restricted cash

     1,467       1,242       190       530       81  

Short-term investments

     16,546       4,989       765       1,864       285  

Time deposits

           28,128       4,311       28,328       4,324  

Property and equipment, net

     35,890       42,105       6,453       43,624       6,658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     582,389       959,590       147,064       816,009       124,549  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities:

          

Deferred revenue

     217,525       270,863       41,512       279,885       42,719  

Total current liabilities

     316,710       424,567       65,069       403,416       61,574  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current liabilities:

          

Deferred revenue

     98,231       116,663       17,879       107,191       16,361  

Total non-current liabilities

     100,291       118,226       18,119       108,598       16,576  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     417,001       542,793       83,188       512,014       78,150  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity

     912,318       1,600,936       245,354       1,646,251       251,267  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ deficit:

          

Ordinary shares (US$0.000025 par value, 3,327,046,937, 3,248,656,312 and 3,248,656,312 shares authorized; 452,446,840 shares issued, 407,052,332, 428,614,723 and 432,019,311 shares outstanding as of December 31, 2019, December 31, 2020 and March 31, 2021, respectively)

     74       74       11       74       11  

Additional paid-in capital

                              

Accumulated other comprehensive income

     30,823       12,107       1,855       14,563       2,223  

Accumulated deficit

     (777,827     (1,196,320     (183,344     (1,356,893     (207,102

Total shareholders’ deficit

     (746,930     (1,184,139     (181,478     (1,342,256     (204,868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, mezzanine equity and shareholders’ deficit

     582,389       959,590       147,064       816,009       124,549  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

Selected Consolidated Cash Flow Data:

        

Net cash used in operating activities

     (89,350     (132,473     (20,302     (88,534     (147,993     (22,587

Net cash provided by/(used in) investing activities

     (39,783     (58,337     (8,941     196       (27,318     (4,170

Net cash provided by financing activities

     163,184       555,209       85,090                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     5,071       (21,258     (3,258     2,380       2,517       384  

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

     39,122       343,141       52,589       (85,958     (172,794     (26,373

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

     465,438       504,560       77,327       504,560       847,701       129,384  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     504,560       847,701       129,916       418,602       674,907       103,011  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Manycore is a fast-growing, disruptive design software platform. Being cloud-native, mobile-friendly and smart, our platform pioneers the interior design, decoration and construction industry for residential, commercial and industrial spaces. We integrate and deliver computer-aided design and building information modeling capabilities on a SaaS model, empowering businesses to deliver superior user experience and achieve operational excellence. With our mission-critical offerings and end-to-end coverage, we have become the central hub of an ecosystem connecting millions of designers, enterprises and end customers.

We are the world’s largest platform for 3D interior design, decoration and construction by the number of average monthly active users, or MAUs, in the first quarter of 2021, according to iResearch. We had approximately 1.5 million average MAUs in the first quarter of 2021, consisting mainly of designers and enterprise users. We make free version of our products available to everyone, providing low-friction entry points and building a thriving, large user base. Every day, our platform executes millions of renderings and processes billions of API calls on cloud. From March 2021 to May 2021, our platform executed an average of 2.1 million renderings on a daily basis and processed an average of over 7.7 billion API calls per day in May 2021 alone. As our users increase their usage of our products, many of them choose to upgrade to paid and higher-tiered subscriptions and become our customers. As of March 31, 2021, we had 20,806 enterprise customers across different industry verticals, representing a 69% year-over-year growth. These enterprise customers contributed substantially all of our revenues. In addition, we also served over 240,000 and 89,000 paying individual customers during the year ended December 31, 2020 and during the first quarter of 2021, respectively, which we believe reflects our growing popularity among designers. We are the largest interior design, decoration and construction software provider in China, as measured by gross billings in 2020, taking approximately 10.3% market share, according to iResearch.

Technology and innovation are at the core of our business. We are a frontrunner in transforming design experiences with cloud-based solutions, providing users with the long-desired speed and convenience that legacy software could not offer. Empowered by our proprietary hybrid cloud infrastructure and extensive AI capabilities, we deliver high-quality results to users with enhanced efficiency. Our users can access the works they create across devices and seamlessly share them through numerous social media channels anytime, anywhere.

We operate a pure play SaaS model with strong customer land-and-expand. We have adopted a freemium go-to-market model for most of our products, offering free version to capture the mindshare of designers and end customers. We also offer paid, subscription-based premium versions to enrich the experience of our enterprise customers and professional designers. We relentlessly focus on customer success support to help customers achieve their own business success. We have high visibility in our revenue as we generate substantially all of our revenue on a subscription basis with a strong track record in renewal and upsell. As of December 31, 2020, our net revenue retention rate for key accounts and advanced customers reached 130% and 95%, respectively, and our deferred revenue amounted to RMB387.5 million (US$59.4 million).

 

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We have experienced strong growth in recent years. Our revenues grew by 25% from RMB282.3 million in 2019 to RMB353.4 million (US$54.2 million) in 2020 despite the impact of COVID-19 and increased by 33% from RMB75.7 million in the three months ended March 31, 2020 to RMB100.9 million (US$15.4 million) in the three months ended March 31, 2021. Our gross margins were 69%, 68% and 66% in 2019, 2020 and the three months ended March 31, 2021, respectively. We had a net loss of RMB260.6 million, RMB296.6 million (US$45.5 million) and RMB117.0 million (US$17.9 million) in 2019, 2020 and the three months ended March 31, 2021, respectively. Our gross billings increased by 16% from RMB366.0 million in 2019 to RMB425.2 million (US$65.2 million) in 2020, and increased by 72% from RMB58.5 million in the three months ended March 31, 2020 to RMB100.4 million (US$15.3 million) in the three months ended March 31, 2021. Gross billings is a non-GAAP measure and for a description of how we calculate gross billings, see “—Non-GAAP Financial Measures.”

Key Milestones

 

LOGO

 

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Key Operating Metrics

We adopt a growth strategy with a focus on increasing the lifetime value of our enterprise customers, particularly our advanced customers and key accounts, while expanding our market share. To evaluate our implementation of such strategy and assess our business performance, we regularly review a number of key operating metrics that are presented in the following table as of the dates indicated:

 

    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
 

Enterprise customers(1):

                 

Number

    8,712       9,781       10,905       11,624       12,311       14,669       16,755       18,592       20,806  

ARR(2) (RMB in millions)

    246       272       289       302       312       332       358       387       416  

Advanced customers(3):

                 

Number

    3,679       4,007       4,237       4,382       4,381       4,589       4,749       4,847       5,084  

ARR(2) (RMB in millions)

    215       240       255       267       277       290       312       337       361  

NRR rate(4) (%)

    82       84       83       86       89       89       93       95       97  

Key accounts(5):

                 

Number

    185       205       221       231       238       242       254       260       267  

ARR(2) (RMB in millions)

    50       63       69       75       85       90       105       126       136  

NRR rate(4) (%)

    109       119       112       115       125       114       127       130       125  

 

Notes:    

(1)

“Enterprise customers” as of a given date refer to entities that were subscribers to our paid versions on such date. Each enterprise customer may have more than one registered account. Different affiliated customer entities that subscribe to our products and solutions are deemed as one enterprise customer for purposes of this calculation.

(2)

“ARR” or “annual recurring revenue” with respect to one customer refers to the annualized value of the revenue from the subscription of our products and solutions by such customer as of a given date. ARR from more than one customer equals the sum of the ARR from each of such customers.

(3)

“Advanced customers” refer to enterprise customers who subscribe to at least five registered accounts.

(4)

“NRR rate” or “net revenue retention rate” as of a given date, or the benchmark date, is a percentage calculated by using (i) the total ARR from a group of customers on the date 12 months prior to the benchmark date as the denominator, and (ii) the ARR from the same group of customers on the benchmark date as the numerator.

(5)

“Key accounts” refer to advanced customers whose ARR reached RMB200,000.

In 2019, 2020 and the three months ended March 31, 2021, our enterprise customers contributed substantially all of our subscription revenue. In particular, our advanced customers contributed RMB218.6 million, RMB270.5 million (US$41.5 million) and RMB76.6 million (US$11.7 million) of our subscription revenue, respectively, accounting for 82%, 81% and 79%, respectively, of our total subscription revenue in the same periods. Among our advanced customers, our key accounts contributed RMB56.6 million, RMB85.2 million (US$13.1 million) and RMB28.9 million (US$4.4 million) of our total subscription revenue in 2019, 2020 and the three months ended March 31, 2021, respectively, accounting for 21%, 25% and 30%, respectively, of our total subscription revenue in the same periods.

We assess our performance in terms of customer retention using a metric that we refer to as net revenue retention rate, or NRR rate. We believe that the NRR rate provides meaningful insight into revenue contribution from our existing customers over periods, indicating our ability to drive their lifetime value on our platform. Customer churns, whether resulting from business closures, discontinuation of subscription or otherwise, could adversely impact the NRR rate. Also, the NRR rate is affected by customers’ purchase cycles, which could fluctuate from time to time within a year, as well as a number of other factors including but not limited to introductions of new features, promotional activities, and the variable timing and amount of customer purchases. As a result, the NRR rate as of the last day of each quarter is an inherently volatile metric. The calculation of these key metrics and other measures disclosed elsewhere in this prospectus may differ from other similarly titled metrics used by other companies, securities analysts or investors.

As we are adopting a freemium model, we have served a large number of individual users, some of which also subscribe to our paid versions. Subscription revenue from individual customers was RMB20.2 million, RMB27.1 million (US$4.1 million) and RMB7.8 million (US$1.2 million) in 2019, 2020 and the three months

 

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ended March 31, 2021, respectively, and accounted for approximately 8% of our total subscription revenue for each period. Although the revenue contributions from individual customers were insignificant, we believe the total number of individual customers reflects the popularity of our products and solutions among designers. The following table sets forth the number of individual customers we served for the periods presented:

 

    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
 

Paying individual customers:

                 

Number

    49,703       70,191       71,073       76,919       59,560       120,965       99,503       81,811       89,007  

Because of the short-term nature of subscriptions by our individual customers, which typically range from 30 to 180 days, the quarterly number of individual customers is an inherently volatile metric. The number of our individual customers decreased substantially in the first quarter of 2020 due to the reduced business activities caused by the measures to combat COVID-19. As the restrictions eased and business activities gradually resumed in China, we saw a significant bounce-back in the number of individual customers in the second quarter of 2020 and additional fluctuations in the second half of 2020 as a result of customer subscription patterns.

Key Factors Affecting Our Performance

Our business and results of operations are affected by the overall economic conditions in China and globally, especially the development of the interior DDC industry, as well as factors unique to our company:

Trends in economic conditions and development of the interior DDC in China and globally

The demand for our products and solutions is driven by a number of external factors affecting the interior DDC industry in China and other geographies in which we operate. These factors include, among other things:

 

   

China’s and global economic growth;

 

   

demand and supply for real properties;

 

   

the progress of digitalization and cloud adoption of interior DDC industry;

 

   

business growth and spending strategies of the interior DDC industry participants amid digital transformation;

 

   

adoption of design software solutions in the interior DDC industry; and

 

   

governmental policies, initiatives and incentives affecting the interior DDC industry.

Our ability to acquire new customers

We have a history of successfully growing our customer base. We have adopted a freemium go-to-market strategy to capture mindshare of designers, who wield significant influence on businesses’ selection of software solutions. So far, the strategy has been proven effective. The number of our average MAUs increased from 1.2 million for the fourth quarter of 2019 to 1.5 million for the fourth quarter of 2020 and from 1.1 million for the first quarter of 2020 to 1.5 million for the first quarter of 2021, representing 23% and 24% year-over-year growth rate for the respective period. The number of our enterprise customers increased from 11,624 as of December 31, 2019 to 18,592 as of December 31, 2020 and from 12,311 as of March 31, 2020 to 20,806 as of March 31, 2021, reflecting year-over-year growth rate of 60% and 69% respectively. The effective conversion of non-paying users to revenue-generating customers is important to the growth of our revenue. We intend to keep focusing on engaging our prospective customers mainly through our direct sales team to boost the conversion.

Our revenue growth is also driven by our ability to move up the market and grow the adoption of our products among enterprise customers, who typically have the potential to subscribe for higher contract value. We assess our performance in this area by tracking the growth of our key accounts. The number of our key accounts

 

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increased from 231 as of December 31, 2019 to 260 as of December 31, 2020, and our ARR from key accounts grew by 67% from RMB75 million as of December 31, 2019 to RMB126 million (US$19.3 million) as of December 31, 2020. The number of our key accounts increased from 238 as of March 31, 2020 to 267 as of March 31, 2021, and our ARR from key accounts grew by 60% from RMB85.4 million as of March 31, 2020 to RMB136.5 million (US$20.8 million) as of March 31, 2021. We have a dedicated team with combined responsibilities of providing customers success support to key accounts, on the one hand, and promoting sales and marketing, on the other. We intend to continue the efforts in growing our key accounts.

The growth of our revenue also depends on our ability to expand coverage from the residential interior DDC sector to new verticals such as interior DDC for commercial space and industrial areas. We plan to tap into these new verticals by expanding first into design services for commercial and industrial spaces and providing vertical-tailored solutions that are built around design. To this end, we intend to continue building our sales and marketing team and work with channel partners to reach customers inside and outside China.

Our ability to improve customer retention and expand customer lifetime value

We are committed to providing superior product capabilities and best-in-class customer success support to foster strong customer loyalty. We believe that our ability to retain and grow subscription from our existing customers strengthens the stability and predictability of our revenue and is reflective of the value we deliver to our existing customers.

We assess our performance in this regard using a metric that we refer to as net revenue retention rate, or NRR rate. We calculate the NRR rate at a point in time, or the benchmark date, as a percentage using the total ARR from a group of customers on the date 12 months prior to the benchmark date as the denominator, and the total ARR from the same group of customers on the benchmark date as the numerator. Customer churns, whether resulting from business closures, discontinuation of subscription or otherwise, could adversely impact the NRR rate. We believe that the NRR rate provides meaningful insight into revenue contribution from our existing customers over periods, indicating our ability to drive their lifetime value on our platform. As of December 31, 2019 and 2020, our NRR rate for all advanced customers was 86% and 95%, respectively, and for key accounts was 115% and 130%, respectively.

Our ability to maintain and improve the NRR rate depends on our ability to retain existing customers, and more importantly, our ability to successfully upsell our products and solutions to customers. To this end, we intend to continue building our customer success support network to enhance customer satisfaction and lifetime value.

Our ability to enhance technology and product development capabilities

To capitalize on the enormous market opportunities from the evolving interior DDC industry, we believe it is critical to continually promote innovation, master state-of-the-art technology and enhance product functioning. We intend to continue to invest in our research and development capabilities and develop more innovative product features to maintain our strong reputation among the designer community. We have been and will continue upgrading and optimizing our products to address our customers’ evolving business needs. We will also relentlessly enhance our product capabilities by developing industry-specific solutions that satisfy evolving business needs and complex working environments and invest in expanding our product offerings that cater to use cases for customers from new verticals such as the interior DDC for commercial and industrial spaces. Leveraging our cloud-native software infrastructure, we will continue to make our products mobile friendly, easily accessible and scalable. The foregoing endeavors may result in the increase of our research and development expenses.

Our ability to manage operating expenses and improve operational efficiency

We primarily sell subscriptions to our products through direct sales team targeting prospective enterprise customers. Prudently managing our customer acquisition costs is important to our overall profitability. As we

 

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continue to grow our business scale, we expect the sales and marketing expenses to decrease as a proportion of revenues.

In addition, our success to date is largely attributable to our ability to integrate the use of technologies into business operations. We have been leveraging our technology capabilities to increase the automation level of our operations and optimize efficiency in various aspects. As our business grows, we expect to benefit from economies of scale and achieve additional cost savings.

International expansion

We aim to replicate our success in China globally. In 2018, we launched Coohom, the international version of Kujiale, mainly targeting the U.S., European, South Korean, Japanese and Southeast Asian markets. Our international business has witnessed rapid growth in recent years. The revenues from our international customers increased by approximately 14 times from RMB1.0 million in 2019 to RMB14.0 million (US$2.1 million) in 2020. While growing fast, our international business still contributes a small portion of our total revenue. In 2019, 2020 and the three months ended March 31, 2021, revenues from customers in markets outside China accounted for approximately 0.3%, 4.0% and 8.5% of our total revenues, respectively. We see substantial growth opportunities on the international markets and will continue to expand our international go-to-market efforts in the near future. As we roll out our software solutions to more markets internationally, our global sales efforts and launch of additional private computing clusters in destination countries will add additional complexity and cost to our business. With better unit pricing and relatively stable cost in the international business, we expect international expansion will gradually improve our overall profit margin.

Strategic investment and acquisitions

We have made, and intend to continue to make, strategic acquisitions to solidify our current market presence and expand into new verticals. We intend to selectively pursue strategic alliances and investments to further enhance our product offerings and strengthen our competitiveness.

Impacts of COVID-19

Since 2020, the COVID-19 pandemic has had material and adverse economic and social impacts around the world. Governments worldwide have imposed widespread lockdowns, closure of work places and restrictions on mobility and travel to contain the spread of the virus. During the lockdowns in 2020, we had to temporarily close certain of our office facilities, restrict employee travel, switch to online virtual meetings or even cancel meetings with customers or prospective customers, all of which have temporarily restrained our operating activities, including our sales efforts. Although our operations, sales and marketing activities and customer success support had been affected to the extent physical meetings were required or preferred, the cloud-native nature of our platform and operations helped reduce the impact of COVID-19 on us in general.

To date, the global COVID-19 pandemic continues to rapidly evolve, and we have been monitoring the COVID-19 situation closely. The impact of the COVID-19 on our business and operations has been immaterial so far. However, the ultimate impact of the COVID-19 pandemic is highly uncertain, and will depend on certain developments, including the duration and spread of the pandemic and its impact on our daily business operation and other third parties with whom we do business, as well as its impact on regulatory authorities and our key management personnel. Other than our employees outside China who are currently working remotely, we are generally conducting business as usual, with necessary or advisable modifications to employee travel. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by government authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business.

Despite any adverse impact of COVID-19 on the economy in general, we have observed an increased demand for cloud-based software solutions that have been vital in facilitating the shift to remote working

 

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throughout the pandemic. Our revenues grew by 25% from RMB282.3 million in 2019 to RMB353.4 million (US$54.2 million) in 2020, and by 33% from RMB75.7 million in the three months ended March 31, 2020 to RMB100.9 million (US$15.4 million) in the three months ended March 31, 2021. We expect such trend to persist post-pandemic as the cloud transformation continues in the long run, and we believe that we are well positioned to capture this growth opportunity. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and financial condition remains uncertain.

Components of Our Results of Operations

Revenues

We generate revenues from (i) customers’ subscription to our software products and solutions, and (ii) provision of professional and other services. The following table sets forth our total revenues for the periods presented:

 

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

Revenues:

                

Subscription revenue

    266,453        334,472        51,260        71,723        96,572        14,740  

Professional services and other revenue

    15,842        18,946        2,904        3,952        4,317        659  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

    282,295        353,418        54,164        75,675        100,889        15,399  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subscription revenue

We generate subscription revenue principally through the sale of subscription for the use of our software products and solutions. In 2019, 2020 and the three months ended March 31, 2021, over 90% of our subscription revenue was contributed by enterprise customers. We offer subscription plans at various price points and recognize revenues over a service period that generally ranges from one to three years based on the terms of our subscription contracts. We typically bill our customers and collect the subscription fees at the beginning of our services and recognize revenue over the service period. As a result, we record deferred revenue, and a portion of the revenues we report in each period is attributable to the recognition of deferred revenue related to subscription that we entered into during previous periods. As of March 31, 2021, we had RMB387.1 million (US$59.1 million) deferred revenue.

Professional services and other revenue

We generate professional services and other revenue from sale of professional services which primarily consist of modeling services, design services and project implementation services.

Cost of Revenues

The following table sets forth our cost of revenue in absolute amount and as a percentage of our total revenues for the periods presented:

 

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

Cost of revenues

     (88,002     (31     (114,669     (17,574     (32     (22,057     (29     (33,943     (5,181     (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Cost of revenues consists of cost of subscription revenues and cost of professional services and other revenues. Cost of subscription revenues consists primarily of (i) expenses incurred in connection with the set-up, operation and maintenance of our IT infrastructure, such as depreciation expenses of servers and other hardware equipment, internet data center lease expenses and third-party cloud infrastructure expenses, and (ii) personnel-related costs associated with the customer care and support services. Cost of professional services and other revenue consists primarily of personnel-related costs and third-party procurement costs in connection with the provision of such services.

Operating Expenses

Operating expenses consist of research and development expenses, sales and marketing expenses, and general and administrative expenses. The following table sets forth our operating expenses in absolute amount and as a percentage of our total revenue for the periods presented:

 

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

Operating expenses:

                    

Research and development expenses

     (191,768     (68     (270,714     (41,489     (77     (54,054     (71     (98,897     (15,095     (98

Sales and marketing expenses

     (197,339     (70     (219,136     (33,584     (62     (39,765     (53     (70,882     (10,819     (70

General and administrative expenses

     (84,478     (30     (67,377     (10,326     (19     (13,241     (17     (18,165     (2,773     (18