424B4 1 d32788d424b4.htm 424(B)(4) 424(B)(4)
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-255102

9,310,350 American Depositary Shares

 

 

Onion Global Limited

Representing 931,035 Class A Ordinary Shares

This is an initial public offering of 9,310,350 American depositary shares, or ADSs, of Onion Global Limited. Each ten (10) ADSs represent one (1) Class A ordinary share, par value US$0.0001 per share.

Prior to this offering, there has been no public market for the ADSs or our Class A ordinary shares. The initial public offering price is US$7.25 per ADS. We have been approved to list the ADSs representing our Class A ordinary shares on the New York Stock Exchange under the symbol “OG ”.

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 founder, Cong (Kenny) Li, and a principal shareholder, Pingsan Bai (each, a “Founder”, and collectively, the “Founders”) will beneficially own all of our issued Class B ordinary shares and they will in the aggregate hold approximately 56.7% of our total issued and outstanding share capital immediately after the completion of this offering and 92.3% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, both of which percentages exclude ordinary shares issued but deemed to be not outstanding as of the date of this prospectus underlying granted RSUs (except those granted to Cong (Kenny) Li), assuming the underwriters do not exercise their over-allotment option. 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 10 votes and 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 sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person who is not an affiliate of Cong (Kenny) Li, or upon a change of ultimate beneficial ownership of any Class B ordinary share to a person who is not an affiliate of Cong (Kenny) Li, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. See “Description of Share Capital.” Immediately following the completion of this offering, we will be a “controlled company” within the meaning of the NYSE rules. See “Principal Shareholders.”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 20 of this prospectus.

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

PRICE US$7.25 PER ADS

 

 

 

     Per ADS      Total  

Initial public offering price

   US$ 7.25      US$ 67,500,038  

Underwriting discounts and commissions(1)

   US$ 0.36      US$ 3,375,002  

Proceeds, before expenses, to us

   US$ 6.89      US$ 64,215,036  

 

(1)

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

The underwriters have an over-allotment option to purchase up to an additional 1,396,550 ADSs from us at the initial public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about May 11, 2021.

 

AMTD    Huatai Securities
Roth Capital Partners    Tiger Brokers    Valuable Capital Limited

 

 

The date of this prospectus is May 6, 2021.

 


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TABLE OF CONTENTS

 

 

     Page  

Prospectus Summary

     1  

Our Corporate Information

     10  

Implications of Being an Emerging Growth Company

     10  

Conventions Which Apply to this Prospectus

     10  

The Offering

     13  

Our Summary Consolidated Financial Data and Operating Data

     16  

Risk Factors

     20  

Cautionary Statement Regarding Forward-Looking Statements

     67  

Use of Proceeds

     68  

Dividend Policy

     69  

Capitalization

     70  

Dilution

     71  

Enforceability of Civil Liabilities

     73  

Corporate History and Structure

     75  

Selected Consolidated Financial Data

     80  

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

     83  

Industry

     107  

Business

     117  

Regulation

     138  

Management

     156  

Principal Shareholders

     164  

Related Party Transactions

     167  

Description of Share Capital

     172  

Description of American Depositary Shares

     183  

Shares Eligible for Future Sale

     191  

Taxation

     193  

Underwriting

     199  

Expenses Relating to this Offering

     208  

Legal Matters

     209  

Experts

     210  

Where You Can Find Additional Information

     211  

Index to Consolidated Financial Statements

     F-1  

 

 

Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “Onion,” “we,” “us,” “our,” “ours,” “our company,” the “Company,” or similar terms refer to Onion Global Limited, together with its subsidiaries and consolidated affiliated entities.

 

 

No dealer, salesperson or other person is authorized to give any information or to represent 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 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.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any free writing prospectus must inform themselves about, and observe any restrictions

 

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relating to, the offering of the ADSs and the distribution of this prospectus or any free writing prospectus outside of the United States. This offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs representing our Class A ordinary shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

Until May 31, 2021 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade the 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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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the related notes appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” “Business,” and information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding whether to buy the ADSs.

OUR MISSION

Be the dream factory of lifestyle brands for young people.

WHO WE ARE

We are a next-generation lifestyle brand platform that incubates, markets and distributes the world’s fresh, fashionable and future brands, which we refer to as “3F brands,” to young people in China and across Asia.

Our founder Cong (Kenny) Li, an 18-year veteran at a Fortune 100 multi-national consumer goods company, created Onion with an objective to search for and create the next generation of fresh, fashionable and future brands and bring them to the young consumers in China and across Asia.

Today, the Onion global brand family is synonymous with what Kenny initially set out to build. The 4,001 brands on our platform, including 86 brand partners that directly work with us, offer 23 categories of lifestyle products, including beauty products, maternal and baby products, food & beverages, fast fashion and wellness products. Trusted by millions of users, our platform improved our users’ lives in small but meaningful ways by offering our users a wide product selection and an enjoyable online shopping experience. Our online platform disrupts the conventional lifestyle retail landscape in China by offering an integrated solution to develop, market and distribute new and inspiring branded products, thereby reshaping the lifestyle shopping and consumer culture in China.

Our unique ability to identify the next fresh, fashionable and future brands around the world and promote them to become the consumer crazes in China ahead of the curve is rooted in years of experience that our founder has accumulated in brand management and sales and marketing and is further reinforced by our close relationships with 86 brand partners and over 130 authorized distributors and resellers around the globe.

Over the years, we have built an integrated platform for brand sourcing, building, marketing and distribution with a track record of high performance:

 

   

As of December 31, 2020, products of 4,001 brands were offered on our platform, including brands from our 86 brand partners and 21 private label brands. The GMV generated by sales of products from our brand partners on our self-operated retail platform, O’Mall, increased by 125.5% from RMB428.8 million in 2018 to RMB966.8 million in 2019, and further by 35.5% to RMB1,309.9 million in 2020 from 2019. The GMV generated by sales of our private label products on O’Mall reached RMB50.9 million 2020 despite only having launched our private label business in 2018.

 

   

Our omni-channel marketing and distribution empowers brands with the technology and services to reach the widest and most relevant consumer base. We help brands build a large, loyal following through connecting and empowering over 516 thousand active KOCs on our platform as of December 31, 2020, who effectively promote our products and share their shopping experience through social media. We build our big data analytics capability upon a large volume of transactional data collected on our platform. Based on



 

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our buyers and active KOCs’ purchase behaviors and relevant usage patterns, we use our algorithm to improve our product selections and recommendations, thereby optimizing our operation and enhancing user experience. We strive to continue to enhance our predictive and statistical models based on the big data we have accumulated. As of December 31, 2020, our technology leverages data from over 61.3 thousand SKUs and millions of user interactions online, particularly these by or through our active KOCs, creating a strategic asset of hundreds of millions of data points.

 

   

Through our advanced technology and global supply chain capabilities, we take the guesswork out of our customers’ global shopping experience, enabling seamless delivery of products manufactured and sourced around the world to Chinese consumers at competitive prices. We have processed 5.5 million, 10.3 million and 15.8 million orders for the years ended December 31, 2018, 2019 and 2020, respectively. The delivery time for these orders were generally around ten days for products shipped directly from overseas to China and one to four days for products we pre-stocked in our bonded warehouses in China and Hong Kong hub facility, compared to an industry average of approximately 15 days and five days, respectively, in China’s cross-border online retail industry, according to the CIC Report.

 

   

We have achieved rapid profit growth at scale. Within five years since the commencement of our operations, we achieved RMB3,810.7 million (US$584.0 million) revenues in 2020. Our net income increased from net loss of RMB94.8 million in 2018 to net income of RMB102.8 million in 2019 and further increased by 102.3% to net income of RMB208.0 million (US$31.9 million) in 2020. At the same time, our net margin as measured by net income as a percentage of total revenues increased from 3.6% in 2019 to 5.5% in 2020.

KEY PILLARS OF OUR BUSINESS MODEL

The growth and success of our business are supported by three integrated components:

 

   

a high-performing brand portfolio consisting of brands from our brand partners or represented by authorized resellers and distributors, as well as our private label brands,

 

   

integrated omni-channel marketing and distribution solutions, and

 

   

proven and effective monetization strategies.

 

 



 

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High-performing brand portfolio: As of December 31, 2020, we cooperated with 86 brand partners. Together with them, we have developed a deep understanding of young consumers’ tastes and preferences, through which we are able to accurately predict consumer trends and quickly identify, incubate and promote fresh, fashionable and future brands that represent the future of lifestyle consumption. As of December 31, 2020, we had launched 21 private label brands, covering a total of 634 cumulative SKUs. During the period between August 2015 to December 2020, 242 brands generated more than RMB1.0 million GMV within only six months after their initial sales through our platform.

 

   

Integrated omni-channel marketing and distribution solutions: Unlike traditional brand holding companies or social e-commerce platform, we are not only able to identify and develop inspiring brands, but also able to rapidly increase a brand’s exposure and sales through customized, multi-channel marketing and distribution. While our strengths in marketing and distribution extend well beyond social media, we are recognized as a pioneer and leader in social e-commerce. According to the CIC Report, our social e-commerce platform, O’mall, ranked among the top ten social e-commerce platforms in terms of GMV as of December 31, 2019, and ranked among the top five social e-commerce platforms in terms of GMV generated from cross-border online retail as of December 31, 2019. “GMV generated from cross-border online retail” refers to GMV of all types of consumer goods (excluding automobile, housing and consumer services) sold or purchased from China’s imports and exports through online retailing platforms. Our social e-commerce is centered around over 516 thousand active KOCs on our platform as of December 31, 2020, whom we actively manage to effectively attract, influence and retain potential customers. We reward our active KOCs for promoting our products through their social networks. This unique social e-commerce model allows us to promote and sell products in a more cost-effective way and delivers a personal and interactive shopping experience that drives customer acquisition, retention and lifetime value. In addition, we leverage buzzworthy offline marketing campaigns, cooperate with social media influencers, and create various innovative multi-format content to help brands reach a wider audience.

 

   

Proven and effective monetization strategies: We adopt effective monetization strategies that enable us to benefit throughout a brand’s lifecycle and across all types of brands we offer on our platform. For third-party brands we promote on our platform, we are able to purchase them at discounted prices either directly from brand partners or from product resellers and distributors. For our private label brands which we focus on building to drive our future growth, we directly benefit from their growth and success—through their attractive profits from products sales and the increase in brand value over the long-term.



 

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We believe the three components that underpin our business model have contributed to our rapid growth in the past and formed a virtuous and self-reinforcing cycle that will continue to fuel our long-term growth.

 

Throughout this cycle, we believe our successful track record in developing, marketing and distributing brands will help us attract more brand partners to our platform. With more brand partners joining our platform, we believe we will be able to develop deeper data insights into market trends and consumer preferences, which we believe will further improve our ability to identify, develop and market more brands. As we continue to expand our brand portfolio, we believe more active KOCs and customers will be attracted to the growing product offerings on our platform, which will increase our bargaining power and control over our supply chain business partners, particularly our product suppliers. With more competitively priced and better products, we believe we will be able to attract more active KOCs and customers, which will then in turn enable us to further improve our ability to attract, develop and market brands on our platform. Last but not least, as we help our brand partners achieve greater success, we believe their growth and profitability will improve, which in return, will incentivize them to increase their reliance on our platform, thereby further improving our profitability.

OUR STRENGTHS

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

 

   

unique, high-performing and profitable lifestyle brand platform;

 

   

one-of-a-kind brand portfolio with fresh, fashionable and future product offerings;

 

   

integrated and customized omni-channel marketing and distribution;

 

   

fully-integrated and efficient supply chain operations;

 

   

strong data analytics bringing brands closer to consumers; and

 

   

an empowering, entrepreneurial culture steering our people to innovations.



 

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HOW WE APPROACH THE FUTURE

The global ecosystem of lifestyle brands offers tremendous opportunities and we are still in the early phases of building our global brand platform. We plan on executing the following strategies to bring lifestyle brands to young people.

 

   

develop brand portfolio;

 

   

strengthen marketing and distribution capabilities.;

 

   

broaden fulfillment and logistics network;

 

   

invest in technology and innovation; and

 

   

continue international expansion.

Our Challenges

Investing in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties summarized below, the risks described under the “Risk Factors” section beginning on page 18 of, including the risks described under the subsections headed “Risks Related to Our Business and Industry”, “Risks Related to Our Corporate Structure”, “Risks Related to Doing Business in China” and “Risks Related to the ADSs and This Offering”, and the other information contained in, this prospectus before you decide whether to purchase our ADSs.

We face risks and uncertainties in realizing our business objectives and executing our strategies, including:

 

   

our limited operating history may not be indicative of our future growth or financial results, and we may not be able to sustain our historical growth rates;

 

   

our business depends on the continued success of our growing brand portfolio and if we fail to maintain and expand our brand portfolio, including our private label offerings, or maintain and enhance our brand recognition, our business, results of operations and prospects may be harmed;

 

   

our business relies on our leading brand partners. Any failure to maintain the popularity of or any loss of any of our leading brand partners would negatively impact our business and prospects;

 

   

if we fail to maintain KOC loyalty or sustain growth of our KOC community, our business, operations, profitability and prospects may be materially and adversely affected;

 

   

negative publicity about our brands, our business model or our products may materially and adversely affect our reputation, our business and the trading price of our ADSs, regardless of its accuracy. We may also be adversely affected by negative publicity concerning us and our business, shareholders, affiliates, directors, officers, employees, agents, other business partners and the industry in which we operate, regardless of its accuracy;

 

   

if we fail to anticipate and respond to changing customer preferences and shifts in lifestyle brand and market trends in a timely manner, our business and operating results could be harmed;

 

   

our flexible supply chain is essential to our business and is subject to risks associated with demands forecasting, timely supplying and warehousing, as well as maintaining relationship with our suppliers;

 

   

we may incur liability for counterfeit, unauthorized, illegal or infringing products sold or misleading information available on our platform that we operate or during our KOCs’ sales or promotion. In addition, we may be subject to product liability claims that could be costly and time-consuming;

 

   

we conduct our business through e-commerce platforms and online social media platforms. The material disruption of those platforms or any adverse changes on our cooperation with them could harm our business and operation;



 

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we rely on brand partners, third-party suppliers, manufacturers, logistics service providers and other vendors to serve our customers. If they fail to provide products or services that are consistent with our standards or applicable regulatory requirements, we may have to find alternative vendors, and our reputation and operation could suffer; and

 

   

we procure inventory based on our forecast on customer demands, and if we are unable to manage our inventory effectively, our operating results could be adversely affected.

We are a China-based company and we may face risks and uncertainties in doing business in China, including:

 

   

uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

 

   

the audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and as such, our investors are deprived of the benefits of such inspection. In addition, various legislative and regulatory developments related to U.S.-listed China-based companies due to lack of PCAOB inspection and other developments due to political tensions between the United States and China may have a material adverse impact on our listing and trading in the U.S. and the trading prices of our ADSs, and we could be delisted if we are unable to meet the PCAOB inspection requirements in time.

 

   

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

 

   

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

 

   

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

Recent Development

Estimated Preliminary Results for the First Quarter of 2021

The following sets forth certain estimated preliminary unaudited selected financial data for the three months ended March 31, 2021, which have been prepared by, and are the responsibility of, our management. Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, has not audited, performed a review specified by the PCAOB for a review of interim financial information as described in AS 4105, Reviews of Interim Financial Information, or performed any procedures with respect to the estimated preliminary financial results. Accordingly, Ernst & Young Hua Ming LLP does not express an opinion or any other form of assurance with respect thereto. We are still in the process of preparing our full financial statements for the three months ended March 31, 2021. These estimated preliminary results are based on the information currently available to us as of the date of this prospectus. Accordingly, our actual results may differ from the estimated preliminary results presented here and will not be finalized until after the completion of this offering.

We expect our total revenues for the three months ended March 31, 2021 to be lower than those in the first three months ended March 31, 2020. In particular, we expect our total revenues for the three months ended



 

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March 31, 2021 to be within a range of RMB650.0 million to RMB670.0 million, representing an approximate 8.5% to 5.6% decrease from approximately RMB710.0 million in the three months ended March 31, 2020. The revenue decrease was mainly due to the decrease of both of our total GMV generated by the sales of the Group and the sales of O’Mall as discussed in greater details below. In addition, we expect our total operating cost and expenses for the three months ended March 31, 2021 to be within a range of RMB650.0 million to RMB660.0 million, representing an approximate 0.8% to 2.3% increase from approximately RMB645.0 million for the three months ended March 31, 2020. Such increase was mainly attributable to the increased expenses incurred in the first quarter of 2021 to strengthen our diversified distribution channels and additional legal and professional service fees incurred in relation to our proposed listing. Cost of revenues for the first quarter of 2021 is expected to remain largely in line with the amount incurred in the same period of last year. As a result of the foregoing, we expect our net income to be within a range of RMB8.0 million to RMB13.0 million for the first quarter of 2021, compared to approximately RMB40.0 million for the same period of 2020.

Our total GMV generated by the sales of the Group decreased by 22.5% from RMB942.6 million in the three months ended March 31, 2020 to RMB730.9 million in the three months ended March 31, 2021, and our total GMV generated by sales of O’Mall decreased by 18.4% from RMB816.5 million in the three months ended March 31, 2020 to RMB666.6 million in the three months ended March 31, 2021. Both our total GMV generated by the sales of the Group and total GMV generated by the sales of O’Mall decreased in the three months ended March 31, 2021 compared to those in the same period of 2020, mainly due to (i) the increased sales of disinfection and/or sanitizing kits in the first quarter of 2020 due to the COVID-19 outbreak, (ii) stock piling of daily necessaries and other household products by our buyers during the initial periods of the COVID-19 outbreak, and (iii) shift from “daigou” (surrogate shopping) to cross-border e-commerce retail platforms in the first quarter of 2020 in response to overseas transportation and shipment restrictions that were imposed as a result of the COVID-19 outbreak. Despite such decreases, we achieved significant growth in GMV generated by sales of our private label brands on O’Mall, which increased by 149.1% from RMB9.1 million in the first quarter of 2020 to RMB22.7 million in the same period of 2021, as a result of our enhanced product development capabilities and improved market reputation as a leading lifestyle brand in China. The total GMV generated by sales of the Group and sales of O’Mall for the first quarter of 2021 also reflected the seasonality we expect with the first quarter typically being a slower quarter for the retail and e-commerce industries in China as a result of Chinese New Year and other market factors. The following tables present key operating metrics of the Group and O’Mall for the first quarter of 2021, and for the comparative period, where applicable:

 

     As of and for the twelve months
ended March 31, 2021
 
     (in thousands)  

Total number of brands

     4.1  

Total number of active buyers

     2,097.6  

Total number of active KOCs

     513.2  

Total number of KOCs

     710.8  

Total number of registered users

     15,516.4  

 

     For the three months
ended March 31, 2020
     For the three months
ended March 31, 2021
 
     (in RMB million)  

Total GMV generated by sales of the Group(1)

     942.6        730.9  

Total GMV generated by sales of O’Mall

     816.5        666.6  

 

Note:

(1)

includes both (a) GMV generated by sales through self-operated distribution channels (including O’Mall) and third-party platforms and (b) all types of payments made by individuals who open an O’Partner account registered with our system. For detailed definition, see “—Conventions Which Apply to This Prospectus.”



 

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     For the three months
ended March 31, 2020
     For the three months
ended March 31, 2021
 
     (in millions)  

Total number of orders

     3.1        2.7  

 

     For the three months
ended March 31, 2020
     For the three months
ended March 31, 2021
 

Average order value

     RMB264        RMB247  

We cannot assure you that our estimated preliminary results for the three months ended March 31, 2021 will be indicative of our financial results for future interim periods or for the full year ending December 31, 2021. These estimates should not be viewed as a substitute for our full quarterly or annual financial statements prepared in accordance with U.S. GAAP. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included elsewhere in this prospectus for information regarding trends and other factors that may affect our results of operations.

Our Corporate History and Structure

Our Corporate History

Guangzhou Onion Vogue Group Co., Ltd. (formerly known as Guangzhou Liangkeshu Network Technology Co., Ltd.), or Guangzhou Onion was incorporated in July 2009. We formally commenced our operations via Guangzhou Onion starting in September 2015. In June 2018, Onion Global Limited, our current ultimate holding company, was incorporated under the laws of the Cayman Islands. In July 2018, Guangzhou Transasia Trading Co., Ltd. (formerly known as Guangzhou He Shanshan Investment Co., Ltd.) was established as our wholly foreign owned entity, or WFOE, to control Guangzhou Onion. From 2017 to 2020, we also established a number of overseas entities (which are currently not material to our group as a whole) in South Korea, Japan, Thailand and Malaysia, with a view to expand our overseas business in the future.

Each of Guangzhou Onion and several of its subsidiaries is holding an ICP license to operate our online data and transaction processing business, which falls into the category of value-added telecommunications services. Because of the restrictions on foreign ownership of companies providing value-added telecommunications services and to ensure compliance with the PRC laws and regulations, WFOE entered into a series of contractual arrangements with Guangzhou Onion and each of its shareholders, as amended and restated, through which we obtained control over Guangzhou Onion. As a result of these contractual arrangements, we exert effective control over, and are considered the primary beneficiary of, Guangzhou Onion. We treat Guangzhou Onion and its subsidiaries as our consolidated affiliated entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP. For more details and risks related to our VIE structure, please see “Our History and Corporate Structure—Contractual Arrangements with Our VIE and Its Shareholders” and “Risk Factors—Risks Relating to Our Corporate Structure.”



 

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Our Corporate Structure

The following diagram illustrates our corporate structure, including our significant subsidiaries and Guangzhou Onion, our VIE, immediately upon the completion of this offering.

 

 

Notes:

(1)

Shareholders of Guangzhou Onion Vogue Group Co., Limited are: Purple Gas Was Shawn Limited Partnership, Hangzhou Xianfeng Qiyun Investment Limited Partnership, Guangzhou Yilian Equity Investment Partnership (Limited Partnership), Shenzhen Futian SAIF Dynamiques Equity Investment Fund Partnership (Limited Partnership), Xiamen SAIF Equity Investment Partnership (Limited Partnership), Beijing Liangjun Junze Management Center (Limited Partnership), Beijing Liangjun Huize Management Center (Limited Partnership), Beijing Liangjun Ruize Management Center (Limited Partnership), Goldjet Logistics Group Co., Ltd. and Beijing Liangjun Hongze Management Center (Limited Partnership), all of whom are also shareholders of Onion Global Limited.

(2)

Nine subsidiaries of Guangzhou Onion are: Guangzhou Onion Fans Technology Co., Ltd., Doubletree (Tibet) Trading Co., Ltd., Guangzhou Lifestyle Co., Ltd., Guangzhou Peacheese Information Technology Co., Ltd., Guangzhou Ocean Unbounded Technology Co., Ltd., Guangzhou Young Internet Co., Ltd., Zhuhai Young Supply Chain Technology Co., Ltd., Guangzhou EQuick Technology Co., Ltd., and VOYAGE OF THE DAWN TRADING LIMITED (a Hong Kong company).



 

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OUR CORPORATE INFORMATION

Our principal executive offices are located at No. 309 3-05 Huangfu Avenue Zhong, Tianhe District, Guangzhou City, Guangdong Province, People’s Republic of China. Our telephone number at this address is +86-020-38262863. 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. Our agent for service of process in the United States is located at .

Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our principal website is https://www.msyc.com. The information contained on our website is not a part of this prospectus.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America’s Surface Transportation Act of 2015), or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of such exemptions, with the exception of ASC 606, Revenue from Contracts with Customers, ASC 321, Investments—Equity Securities, ASU No. 2018-7, Compensation—Stock Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting and ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which allows for early adoption by private companies.

We will remain an emerging growth company until the earliest of (i) the last day of our 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 previous 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. See “Risk Factors—Risks Related to the ADSs and This Offering—We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.”

CONVENTIONS WHICH APPLY TO THIS PROSPECTUS

Unless we indicate otherwise, all information in this prospectus reflects the following:

 

   

no exercise by the underwriters of their over-allotment option to purchase up to 1,396,550 additional ADSs representing 139,655 Class A ordinary shares from us; and



 

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

 

   

“active KOCs” in a given period refers to KOCs that confirmed one or more shipped orders on our platform within the indicated period;

 

   

“active buyer” in a given period refers to a registered account, identified by a phone number that confirmed one or more shipped orders on our platform within the indicated period, which, for the avoidance of doubt, includes active KOCs;

 

   

“ADSs” refers to the American depositary shares, each ten (10) ADSs representing one (1) Class A ordinary share;

 

   

“average order value” is calculated using total GMV divided by our total order volume during the specified period;

 

   

“brand” refers to a collection of lifestyle products manufactured by a given lifestyle goods and/or brand company under a particular trade name;

 

   

“brand partners” refer to our third-party brand companies that supply products directly to us pursuant to our collaboration arrangements.

 

   

“CAGR” refers to compound annual growth rate;

 

   

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

 

   

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

 

   

“KOCs” refers to key opinion consumers, who tests products, gives reviews on, and recommends the products sold on our platform to other prospective customers through their social networks. For the avoidance of doubt, the number of KOCs includes the number of O’Partners;

 

   

“Onion,” “we,” “us,” “our,” “ours,” “our company,” the “Group” and the “Company,” refer to Onion Global Limited, a Cayman Islands company, its subsidiaries and, in the context of describing our operations and consolidated financial statements, its VIE and subsidiaries of VIE;

 

   

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

 

   

“GMV” (i) with respect to GMV generated by sales through self-operated distribution channels (including O’Mall) and third-party platforms, such term refers to gross merchandise volume, which represents the total value of confirmed orders placed with us and sold via our platforms, including the total value of orders sold through our active KOCs through their social networks, as well as the VAT and tax surcharges paid, regardless of whether the merchandises are returned and without taking into consideration any incentives granted to KOCs; for the avoidance of doubt, such value of confirmed orders placed with and sold via our platforms before deduction of discounts and loyalty points applied to the orders sold and (ii) with respect to GMV generated by the Group, such term includes both (a) GMV referred in (i) and (b) all types of payments made by individuals who open an O’Partner account registered with our system;

 

   

“Guangzhou Onion” refers to Guangzhou Onion Vogue Group Co., Ltd.;

 

   

“incubate brand partners” refers to our effort to develop and cultivate new and emerging brands that are unknown to our consumers to become ones that are well recognized among such consumers, through providing sales and marketing, brand development and distribution services and support;

 

   

“lifestyle brand” refers to a brand that offers a variety of consumer goods that typically embody the values, interests or opinions of a group or a culture for marketing purposes;

 

   

“O’Partner” refers to a group of individuals who provide product promotion and distribution support services to KOCs;



 

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“ordinary shares” prior to the completion of this offering refers to ordinary shares of Onion Global Limited, par value US$0.0001 per share and upon and after the completion of this offering, refers to our Class A ordinary shares and Class B ordinary shares, par value US$0.0001 per share;

 

   

“provinces” refers to provinces, autonomous region and municipality of the People’s Republic of China;

 

   

“RMB” or “Renminbi” refers to the legal currency of the People’s Republic of China;

 

   

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

 

   

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

 

   

“variable interest entity” or “VIE” refers to the PRC entity of which we have power to control the management, and financial and operating policies and have the right to receive economic benefits that are significant to the VIE and in which we have an exclusive option to purchase all or part of the equity interests and/or the assets at the minimum price possible to the extent permitted by PRC law;

 

   

“WFOE” refers to Guangzhou Transasia Trading Co., Ltd.;

Unless specifically indicated otherwise or unless the context otherwise requires, all references to our ordinary shares as of the date of this prospectus exclude a total of 1,115,466 ordinary shares issued but deemed to be not outstanding as of the date of this prospectus, consisting of : (i) the 965,103 ordinary shares underlying share awards under our share incentive plans that are issued but deemed to be not outstanding and held by Onion Plus Group Limited for the sole benefits of the participants under the 2019 RSU Scheme, and (ii) the 150,363 ordinary shares underlying RSU awards under our share incentive plans that are issued but deemed to be not outstanding and held by Evolution Infinity Limited, a British Virgin Islands company ultimately controlled by Ms. Shan (Mio) Ho, assuming that the underwriters will not exercise their option to purchase additional ADSs. Such ordinary shares will be redesignated as Class A ordinary shares on a one-on-one basis immediately prior to the completion of this offering. Among the ordinary shares issued but deemed to be not outstanding as of the date of this prospectus, the 150,363 ordinary shares underlying RSU awards held by Evolution Infinity Limited will become outstanding upon completion of this offering.

Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus are made at RMB6.5250 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2020. 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 April 23, 2021 the noon buying rate for Renminbi was RMB6.4945 to US$1.00.

This prospectus contains information derived from various public sources and certain information from an industry report commissioned by us and prepared by China Insights Consultancy, a third-party industry research firm, to provide information regarding our industry and market position in China. Such information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in these publications and reports.



 

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THE OFFERING

 

Offering price range

The initial public offering price is US$7.25 per ADS.

 

ADSs offered by us

9,310,350 ADSs (or 10,706,900 ADSs if the underwriters exercise their over-allotment option in full).

 

The ADSs

Each ten (10) ADSs represents one (1) Class A ordinary share, par value US$0.0001 per share. The depositary, through its Custodian, will hold the ordinary shares underlying the ADSs. You will have rights as provided in the deposit agreement.

 

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

 

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

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold the 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.

 

Ordinary shares

We will issue 931,035 Class A ordinary shares represented by the ADSs in this offering (assuming the underwriters do not exercise their option to purchase additional ADSs).

 

 

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. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 10 votes and 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 sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person who is not an affiliate of Cong (Kenny) Li, or upon a change of ultimate beneficial ownership of any Class B ordinary share to a person who is not an affiliate of Cong (Kenny) Li, each of such Class B ordinary



 

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shares will be automatically and immediately converted into one Class A ordinary share.

 

  All restricted share units, regardless of grant dates, will entitle holders to the equivalent number of Class A ordinary shares once the vesting and exercising conditions on such share-based compensation awards are met.

 

  See “Description of Share Capital.”

 

Ordinary shares outstanding immediately after this offering

8,924,881 ordinary shares, comprising of 4,084,881 Class A ordinary shares, par value US$0.0001 per share, and 4,840,000 Class B ordinary shares, par value US$0.0001 per share (or 9,064,536 ordinary shares, comprising of 4,224,536 Class A ordinary shares , par value US$0.001 per share, and 4,840,000 Class B ordinary shares, if the underwriters exercise their option to purchase additional ADSs in full).

 

Over-allotment option

We have granted the underwriters the right to purchase up to an additional Class A ordinary share from us within 30 days of the date of this prospectus, to cover over-allotments, if any, in connection with the offering.

 

Listing

We have been approved to list the ADSs representing our Class A ordinary shares on the New York Stock Exchange, or NYSE, under the symbol “OG”.

 

Use of proceeds

We estimate that the net proceeds to us from the offering will be approximately US$59.1 million, or approximately US$68.7 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise their over-allotment option. We intend to use the net proceeds from the offering for (i) development of private label brands and brand partnerships, (ii) expansion and diversification of our marketing and distribution channels, (iii) enhancement of our technological capabilities, and (iv) working capital and general corporate purposes, including potential strategic investments and acquisitions. See “Use of Proceeds.”

 

Lock-up

We, our director, executive officers and existing shareholders have agreed with the underwriters, subject to certain exceptions, not to offer, sell, or dispose of any shares of our share capital or securities convertible into or exchangeable or exercisable for any shares of our share capital during the 180-day period (or 12 months in the case of Cong (Kenny) Li and Li Bai Global Limited) following the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.


 

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Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on May 11, 2021.

 

Depositary

The Bank of New York Mellon

 

Taxation

For Cayman Islands, PRC and U.S. federal income tax considerations with respect to the ownership and disposition of the ADSs, see “Taxation.”

 

Risk Factors

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

Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the option granted to the underwriters to purchase up to additional 139,655 Class A ordinary shares to cover over-allotments, if any, in connection with the offering.



 

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OUR SUMMARY CONSOLIDATED FINANCIAL DATA AND OPERATING DATA

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

The following table presents our summary consolidated statement of comprehensive (loss)/income data for the years ended December 31, 2018, 2019 and 2020.

 

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

Summary Consolidated Statement of Comprehensive (loss)/income Data:

       

Revenues:

       

Total revenues

    1,805,220       2,850,724       3,810,660       584,009  

Operating cost and expenses:

       

Cost of revenues

    (1,437,612     (2,308,004     (3,032,110     (464,691

Fulfillment expenses

    (225,066     (212,183     (201,635     (30,902

Technology and content expenses

    (17,395     (19,889     (24,316     (3,727

Selling and marketing expenses

    (113,016     (127,160     (243,784     (37,362

General and administrative expenses(1)

    (77,084     (50,597     (63,151     (9,678
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating cost and expenses

    (1,870,173     (2,717,833     (3,564,996     (546,360
 

 

 

   

 

 

   

 

 

   

 

 

 

Other operating income

    1,100       13,105       10,238       1,569  
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from operations

    (63,853     145,996       255,902       39,218  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other (expenses)/income:

       

Interest income

    3,613       1,529       6,758       1,036  

Interest expense

    (673     (87     (755     (116

Foreign exchange loss

    (12,704     (21,240     (20,168     (3,091

Other (expenses)/income, net

    (7,234     (4,369     14,992       2,298  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expenses)/income

    (16,998     (24,167     827       127  
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income taxes and share of losses from equity method investments

    (80,851     121,829       256,729       39,345  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

    (13,370     (15,067     (29,848     (4,574
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before share of losses from equity method investments

    (94,221     106,762       226,881       34,771  
 

 

 

   

 

 

   

 

 

   

 

 

 

Share of losses from equity method investments

    (529     (3,928     (18,879     (2,893
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (94,750     102,834       208,002       31,878  
 

 

 

   

 

 

   

 

 

   

 

 

 

Less: net loss attributable to non-controlling interests

    (346     (361     (1,657     (254
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to Onion Global Limited

    (94,404     103,195       209,659       32,132  

Accretion to redemption value of redeemable preferred shares

    (17,167     —         —         —    

Deemed dividend—extinguishment of redeemable preferred shares

    (511,190     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to ordinary shareholders

    (622,761     103,195       209,659       32,132  


 

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

(Loss)/earnings per share:

       

Basic and diluted

    (109     13       26       4  

Weighted average shares outstanding used in (loss)/earnings per share computation:

       

Basic and diluted

    5,738,630       7,993,846       7,993,846       7,993,846  

Other comprehensive income/(loss)

       

Foreign currency translation adjustment net of tax of nil

    665       (70     737       113  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income/(loss), net of tax

    665       (70     737       113  
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income

    (94,085     102,764       208,739       31,991  

Less: Comprehensive loss attributable to non-controlling interests

    (202     (308     (1,536     (235
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income attributable to Onion Global Limited

    (93,883     103,072       210,275       32,226  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the Year Ended December 31,  
     2018      2019      2020  
     RMB      RMB      RMB      US$  
     (in thousands, except for percentages,
shares and per share data)
 

Share-based compensation expenses:

           

General and administrative expenses

     39,515        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     39,515        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 


 

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The following table presents our summary consolidated balance sheet data as of December 31, 2018, 2019 and 2020.

 

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

Summary Consolidated Balance Sheet Data:

           

Cash and cash equivalents

     99,802        230,632        241,706        37,403  

Restricted cash

     —          —          8,014        1,228  

Short-term investments

     —          67,600        103,217        15,819  

Accounts receivable, net

     1,885        1,437        9,433        1,446  

Inventories, net

     261,986        468,668        442,628        67,836  

Loan receivable, net

     —          —          5,575        854  

Prepayments and other current assets

     100,765        94,005        189,812        29,092  

Amounts due from related parties

     4,951        9,539        9,358        1,434  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     469,389        871,881        1,009,743        154,752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     510,973        909,324        1,059,312        162,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term bank loans

     —          1,924        24,200        3,709  

Accounts payable

     21,840        68,730        145,995        22,375  

Customer advances and deferred revenue

     228,556        378,307        174,456        26,737  

Amounts due to related parties

     770        869        —          —    

Income tax payable

     7,853        20,694        37,969        5,819  

Accrued expenses and other liabilities

     125,492        207,141        233,587        35,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     384,511        677,665        616,207        94,440  
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term loan

     —          —          1,199        184  

Customer advances and deferred revenue

     —          2,121        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     384,511        679,786        617,406        94,624  
  

 

 

    

 

 

    

 

 

    

 

 

 

Onion Global Limited shareholders’ equity

     123,416        226,036        436,311        66,868  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

     126,462        229,538        441,906        67,725  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ equity

     510,973        909,324        1,059,312        162,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents our summary consolidated cash flow data for the years ended December 31, 2018, 2019 and 2020.

 

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

Summary Consolidated Cash Flow Data:

   

Net cash (used in)/generated from operating activities

    (2,595     199,828       55,243       8,465  

Net cash generated from/(used in) investing activities

    8,157       (71,164     (60,070     (9,207

Net cash (used in)/generated from financing activities

    (89,769     2,236       23,395       3,586  

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

    665       (70     520       81  

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

    (83,542     130,830       19,088       2,925  

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

    183,344       99,802       230,632       35,346  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    99,802       230,632       249,720       38,271  
 

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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Key Operating Data

The following table presents key operating metrics of the Group and O’Mall for the periods indicated.

 

     As of and for the
year ended
December 31, 2018
     As of and for the
year ended
December 31, 2019
     As of and for the year ended
December 31, 2020
 
     (in thousands)  

Total number of brands

     1.8        2.9        4.0  

Total number of active buyers

     737.5        963.9        2,239.5  

Total number of active KOCs

     254.0        385.2        516.3  

Total number of KOCs

     310.3        492.5        691.4  

Total number of registered users

     4,210.9        7,923.8        15,117.0  

 

     For the year
ended
December 31,
2018
     For the year
ended
December 31,
2019
     For the year
ended
December 31,
2020
 
     (in RMB million)  

Total GMV generated by sales of the Group(1)

     2,446.6        3,842.2        4,429.0  

Total GMV generated by sales of O’Mall

     2,065.2        3,529.4        4,010.0  

 

Note:

(1)

includes both (a) GMV generated by sales through self-operated distribution channels (including O’Mall) and third-party platforms and (b) all types of payments made by individuals who would like open an O’Partner account registered with our system. For detailed definition, see “—Conventions Which Apply to This Prospectus.”

 

     For the year
ended
December 31,
2018
     For the year
ended
December 31,
2019
     For the year
ended
December 31,
2020
 
     (in millions)  

Total number of orders

     5.5        10.3        15.8  

 

     For the year
ended
December 31,
2018
     For the year
ended
December 31,
2019
     For the year
ended
December 31,
2020
 

Average order value

     RMB378        RMB342        RMB254  


 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below and the other information in this prospectus before making an investment in the ADSs. Our business, financial condition or results of operations could be materially and adversely affected if any of these risks occurs, and as a result, the market price of the ADSs could decline and you could lose all or part of your investment.

In particular, as we are a China-based company incorporated in the Cayman Islands, you should pay special attention to subsections headed “Risks Related to Our Corporate Structure” and “Risks Related to Doing Business in China” below.

This prospectus also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks and uncertainties described below and elsewhere in this prospectus.

Risks Related to Our Business and Industry

We are a rapidly growing company with limited operating experience at our current scale of operations. Our limited operating history may not be indicative of our future growth or financial results, and we may not be able to sustain our historical growth rates.

We have experienced rapid expansion since our inception. Our revenues increased by 57.9% from RMB1,805.2 million in fiscal year 2018 to RMB2,850.7 million in fiscal year 2019 and further increased by 33.7% from fiscal year 2019 to RMB3,810.7 million (US$584.0 million) in fiscal year 2020. Our net income increased from net loss of RMB94.8 million in fiscal year 2018 to net income of RMB102.8 million in fiscal year 2019 and further increased by 102.3% from fiscal year 2019 to net income of RMB208.0 million (US$31.9 million) in fiscal year 2020. Our limited operating history at this scale, combined with the rapidly evolving nature of the lifestyle brand industry in which we operate, and other factors beyond our control, may make it difficult to evaluate our prospects as well as the risks and uncertainties associated with our business. We cannot guarantee that we will be able to maintain or increase our growth rates, net revenue, or other performance indicators. Our growth may slow down or become negative, and revenues may decline for a number of possible reasons, some of which are beyond our control, including decreasing consumer spending, increasing competition, declining growth of our overall market or industry, the emergence of alternative business models, changes in rules, regulations, government policies or general economic conditions. It is difficult to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in rapidly evolving markets may be exposed. If our growth rate declines, investors’ perceptions of our business and prospects may be materially and adversely affected and the market price of the ADSs could decline. You should consider our prospects in light of the risks and uncertainties that companies with a limited operating history may encounter.

If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.

As we continue to expand, our continued growth could strain our existing resources, and we could experience ongoing challenges, including:

 

   

managing our operational, administrative and financial capabilities and other resources;

 

   

managing our brand portfolio, including further expanding our private label offerings, products and services;

 

   

expanding marketing channels and deepening end customer outreaches;

 

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staying abreast of the evolving industry demands and market developments and catering to consumers’ changing tastes;

 

   

developing and applying technologies necessary to support our expanded operations;

 

   

effectively managing our supply chain;

 

   

responding to changes in the regulatory environment;

 

   

exploring new market opportunities such as new monetization channels; and

 

   

addressing other challenges resulting from our expansion.

All efforts to address the potential challenges on our way to expansion require significant managerial, financial and human resources. We cannot assure you that we will be able to effectively or timely address operating difficulties and challenges to keep up with our growth. If we are unable to successfully address these difficulties, risks and uncertainties, our business, financial conditions and results of operations could be materially and adversely affected.

Our business depends on the continued success of our growing brand portfolio and if we fail to maintain and expand our brand portfolio, including our private label offerings, or maintain and enhance our brand recognition, our business, results of operations and prospects may be harmed.

We mainly depend on our brand portfolio to scale our business, attract and retain our brand partners and customers. As of December 31, 2020, our Luca Bank portfolio seamlessly connected various lifestyle brands from our 86 brand partners with customers around China and overseas. In addition, as of December 31, 2020, we had developed 21 private labels, covering over 630 cumulative SKUs. For detailed discussion on Luca Bank, please see “Business—Our Comprehensive Global Brand Platform—“Luca Bank—Our Brand Portfolio.” Although we have devoted significant resources to and incurred large amount of expenses on sourcing, maintaining, promoting and expanding our brands, we cannot assure you that these efforts will be successful. In addition, maintaining and enhancing the recognition of our brands are also key to our success, which could be affected by various factors, including the effectiveness of our brand marketing strategy, publicity about our business, quality of products offered under the brands as well as preference of consumers, certain of which are beyond our control. Any failure to maintain and expand our brand portfolio or maintain and enhance our brand recognition could have a material and adverse effect on our business, results of operations and prospects.

Our business relies on our leading brands of lifestyle goods. Any failure to maintain the popularity of or any loss of any of our leading brands would negatively impact our business and prospects.

In fiscal years 2018, 2019 and 2020, the top five best-seller brands on our O’Mall platform contributed approximately 15.6%, 13.5% and 13.1% of the total GMV generated from sales on O’Mall, respectively. Such concentration subjects us to the risk of substantial decreases in, or impediments to the growth of, our GMV and revenues, if we fail to maintain the popularity of any of these leading brands.

We anticipate that the concentration risks on our leading brands will continue to exist in the foreseeable future, and the portion of our revenues attributable to such brands may further increase in the future. Any failure to maintain the popularity or any loss of our leading brands would negatively affect our business and prospects.

If we fail to maintain KOC loyalty or sustain growth of our KOC community, our business, operations, profitability and prospects may be materially and adversely affected.

We mainly rely on our KOCs’ interactions and referrals through their social networks to promote products sold on our platform. We provide incentives to active KOCs based on a completed sales transction referred by such active KOCs; however, our KOCs may decide to stop promoting the products at any time or not to promote the products at all. Therefore, we cannot guarantee the performance of our KOCs will be satisfactory, particularly in terms of making interactions and referrals and promoting products.

 

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Maintaining engagement and interaction with our KOCs is challenging and subject to many factors beyond our control, including, but not limited to, changing lifestyle tastes, dissatisfactions with our brand partners’ products or our products, intensified market competitions and negative publicities regarding our business. In particular, we serve our community through O’Partners, who invite KOCs to join our platform and provide them with product promotion and distribution support. We do not have direct power to direct O’Partners’ operations. As such, we cannot guarantee their engagement and interactions with our KOCs will be effectively managed and maintained in a way that benefits our platform.

Even if we are able to maintain or enlarge our active KOC base, we may not be able to effectively convert the advantage of our KOC base into sales, which is subject to various factors, including refining our current product offerings, expanding our offerings into new categories, expanding our marketing channels, or exploring other monetization channels. If we fail to direct customers’ spending, our growth strategy would be harmed, which could in turn harm our business and financial results.

Negative publicity about our brands, our business model or our products may materially and adversely affect our reputation, our business and the trading price of our ADSs, regardless of its accuracy. We may also be adversely affected by negative publicity concerning us and our business, shareholders, affiliates, directors, officers, employees, agents, other business partners and the industry in which we operate, regardless of its accuracy.

Regardless of its accuracy, negative publicity about our business model or our products may arise and appear on the internet and other media from time to time, and negative publicity of more serious natures may arise in the future. For example, our KOCs may post unlawful, false, offensive or controversial content on their social media pages, which may result in negative comments and complaints or even cause their accounts to be closed by certain social media platforms. Especially because we do not own our KOCs’ social media accounts and are not able to control such accounts, it is hard to remove any negative publicity after a post goes online.

In addition, our business model utilizing our KOC network may be alleged to be involved in misconducts, improper activities, rumors, scandals or illegal activities from time to time related to a variety of matters, such as misleading advertising practice. These allegations, even if factually incorrect or based on isolated events, would result in negative publicity of our KOCs, and may further have an adverse effect on our brand and reputation.

Our brands and products may also be subject to negative publicity for various reasons, such as complaints about the quality of the products, customer services or other public relation incidents of us, which may adversely affect our reputation, brand loyalty and consequently affect the sales of our products. Any such negative publicity, regardless of its veracity, could result in the expenditure of funds and management time and may have a material and adverse effect on our reputation, our business and the trading price of our ADSs.

Moreover, negative publicity concerning us and our business, shareholders, affiliates, directors, officers, employees, agents, other business partners and the industry in which we operate can harm our brand and reputation, regardless of its accuracy. Negative publicity concerning these parties could be related to a wide variety of matters, including, but are not limited to:

 

   

alleged misconducts or other improper activities committed by our directors, officers, employees, agents and other business partners;

 

   

false or malicious allegations or rumors about us or our directors, shareholders, affiliates, officers, employees, KOCs and other business partners;

 

   

complaints from our followers and customers about our products and services;

 

   

security breaches of the social media accounts of our KOCs, our customers’ confidential information or transaction data;

 

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employment-related claims relating to employment discrimination, working hours violation, tax, wage or pension matters;

 

   

governmental and regulatory investigations, penalties or claims resulting from misconduct of our KOCs or business partners, or our failure to comply with applicable laws and regulations;

 

   

negative publicity and claims asserted against our brand partners, especially any product quality issues of our brand partners’ products promoted by our KOCs; and

 

   

negative publicity of the industry in which we operate, including, but not limited to, bankruptcy and cessation of business operations of any of our major competitors.

If we fail to anticipate and respond to changing customer preferences and shifts in lifestyle brands and market trends in a timely manner, our business and operating results could be harmed.

Our success largely depends on our ability to consistently gauge customers’ tastes and market trends, provide a balanced assortment of merchandize and source brands that satisfies customer demands in a timely manner. Our failure to anticipate, identify or react appropriately and timely to changes in customer preferences, tastes and market trends or economic conditions could lead to, among other things, missed opportunities, excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability. In addition, failure to respond to changing customer preferences and trends in lifestyle brand could negatively impact our brand image with our customers and result in diminished brand loyalty, and thus harm the prospects of our business.

Our product supply chain is essential to our business and is subject to risks associated with demands forecasting, timely supplying and warehousing, as well as maintaining relationship with our suppliers.

We largely depend on our supply chain management capabilities to minimize our inventory risks, maintain our short turnaround time and improve our operational efficiency. However, our demand forecast may not be accurate, which could result in inventory write-offs or inventory shortages. Even if we are able to make accurate demand forecast, our product supply chain may not be able to meet our demand on a timely basis due to unexpected reasons, including but not limited to delays in manufacturing. In addition, warehouses that we operate may not have sufficient capacity to process orders efficiently.

Our product supply chain is also largely dependent on our relationship with our product suppliers. As of December 31, 2020, we worked with over 2,000 product suppliers, including both brand partners and other product resellers and distributors. We cannot assure you that our current product suppliers will continue to sell products or provide services to us on commercially acceptable terms, or at all, after the current term of the agreement expires. If our suppliers cease to transact with us on favorable payment terms or deliver production in a timely manner as agreed under the contract terms, our operations may be materially and adversely affected.

Although we believe our supply chain has capacity to support our current operation, we cannot guarantee our supply chain will be adequate to support our expanded business in the future. Thus, if we fail to manage our supply chain in line with our business expansion, our business, prospects, financial condition and results of operations may suffer.

We may incur liability for counterfeit, unauthorized, illegal or infringing products sold or misleading information available on our platform that we operate or during our KOCs’ sales or promotion. In addition, we may be subject to product liability claims that could be costly and time-consuming.

We promote sales of third-party products and sell our own private label products on our platform, some of which may be defective. We rely on third parties to manufacture our private label products and have limited control over the quality of third-party products sourced from our product suppliers, including both brand partners

 

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and other product resellers and distributors. As we are expanding product categories and promoting various third-party brands’ products, our exposure to product risks and liabilities could further increase. If any product that we sell were to cause personal injury or injury to property, the injured party or parties could bring claims against us. We could also be subject to claims from consumers for any harm resulted from their reliance on our KOCs’ promotion of third-party brands’ products. If a successful claim were brought against us, our business could be adversely affected. Although we may have the right under applicable laws, rules and regulations to recover the compensation from the relevant manufacturers or third-party merchants, there can be no assurance that the enforcement of these remedies will be timely and adequate for covering the compensation that we are required to make to consumers. Furthermore, any discovery of counterfeit, unauthorized, illegal or infringing products sold on our online stores or promoted by our KOCs may severely damage our reputation among brand partners, and they may refrain from having further collaborations with us in the future, which would materially and adversely affect our operations and financial results.

In addition, we may be subject to penalties under applicable laws and regulations if we are deemed to have participated or assisted in infringement activities associated with counterfeit goods, unauthorized products, or products, images, logos or any other information that otherwise infringe third parties’ rights, which may include injunctions to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability, depending on the gravity of such misconduct. Our reputation or operation may also be harmed by third-party brands’ inadequate measures for avoiding counterfeit, unauthorized, illegal or infringing products.

If we fail to develop, upgrade and apply our technologies to support and expand our business, our business may be materially and adversely affected.

We rely on our technology infrastructure and operating systems to carry out the key aspects of our business, including identifying market trends in lifestyle brands, selecting and partnering with quality brand partners, assisting in product designs for our private label brands, forecasting customers’ demands, supporting our product supply chain, enabling effective marketing and distribution, and refining customer services. Although we did not experience any material failure or breakdown of our operating systems in the past, we cannot guarantee that such risks are always under control. In addition, computer viruses, security breaches and information theft may lead to delays or errors in transaction processing, inability to fulfill purchase orders or loss of data. Any interruptions of our operating platform, whether caused by computer viruses, hacking or other security breaches, and errors encountered during platform upgrades or other issues resulting in the unavailability, or slowdown of our information technologies may, individually or collectively, materially and adversely affect our business and results of operations.

The lifestyle brand industry, and in particular combined with e-commerce, is subject to rapid technological changes and innovations. Our technologies may become obsolete or insufficient, and we may have difficulties in following and adapting to technological changes in the lifestyle brand industry in a timely and cost-effective manner, which could impact every key aspect of our business. New technologies developed and introduced by our competitors could render our products and services less attractive or obsolete, thus materially affecting our business and prospects. In addition, our substantial investments in technology may not produce expected results. If we fail to continue to develop, innovate and utilize our technologies or if our competitors develop or apply more advanced technologies, our business, financial condition and results of operations could be materially and adversely affected.

We conduct our business through e-commerce platforms and online social media platforms. The material disruption of those platforms or any adverse changes on our cooperation with them could harm our business and operation.

In fiscal years 2018, 2019 and 2020, we generated the majority of our sales from our self-operated e-commerce platform, O’Mall. Our active KOCs use social media platforms to promote our products. If we are unable to leverage social media platforms to effectively attract followers and convert them into active buyers, or

 

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if there is any change, disruption or discontinuity in the features and functions of such social media platforms, our ability to acquire new consumers and our financial condition may suffer.

Moreover, our growth is subject to aforesaid platforms’ traffic growth, account using terms and conditions and regulations, among other factors. If these platforms’ traffic fails to grow in the future, our growth may slow down as well. While these platforms are generally open to all users, they have no obligation to allow us or our KOCs to use their platforms in any circumstances. If we or our KOCs breach the using terms of such platforms, the platform operators may decide at any time to curtail or inhibit our ability to use such platforms. Meanwhile, these platforms may increase their fees or make changes to their respective business models, using terms, policies or systems, and those changes could impair or restrict our or our KOCs’ ability to post content or sell products. In addition, these platforms may be interrupted by regulatory restrictions, cease operations unexpectedly due to a number of events, or even shut down due to their operating problems. We also cannot guarantee we will be able to expand our operation into new emerging e-commerce platforms or online social media platforms in the future.

Any of the above could reduce sales of our self-owned online platforms, our end customers’ engagement time, our KOCs’ ability to post promotional content, and our ability to serve our self-owned online platforms and our brand partners, any of which could affect our ability to maintain profitability or have a material adverse effect on our business, financial condition or results of operations.

Order cancelation as well as merchandize return and exchange policies may adversely affect our business and results of operations.

We allow our customers to cancel orders within six hours after the payment and to return products, subject to our return policy. The order cancelation rate of our self-operated platform, O’Mall, measured by the number of cancelled orders before shipping as a percentage of the total number of orders placed, was approximately 4.5%, 5.3% and 5.5%, respectively, and the product return rate of our self-operated platform, O’Mall, measured by the number of orders returned to us after delivery to customers as a percentage of the total number of orders placed, was approximately 0.7%, 1.0% and 1.3%, respectively, in fiscal years of 2018, 2019 and 2020. Our low order cancelation rate and product return rate may fluctuate or even increase in the future due to various factors, many of which, including changing consumers’ habits and product quality, are beyond our control. In addition, as we diversify our marketing efforts, such as promotion through live streaming and social media, and expand to more sales channels, our order cancelation rate and product return rate may further increase. Moreover, our products might be damaged during transit from time to time, especially during the international transportation, which increases return rate and harms our brands as well. If the rate of order cancelation or product returns increases significantly, our inventory turnovers and cash flow could be adversely affected, and thus harm our financial condition and operating results.

Moreover, we may be required by law to adopt new or amend existing return and exchange policies from time to time. For example, pursuant to the PRC Consumer Protection Law, effective in March 2014, except for certain types of products, consumers are generally entitled to return the products purchased pursuant to PRC laws within seven days upon receipt without giving any reasons when they purchase the products from business operators via the internet. See “Regulation—Regulations Relating to Product Quality and Consumer Protection.” In addition to regulatory requirements, we may also modify our return policies from time to time, which may result in customers’ dissatisfaction or an increase in order cancelation or product returns rates.

Our industry is highly competitive and we may not be able to compete successfully against current and future competitors.

We face intense competition in the lifestyle brand and e-commerce industries in China. See “Industry Overview.” We expect greater competition in the future from existing players and new market entrants. Some of our current and future competitors may have greater brand recognition and financial and other resources than we do, which may make it more difficult for us to maintain or gain market share.

 

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If we are not able to effectively compete against current or future competitors, our business, financial condition and results of operations could suffer. Increased competition may result in higher pricing pressure, reducing our ability to charge higher prices for our products and services, more expenses to attract online traffic, and decreased market share, any of which could materially and negatively affect our business, financial condition and results of operation.

We rely on brand partners, third-party product suppliers, manufacturers, logistics service providers and other vendors to serve our customers. If they fail to provide products or services that are consistent with our standards or applicable regulatory requirements, we may have to find alternative vendors, and our reputation and operation could suffer.

We do not own or operate any manufacturing facilities. Instead, we rely on third-party manufacturers and brand partners and third-party product suppliers to supply all of the products offered on our platform. We enter into framework procurement contracts with different brand partners, third-party product suppliers and manufacturers. The capacities of our brand partners, third-party product suppliers and manufacturers are subject to orders placed by their other clients, which may include our competitors. If our demands increase significantly, or our existing suppliers run out of their capacity, we may not be able to find additional or alternative suppliers in a timely manner. We also cannot guarantee that we will have superior bargaining power over brand partners, third-party product suppliers and manufacturers for our newly launched products. In addition, quality control issues, such as the use of unqualified materials, may exist in certain third-party product suppliers and could cause consumer dissatisfaction and as a result, harm our business.

We rely on third-party logistics service providers to deliver products to our customers. Any delay, damages, loss and inappropriate actions taken by logistics service providers might cause customer complaints. Although we may claim compensation from third-party logistics service providers in some cases, our business, financial condition and results of operations could suffer as well.

If we do not successfully optimize and operate our logistics network, our business and growth strategy could be harmed.

The cost of shipping is one of the largest obstacles to a global consumer trying to complete an online purchase. An important part of our strategy is to remove such obstacle through our expansive, efficient and cost-effective logistics and distribution infrastructure. As part of this strategy, we intend to continue reducing the cost of logistics by enhancing logistic optimization. As we continue to expand our Luca Bank, our brand portfolio, and source brands and products globally, our logistics network will become increasingly complex and operating it may become more challenging. If one or more service providers in our logistics network on whom we rely fail to perform adequately, our ability to optimize and operate our logistics network will be impaired. If we are unsuccessful in continuing to optimize and operate, our logistics network, our fulfillment costs, operating results, financial condition and growth prospects will be adversely affected.

We procure inventory based on our forecast on customer demands, and if we are unable to manage our inventory effectively, our operating results could be adversely affected.

Our scale and business model require us to manage a large volume of inventory effectively. Our forecast on demands may significantly differ from actual demands. Demands may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not purchase products in the quantities that we expect. We may not be able to return unsold products to our suppliers unless the products are defective or otherwise agreed with our suppliers. As of December 31, 2018, 2019 and 2020, our inventory provision amounted to RMB4.0 million, RMB10.1 million and RMB14.8 million (US$2.3 million), respectively.

 

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On the other hand, if we underestimate demands and thus run short of inventory, our growth may be adversely affected due to lower sales volume and unsatisfied shopping experiences.

Furthermore, if we fail to negotiate favorable credit terms with our brand partners, third-party suppliers and manufacturers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write- downs or write-offs. In case that we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and operating results.

If we fail to attract or maintain good relationships with our brand partners, our business, financial condition and results of operation may be adversely affected.

An increasing portion of our revenue has been derived from sales of products of our brand partners, and the success of our product promotion efforts largely depends on our ability to generate sufficient traffic from our follower base. Our ability to direct traffic is subject to various factors, including the quality of our KOC community, content, products, as well as factors that are beyond our control, such as market demand and fashion trend. If our ability to attract traffic or enlarge market share is reduced, we may lose our brand partners or fail to maintain revenue from them, which in turn may adversely affect our business, financial condition and results of operation.

There are uncertainties in the interpretation and application of existing PRC laws, regulations and policies relating to our current business model. If our business model were found to be in violation of applicable laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.

In August 2005, the State Council promulgated the Regulations on the Prohibition of Pyramid Selling, which prohibits individuals and entities in China from engaging in pyramid selling. According to the Regulations on Prohibition of Pyramid Selling, the following activities taken by organizers or operators are considered as “pyramid selling”: (i) taking in new members and compensating each member by giving material awards or other financial benefits, based upon the number of new members directly or indirectly introduced by such member on a rolling basis, so as to gain illegal benefits; or (ii) requesting a sum of money as entry fee or as a condition to membership for new members, either directly or through purchasing commodities, so as to gain illegal benefits; or (iii) requesting members to introduce additional members to establish a multi-level relationship and compensating each member based on the level of sales generated by the additional members introduced by such member, so as to gain illegal benefits. The PRC laws and regulations have not defined “illegal benefit” and the determination of gaining “illegal benefit” is to a large extent subject to discretionary view of the competent authorities in the PRC. See “Regulation—Regulations Relating to Pyramid Selling in the PRC.” We and JunHe LLP, our PRC legal advisor, consulted with the competent government authority in Guangzhou, the district branch of SAMR having direct jurisdiction over our PRC entity that currently contracts with the substantial majority of our marketing partners and provides services to O’Partners, and the government authority verbally confirmed that such PRC entity has conducted its business operations lawfully and that such PRC entity is not in violation of the Regulations on the Prohibition of Pyramid Selling or any other applicable laws. Based on our discussion with the competent government authority and the advice of JunHe LLP, we believe that our current business model is not in violation of applicable PRC laws and regulations, including the Regulations on the Prohibition of Pyramid Selling. However, given the uncertainties in the interpretation and application of existing PRC laws, regulations and policies relating to our current business model, including, but not limited to, regulations regulating pyramid selling, we cannot assure you that the relevant government authorities will not, in the future, find our business model in violation of any applicable regulations. Moreover, new laws, regulations or policies may also be promulgated in the future, and there is no assurance that our current business model will be in full compliance with the new laws, regulations or policies. If our business model were to be found in violation of relevant applicable laws, rules, regulations or policies in the future, we will have to make adjustment to our current business model or cease certain of our business operations, and the relevant governmental authorities may

 

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confiscate any illegal gains and impose a fine, which would have a material and adverse impact on our business, financial condition and results of operations.

If we fail to obtain requisite approvals or licenses, or fail to comply with other regulatory requirements applicable to our operations, we may be subject to administrative penalties and our business and operating results could be adversely affected.

Our business is subject to general business regulations governing e-commerce industry. See “Regulation—Regulations Relating to E-Commerce,” “Regulation— Regulations Relating to Product Quality and Consumer Protection” and “Regulation—Regulations Relating to Advertising Business.” We are also subject to supervision and regulation by the State Administration for Market Regulation of the PRC and other relevant PRC government authorities and/or their relevant local counterparts. While we currently hold all material licenses and permits required for our operations, we may be required to renew these licenses and permits upon their expiration or obtain new licenses or permits in the future as a result of our business expansion, changes of our operations, changes in laws and regulations applicable to us, or changes of interpretation from relevant authorities on such laws and regulations.

As the e-commerce and technology industries, including influencers-related business, are still evolving in China, new laws and regulations and enforcement practices may be adopted from time to time, and therefore such industries could be subject to additional regulatory requirements. For example, the E-Commerce Law effective from January 1, 2019 sets forth a series of compliance requirements for e-commerce operators, which include, among others, that individual ecommerce operators must apply for business licenses to qualify for opening online stores on e-commerce platforms, and that e-commerce operators must also duly fulfill their tax obligations. Besides, regulatory authorities may enhance oversight and scrutiny on the tax withholding and declaration practice of the influencers, influencers’ online stores, and other influencers-related business given the public’s heightened attention on individual influencers’ conducts and activities. Furthermore, although relevant PRC government authorities currently have not promulgated any specific laws or regulations governing influencers’ qualifications, activities, behaviors and other elements that may have a material impact to our business, they could tighten the restrictions on influencer-related business and promulgate new laws and regulations in the future. We cannot assure you that our practices or the practices of our influencers have complied, comply or will comply fully with all these regulatory requirements, especially many of which are evolving and subject to interpretation of local authorities.

In addition, we import certain products through certain of our subsidiaries in Hong Kong solely for the purpose of exporting such products to mainland China. Under the import and export regime and regulations of Hong Kong, we may be required to obtain certain licenses, approvals, permits, registrations and/or filings for the import and export of certain types of our products through Hong Kong. See “Regulation––Regulations Relating to Hong Kong Import and Export Regime.” As of the date of this prospectus, we have not received any notification from regulators in relation to any non-compliance with the import and export regulations in Hong Kong in the past three years. However, due to the complexity of the import and export regime and regulations in Hong Kong and the wide variety of our products, we cannot assure you that we have complied with and will be able to comply with all applicable regulations in full. If we are found to be in violation of any such regulation, we may be subject to fines and, depending on the severity of the violation, the directors and senior management of the entity involved may also be subject to potential imprisonment.

Any failure, or perceived failure, by us or our KOCs to comply with any of these requirements could result in damage to our reputation, a loss in business, and proceedings or actions against us which could be costly and disrupt our overall operations. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of noncompliance with any such laws or regulations. Any of these events may have a material and adverse effect on our business, financial condition and results of operations.

 

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We are subject to a variety of laws and other obligations regarding data protection. Privacy concerns or security breaches could result in economic loss and damage our reputation, and expose us to legal penalties and liability.

We collect, process and store significant amounts of data, through our mobile applications, concerning our KOCs, users, brand partners and employees, including personal and transactional data. Such practices are subject to applicable laws, regulations, contractual obligations and industry standards relating to privacy, data protection, information security and consumer protection, including, among others, the Cybersecurity Law of the PRC and the E-Commerce Law of the PRC. See “Regulation—Regulations Relating to Internet Information Security and Privacy Protection.”

These requirements on our practices may be interpreted and applied in a manner that is inconsistent or may conflict with other rules or our practices. As a result, our practices may have not complied or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure to comply with privacy laws, regulations and policies, or abide by privacy or data protection related contractual obligations could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities or require us to change our operations.

We are subject to risks resulting from privacy concerns and security breaches. While we have taken reasonable measures to protect our data, we cannot guarantee the effectiveness. Our cybersecurity measures may not detect or prevent all attempts to interrupt or illegally access our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or maintained by us. As techniques used to sabotage or illegally access systems change frequently, we may be unable to anticipate, or implement adequate measures to protect against, these attacks. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation or deletion of information or data, or other interruption to our business operations.

We may also fail to prevent data leakage due to misconducts of our employees. To the extent necessary and permissible, we share privacy data with certain third parties such as logistic companies. If these third parties fail to preserve privacy data from us, our reputation and operations may also be adversely affected.

Any fraudulent, collusive or illegal activities by our competitors or our employees would adversely affect our business, financial condition and results of operations.

From time to time, we may face unfair competitions from other companies through manipulation of certain operating data, which are critical in attracting active buyers, KOCs and investors. For example, sellers on other third-party platforms may engage in fictitious or “phantom” transactions with themselves or collaborators in order to artificially inflate their sales volume, ratings and search results rankings on the online marketplaces or forge key statistic on social media platforms for the purpose of inflating their reputation and popularity. Such activities may deceive our buyers, KOCs and investors into believing that such platforms are more popular, reliable or trusted than their competitors. If such activities cannot be detected and prohibited properly or promptly by the regulatory bodies or the online marketplaces and platforms, our business may be negatively impacted and our results of operations may be adversely affected.

In addition, we may face other malicious acts from third parties. Malicious orders could also subject us to negative publicity and third-party investigations in relation to fictitious or “phantom” transactions. We have adopted procedures to detect and deal with malicious orders. Despite the measures taken, we cannot assure you that our business would not be adversely affected should we continue to experience this, or that malicious act from third parties.

Moreover, fraudulent, collusive or illegal activities by our employees, such as fraud, bribery or corruption, could also subject us to liability, negative publicity, punishments by the online platforms, including the closure of

 

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our shops in some extreme circumstances, or cause other legal liabilities or losses. We have adopted internal policies to uphold business integrity and implemented measures to detect and prevent the occurrence of any fraudulent, collusive or illegal activities within our organization. However, since we are operating in an evolving industry with a rapidly changing regulatory environment, our compliance policies and measures may not be as effective as we expected. There can be no assurance that the measures, procedures and controls we implement will prevent fraudulent, collusive or illegal activities by our employees. Any such activity by our employees could severely damage our brands and reputation and materially and adversely affect our business, financial condition and results of operations.

We may face litigations or disputes arising out of exaggerated promotion or advertisement of our brand partners’ products. Our advertising content may subject us to penalties and other administrative actions.

Under PRC advertising laws and regulations and third-party e-commerce platforms requirements, we are obligated to monitor our advertising content to ensure that such content is true, accurate and in full compliance with applicable laws and regulations. In addition, advertisements are prohibited from containing, among other prohibited content, false or misleading content, superlative wording such as “the state-level,” “the highest grade,” “the best”, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. According to PRC E-Commerce law and Anti-Unfair Competition Law, a business operator must not engage in false or misleading commercial promotions or publicities about the performances, functions, qualities, sales condition, user reviews and credits of its commodities or by means of fictitious deals, fabricated user comments or otherwise to deceive or mislead consumers. Even if we have adopted internal rules and policies to forbid those behaviors, we cannot assure you the effectiveness. Violation of these laws, regulations and/or third-party e-commerce platforms requirements may subject us to penalties and/or third-party e-commerce platforms’ investigation and punishment, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting the misleading information. In such circumstances involving serious violations by us, PRC government authorities and/or third-party e-commerce platforms may force us to take the products off the shelves, terminate our advertising operations or revoke our licenses. See “Regulation—Regulations Relating to Advertising Business.”

Given the uncertainty in the interpretation of these PRC laws and regulations, we cannot assure you that all the content contained in our advertisements is true, accurate and not exaggerated as required by the advertising laws and regulations and third-party e-commerce platforms’ requirements, and all such content or our business practice for advertising complies with relevant compliance requirements in all aspects. If we are found to be in violation of applicable PRC advertising laws and regulations and/or third-party e-commerce platforms requirements, we may be subject to penalties and our reputation may be harmed, which may negatively affect our business, financial condition, results of operations and prospects.

Our results of operations may fluctuate due to the seasonality of our business and other events, which could cause our stock price to decline.

We have experienced, and expect to continuously experience, seasonal fluctuations in our results of operations, due to seasonal changes in sales volume, as well as seasonality in our advertising services. For example, we generally experience lower sales volume in the first quarter of each year primarily due to Chinese New Year holiday season and higher sales volume in the third and fourth quarter of each year primarily due to our special seasonable promotion events held in September and November each year. In addition, the business hours of our logistics and fulfillment service will be impacted by the holidays Moreover, our results of operations may fluctuate due to changes in production cycle and launch of new styles or events.

 

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Any occurrence of a natural disaster or widespread health epidemic, including the recent COVID-19 outbreak, could have a material adverse effect on our business, financial condition and results of operations.

An outbreak of disease or similar public health threat, or fear of such an event, could have a material adverse impact on our business. Since December 2019, a novel strain of coronavirus named COVID-19 has spread throughout China and worldwide. In March 2020, the World Health Organization declared the COVID-19 a pandemic. COVID-19 is considered highly contagious and poses a serious public health threat. In an effort to control the spread of COVID-19, many countries around the world, including China, have imposed unprecedented quarantine measures, social distancing policies, travel restrictions, and closure of stores and facilities, resulting in a substantial reduction in economic activities.

Our business operations have been adversely affected by the foregoing measures. During the outbreak, we experienced temporary disruption to our business operations, such as temporary closure of office facilities and shortage of human resources. Also, since our third-party suppliers and manufacturers are based across the countries, we may continue to experience supply chain disruption and delayed delivery of products. The COVID-19 outbreak resulted in temporary factory closures, inability to obtain materials, supply chain disruptions and disruption of transportation of goods produced in China and other affected regions, impacting our suppliers’ manufacturing and sourcing activities. Even though business activities in China have largely resumed since March 2020, it may still take some time for our business, especially sales of products sourced globally, to return to normal due to travel restrictions between China and numerous other countries around the world.

As COVID-19 continues to evolve into a worldwide health crisis, it has adversely affected the fashion industry in which we operate, as a whole, and the global economy and financial markets, resulting in significant declines in the global stock markets. Although most of our operations are online which are less affected by the COVID-19 outbreak, we cannot assure you that our business will not suffer from a general downturn of the fashion industry caused by the outbreak. While we are monitoring the situation, we cannot predict at this time for how long and to what extent the COVID-19 outbreak may impact our business operations. If the COVID-19 outbreak is not effectively controlled in a short period of time, our business and results of operations could be adversely affected to the extent the COVID-19 outbreak harms the China or world economy generally. Any potential impact to our business will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by government authorities and other entities to contain COVID-19 or treat its impact, almost all of which are beyond our control. To the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many other risks described in this “Risk Factors” section.

Our business is also vulnerable to natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of other widespread health epidemics, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola and other events, such as wars, acts of terrorism, environmental accidents, power shortages or communication interruptions. The occurrence of such a disaster or a prolonged outbreak of an epidemic illness or other adverse public health developments in China or elsewhere in the world could materially disrupt our business and operations. Such events could cause a temporary closure of the facilities we use for our operations. Our operations could be disrupted if any of our employees or employees of our business partners were suspected of having any contagious disease, since this could require us or our business partners to quarantine some or all of such employees or disinfect the facilities used for our operations. Our operations could also be severely disrupted if our buyers, sellers or other participants were affected by such natural disasters, health epidemics or other outbreaks. In addition, our revenues and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general and our industry as a whole.

 

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If we cannot successfully protect our intellectual property and exclusive rights, our brand and business would suffer.

We rely on a combination of trademark, patent, copyright, domain name and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights and other exclusive rights. We also enter into agreements containing confidentiality obligations with our employees and any third parties who may access our proprietary technology and information, and we rigorously control access to our proprietary technology and information.

Nevertheless, we cannot guarantee that we can successfully protect our intellectual property and exclusive rights from unauthorized usage by third parties or breach of confidentiality obligations by our counterparties. For example, there could be other online stores imitating or copying our self-designed products without our prior consent, which may harm our reputation and operations. Furthermore, a third party may take advantage of the “first-to-file” trademark registration system in China to register our brands in bad faith, which will cause us to incur additional costs for legal actions. Moreover, confidentiality obligations may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights and exclusive rights or to enforce our contractual rights in China or elsewhere.

In addition, policing any unauthorized use of our intellectual property and exclusive rights is difficult, time-consuming and costly. The precaution steps we have taken for protecting our rights may be inadequate. In the event that we resort to litigation to enforce our intellectual property rights and exclusive rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation or that we would be able to halt any unauthorized use of our intellectual property and exclusive rights. In addition, our trade secrets may be leaked to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

We may be accused of infringing intellectual property or proprietary rights of third parties.

We cannot assure you that our content, product design, our offerings or our technologies do not or will not infringe upon copyrights or other intellectual property rights (including, but not limited to, trademarks, patents and know-how) held by third parties. For example, the design of third-party products and our products may be similar and result in intellectual property disputes. Nor can we assure you that our use of software or any other intellectual properties in business and operation will not be alleged by any third party as infringement resulting from lack of licenses. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims. We may also be prohibited from using such intellectual property or relevant content. As a result, we may incur licensing or usage fees, develop alternatives of our own, or even need to pay damages, legal fees and other costs. Even if such assertions against us are unsuccessful, they may cause us to lose existing and future business and incur reputational harm and substantial legal fees. As a result, our reputation may be harmed and our business and financial performance may be materially and adversely affected.

We have adopted policies and procedures to prohibit our KOCs, employees and business partners from infringing upon third-party copyright or other intellectual property rights. However, we cannot assure you that they will not, against our policies, use third-party copyrighted materials or intellectual property without proper authorization, and therefore result in disputes. In addition, we may incur liability for unauthorized duplication or distribution of materials used in our online store and during our services. Although we have set up rules and procedures to enable copyright owners to provide us with notice of alleged infringement, given the volume of content we offer, we may not be able to identify and remove all potentially infringing content that may exist, and thus we may encounter intellectual property claims against us.

 

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We may not be able to obtain sufficient capital to maintain or expand our business.

We have incurred net loss and negative cash flow from operating activities in the past, and we may continue to experience losses and negative cash flow from operating activities in the future.In addition, our business operations and expansion require a substantial amount of capital, and, we may lack of working capital periodically in the future. We expect our business operations will continue to require a substantial amount of working capital, and we cannot assure you that we will be able to maintain positive cash flows from operations in the future. To expand our business, we have also incurred, and expect to continue to incur, substantial costs to expand our KOC matrix, diversify online traffic channels and improve our supply chain. We may only be able to recover such costs over the long term.

We have historically funded our operations with cash generated from our operation and contributions from our shareholders. There can be no assurance that we will be able to generate sufficient cash from our operations to fund our capital requirements or raise additional funds through equity or debt financings on satisfactory terms or at all, in which case we may be required to prioritize projects or curtail capital expenditures, and our results of operations could be adversely affected. On the other hand, if we raise funds through debt financings, we may also become subject to restrictive covenants that could limit our future capital raising activities and other financial and operational matters. If we raise funds through further issuances of equity or equity-linked securities, our existing shareholders could suffer significant dilution in their percentage ownership of our company.

If we are unable to carry out sales and marketing activities cost-effectively, our business, financial condition and results of operations may be materially and adversely affected.

We rely on our diversified marketing efforts and multi-channel sales and distribution network to enlarge our customer base and drive the growth of customer spending. We incurred RMB113.0 million, RMB127.2 million and RMB243.8 million (US$37.4 million) in sales and marketing expenses in fiscal years of 2018, 2019 and 2020, respectively. Our sales and marketing activities may not be well received by the market and may not result in the levels of sales that we anticipate. We also may not be able to retain or recruit a sufficient number of experienced sales and marketing personnel, or to train newly hired sales and marketing personnel, which we believe is critical to implementing our sales and marketing strategies cost-effectively. Further, sales and marketing approaches and tools in China’s e-commerce industry are evolving rapidly, which requires us to continually enhance our sales and marketing approaches and experiment with new methods to keep pace with industry developments and customer preferences. Failure to carry out sales and marketing activities in a cost-effective manner may reduce our market share, cause our net revenues to decline, negatively impact our profitability, and materially harm our business, financial condition and results of operations.

Our product suppliers, manufacturers, independent contractors or commercial partners may engage in misconduct or other improper activities, including unfair competition and noncompliance with laws and regulations, which may adversely affect our business and results of operations.

We are exposed to the risk that our product suppliers, manufacturers, independent contractors or commercial partners may engage in misconduct. Misconduct by these parties could include intentional, reckless or negligent conduct or improper sales, marketing and business arrangements, in particular, arrangements that may constitute unfair competition. It is not always possible for us to identify and deter misconduct by our product suppliers, independent contractors or commercial partners, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown, unmanaged risks and losses, or in protecting us from negative publicity, governmental investigations, actions or lawsuits stemming from such misconducts. No matter whether we can succeed in dealing with negative publicity or defending against investigations or actions, we could incur substantial costs and divert the attention of management, which could adversely affect our ability to operate our business and our results of operations.

 

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We face challenges and risks associated with diversifying our monetization channels.

We generate most of our revenues from our integrated e-commerce business model which involves the sales of lifestyle products we sourced from third-party product suppliers as well as our private label products. We have established self-owned online platforms, targeting different customer groups to diversify our product portfolio and expand into additional verticals to further increase our monetization capabilities under this model. We have also monetized our KOC network, brand portfolio and operational capabilities to generate revenues under our service model.

We plan to continue to explore additional opportunities to increase our monetization channels. If these efforts fail to achieve our anticipated results, we may not be able to increase or maintain our revenue growth and we may not be able to recoup our investments with respect to any new initiatives, in which case our business, financial condition and results of operations could be materially and adversely affected.

If we fail to provide satisfying customer services, our business and reputation will be adversely affected.

We depend on our smart customer service system and our customer service representatives to provide assistance to customers of our online stores. We have also outsourced part of our customer service to third parties whose service qualities are not fully under our control. See “Business—Customer Services.” If they fail to satisfy the individual needs of customers, our sales could be negatively affected and we may lose potential or existing brand partners, which could have an adverse effect on our business, financial condition and results of operations.

The success of our business depends on the continuing efforts of our senior management and other key personnel. If we fail to retain, attract and train such personnel, our business may be materially and adversely affected.

The success of our business depends significantly on our senior management. In particular, we rely on the expertise, experience and vision of our senior management team. We have entered into employment agreements and agreements containing non-compete, non-solicitation and confidentiality obligations with our senior management and other key personnel. However, such agreements do not ensure their continued service. If any of them becomes unable or unwilling to continue to contribute their services to us, we may not be able to replace them easily, or at all. As a result, our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected.

Additionally, our future success also depends on our ability to attract, recruit and train a large number of qualified employees and retain existing key employees. Competition for discovering and signing talents in the internet influencer economy and e-commerce industry in China is intense, and the availability of suitable and qualified candidates in China is limited. In order to compete for talents, we may need to offer higher compensation, better trainings, more attractive career opportunities and other benefits to our employees, which may be costly and burdensome. There can be no assurance that we will be able to retain a qualified workforce necessary to support our future growth. Furthermore, our ability to train and integrate new employees into our operations may not meet the demands of our growing business. Any of the above issues related to our workforce may materially and adversely affect our operations and future growth.

Previous acts of and court judgment against our founder, director and Chief Executive Officer, Mr. Cong (Kenny) Li, could be perceived to harm our reputations that could lead to material and adverse effects on our business, financial condition, results of operations and prospect.

Our founder, director and Chief Executive Officer, Mr. Cong (Kenny) Li was given a fixed-term sentence of 10 months with a probation period of one year, and a fine in the amount of RMB3,000 in June 2016 by a district court in Guangzhou, China (the “Trial Court”) for being found to have attempted to sell certain products without pre-approval by the CFDA (as defined below) (the “Judgment”). As of the date of this prospectus, Mr. Cong

 

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(Kenny) Li has fully paid the fine imposed by the Judgment and was not required to serve any part of the fixed-term sentence after the probation period lapsed in June 2017. According to the Judgment, in June 2015, Mr. Cong (Kenny) Li imported, through legal e-commerce channels, milk powder, food supplements and medicines for personal use in relation to an import and export exhibition. Stored in a warehouse located in Guangzhou, such products, however, were later seized by the then local bureau of the former State Food & Drug Administration (now known as the National Medical Products Administration (the “NMPA”), the “CFDA”) during a check-up of the warehouse. In the Judgment, the Trial Court held that under the then effective Pharmaceutical Administration Law of the PRC (2015 Revision) and the Criminal Law of the PRC, imported milk powder, food supplements and medicines without pre-approval by the CFDA were considered to be counterfeit drugs and selling such products constituted a criminal offense, even though such imported products were produced by qualified overseas manufacturers. If the defendant had started to commit such crime but was prevented from completing the sales due to reasons independent from his will, such attempt to sell counterfeit drugs also constituted a criminal offense. For details concerning such incident involving Mr. Cong (Kenny) Li as well as subsequent changes in the PRC laws that could potentially lead to different legal consequences of Mr. Cong (Kenny) Li’s acts, see “Management.”

Although the Judgment was entered into by the Trial Court against him in his personal capacity, such acts and the Judgment against him could be perceived to materially and adversely harm our reputations due to Mr. Cong (Kenny) Li’s positions as the founder, director and Chief Executive Officer of our company and his instrumental roles in managing our operations and driving our strategies and growth. Such damages to our reputations may lead to losses of our brand partners, users and other business partners and prevent us from pursuing attractive business opportunities in our existing and future markets, including securing future potential partnership with other brand partners. In addition, there could be no assurance that the regulatory and governmental authorities that have jurisdiction over our business and operations will not, as a result of the Judgment against Mr. Cong (Kenny) Li, take any adverse actions against us, challenge the legality or validity of the business activities carried out by our PRC entities during the periods when Mr. Cong (Kenny) Li served as a director or officer of such PRC entities, or otherwise frustrate our efforts to obtain, renew or comply with the terms of any of the regulatory licenses, permits, qualifications or certificates that are material to our existing or future business. In the event that any of such adverse consequences occurs, our business, financial condition, results of operations and prospects could be materially and adversely affected.

We may be challenged by relevant government authorities for products sold on our platform sourced from suppliers who fail to comply with PRC customs laws and regulations and similar laws and regulations in other jurisdictions.

A large portion of products sold on our platform are imported from countries or regions outside of China. Pursuant to relevant PRC customs laws and regulations, failure to complete proper import procedures or evading custom duties may lead to administrative or criminal sanctions imposed by competent PRC governmental or judicial authorities. Moreover, competent PRC governmental or judicial authorities may also impose sanctions on anybody who has (i) directly purchased illegally imported goods with the knowledge that such goods were illegally imported into China, or (ii) intentionally financed or otherwise assisted in such activities. Thus, our standard purchase agreement requires our suppliers to warrant to us as to the legality of the importing procedure of such products in either the purchase agreement with us or other written documents. According to our suppliers, for certain commercial and confidential reasons, they did not provide us with complete customs declaration documents or documents evidencing due payment of import duties. In addition, we cannot assure you that all of our suppliers are fully aware of customs laws and regulations that they should follow. Therefore, although our suppliers warrant that such products are imported legally through the proper import procedures and with the payment of the requisite custom duties, we cannot fully verify such statements ourselves.

We also operate business outside of China where we are subject to local customs law and regulations. Although, we have not in the past been the subject of any regulatory investigations or any civil, administrative or criminal sanctions under PRC customs laws and regulations and other similar laws and regulations in other

 

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jurisdictions, due to uncertainties in the interpretation and enforcement of such customs laws and regulations, we may be determined by competent governmental or judicial authorities to be in violation of PRC and other jurisdictions customs laws and regulations as a result of purchasing goods from law-breaking suppliers.

We may be subject to litigation, allegations, complaints and investigations from time to time arising out of our operations, and our reputation and operations may be adversely affected.

We have not been subject to any material allegations or complaints in the past, but we may be involved in legal and other disputes in the ordinary courses of our business, including allegations against us for potential infringement of third-party copyrights or other intellectual property rights, as well as customer complaints in relation to our refund policy, the quality of our products, data security and other dissatisfactions. We might also be involved in governmental investigations for advertisements or content posted on our or our KOCs’ stores or accounts or other aspect of our business operation in the future. Any claims against us, with or without merit, could be time-consuming and costly to defend or litigate, divert our management’s attention and resources or harm our brand equity. If a lawsuit or governmental proceeding against us is successful, we may be required to pay substantial damages or fines. We may also lose, or be limited in, the rights to offer some of our content, products and services or be required to make changes to our content offerings or business model. As a result, the scope of our content, product and service offerings could be reduced, which could adversely affect our ability to attract new customers, harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

Imposition of trade barriers and taxes may reduce our ability to do business internationally, and the resulting loss of revenue could harm our profitability.

We may experience barriers to conducting business and trade in our targeted overseas markets in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, substantial taxes on profits, revenues, assets and payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products, and there can be no assurance that this will not reduce the level of sales that we achieve in such markets, which would reduce our revenues and profits.

We may fail to renew our leases upon expiration and our use of some leased properties could be challenged by third parties or governmental authorities, in which case we may have to relocate our offices or warehouses and be subject to potential fines.

As of December 31, 2020, we leased an aggregate of over 6,900 square meters of office space and an aggregate of over 67 thousand square meters of warehouses in mainland China and Hong Kong and over 41 thousand square meters of warehouses outside of China. Our operations depend on the due execution and performance of these leases and whether we are able to negotiate these leases on satisfactory terms. Lessors may not duly perform their obligations under the leases, such as unexpected termination. In addition, we may fail to successfully renew leases upon expiration of their current terms, and have to relocate our operations.

Lessors of our certain leased properties in China, which are not our principal operation properties, have not provided us with copies of title certificates or proof of authorization to lease these properties. If those lessors are not the legal owners of the properties and they have not obtained competent authorizations from the legal owners of the properties or have not obtained requisite approvals or permits with respect to the construction of such properties from the relevant government authorities, our leases could be invalidated. If our lease agreements are claimed as null and void by third parties who are the actual owners of such leased real properties, we could be required to vacate the properties, in the event of which we could only initiate the claim against the lessors under relevant lease agreements for indemnities for their breach of the relevant leasing agreements. In addition, some of our leased properties have use restrictions in their title certificates such as not to be used as offices, which the

 

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parties to the leases have otherwise intended to. This may also lead to uncertainties as to our continuation of occupation of the premises during the lease term. If we are asked to evacuate, or the relevant governmental authorities challenge the landlord on the ground of non-compliance of usage of such properties, we could be required to vacate the properties. As of the date of this prospectus, we are not aware of any claim or challenge brought by government authorities or any other third parties concerning the use of our leased properties without obtaining proper ownership proof or in contravention of the permitted use of such leased properties. We cannot guarantee that suitable alternative locations are readily available on commercially reasonable terms, or at all, and if we fail to relocate our operations in a timely manner, our operations may be interrupted.

In addition, we have not registered some of our lease agreements with relevant government authorities as required by PRC law. According to the PRC law, failure to complete the lease registration will not affect the legal effectiveness of the lease agreements, but the real estate administrative authorities may require the parties to the lease agreements to complete lease registration within a prescribed period of time. The failure to do so may subject the parties to fines from RMB1,000 to RMB10,000 for each of unregistered lease agreements.

We may expand our business through acquisitions, investments or strategic alliances in the future, but we might not be able to successfully pursue synergy from acquisitions or to achieve the benefits we expect from recent and future investments, strategic alliances and acquisitions.

We may form strategic alliances or make strategic investments and acquisitions from time to time to complement and enhance our existing business. We may experience difficulties in integrating our operations with the newly invested or acquired businesses, implementing our strategies or achieving expected levels of revenues, profitability, productivity or other benefits. Moreover, if the businesses we acquire or invest in or our strategic alliances or partnerships do not subsequently generate the anticipated financial performance or if any goodwill impairment test triggering event occurs, we may need to revalue or write down the value of goodwill and other intangible assets in connection with such transactions, which would harm our business, financial condition and results of operations.

In addition, we may not be able to identify appropriate strategic investment or alliance targets when it is necessary or desirable to make such acquisition or investment to remain competitive or to expand our business. Even if we identify an appropriate target, we may not be able to negotiate the terms of the transaction successfully. In the event that we do not have control over the companies in which we only have minority stake, we cannot ensure that these companies will at all times comply with applicable laws and regulations in their business operations. Material noncompliance by our investees may cause substantial harms to our reputation and the value of our investment.

We may not have sufficient insurance coverage.

We have purchased property insurance covering our inventories and to insure the authenticity and quality of our products and maintain a few other insurances to manage unexpected risks during our operations. However, we cannot assure you that our insurance coverage is sufficient to prevent us from any losses or that we will be able to successfully claim for losses under our current insurance policies on a timely basis, or at all.

In addition, we do not maintain business interruption insurance, product liability insurance, general third-party liability insurance or key man insurance. Any uninsured risks may result in substantial costs and the diversion of resources, which could adversely affect our results of operations and financial condition.

If we fail to implement and maintain an effective system of internal controls to remediate our material weaknesses over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.

Prior to this offering, we have been a private company with limited accounting and financial reporting personnel and other resources to which we address our internal control over financial reporting. Our independent

 

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registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of December 31, 2018, 2019 and 2020 and for each of the three years in the period ended December 31, 2020, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB, 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 annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified relate to our (i) lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and SEC rules and (ii) lack of financial reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting requirements. We are in the process of implementing a number of measures to address the material weaknesses and deficiencies that have been identified. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, we cannot assure you that these measures may fully address the material weaknesses and deficiencies in our internal control over financial reporting or that we may conclude that they have been fully remediated.

Upon 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 the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report in our second annual report on Form 20-F after becoming a public company. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as we will 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 of the Sarbanes-Oxley Act of 2002, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. We may not be able to anticipate and identify accounting issues, or other risks critical to financial reporting that could materially impact the consolidated financial statements. Generally, if we fail to achieve and maintain an effective internal control environment, it could result in material misstatements in our financial statements and failure 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, may be materially and adversely affected. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

The enforcement and development of the PRC Labor Contract Law and other labor related regulations, as well as the increases in labor costs in the PRC may adversely affect our business and results of operations.

We are subject to the compliance with the PRC labor-related laws and regulations. In particular, the PRC Labor Contract Law has reinforced the protection of employees who, under the PRC Labor Contract Law, have

 

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the right, among others, to have written employment contracts, to enter into employment contracts with no fixed term under certain circumstances, to receive overtime wages and to, under certain circumstances, terminate or alter terms in labor contracts. Furthermore, the PRC Labor Contract Law sets forth additional restrictions and increases the costs involved with dismissing employees. To the extent that we need to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect our ability to do so in a timely and cost-effective manner, and our results of operations could be adversely affected. In addition, for employees whose employment contracts include noncompetition terms, the PRC Labor Contract Law requires us to pay economic compensation to the laborer on a monthly basis during the term of noncompetition after such employment is terminated, which will increase our operating expenses.

In addition, we are required by PRC laws and regulations to make social insurance registration and open housing fund contributions account with relevant governmental authorities and pay various statutory employee benefits, including pensions, a housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has paid for adequate requisite statutory employee benefits for all of its employees, and those employers who fail to make adequate payments or fail to pay such payments for all of its employees may be subject to late payment fees, fines and/or other penalties. If we fail to make adequate social insurance and housing fund contributions, we may be subject to fines and legal sanctions, and our business, financial condition and results of operations may be adversely affected. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations would be materially and adversely affected.

We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses. Vesting of the RSUs granted will increase the number of our shares in circulation, which may affect the market price of our shares.

In December 2015, our PRC subsidiary Guangzhou Onion adopted the 2015 Liangkeshu Share Incentive Plan, or the 2015 PRC Plan. We adopted the Restricted Share Unit Scheme, or the 2019 RSU Scheme, on May 3, 2019, at the Cayman Islands’ level in preparation for this offering, to replace the 2015 PRC Plan. The purpose of the 2019 RSU Scheme is to recognize and reward participants for their contribution to our company, to attract suitable personnel and to provide incentives to them to remain with and further contribute to us. See “Management—2019 RSU Scheme.”

Under the 2019 RSU Scheme, the maximum aggregate number of ordinary shares we are authorized to issue pursuant to restricted share units granted thereunder is 1,115,466 ordinary shares, which have been reserved for issuance pursuant to the 2019 RSU Scheme accordingly. The awards representing 660,000 restricted share units issued under the 2015 PRC Plan have been fully replaced by the awards issued under the 2019 RSU Scheme. As of the date of this prospectus, a total of 1,109,697 RSUs corresponding to 1,109,697 underlying ordinary shares have been granted to the participants under the 2019 RSU Scheme, excluding awards that were forfeited, cancelled or exercised after the relevant grant dates. Such ordinary shares will be redesignated as Class A ordinary shares on a one-on-one basis immediately prior to the completion of this offering.

Pursuant to the 2019 RSU Scheme, the performance condition for awards granted thereunder will be satisfied upon completion of this offering; and as a result, we expect to, upon the date of the completion of this offering, record a significant amount of cumulative share-based compensation expenses for those awards for which the vesting conditions have been satisfied as of such date. Had all vesting conditions been satisfied as of December 31, 2020, we would have recognized share-based compensation expenses of RMB354.8 million (US$54.5 million) for those awards, related to a total of 1,109,697 RSUs representing 1,109,697 underlying ordinary shares granted to the participants under the 2019 RSU Scheme as of the date of this prospectus (excluding awards that were forfeited, cancelled or exercised after the relevant grant dates).

 

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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 expect to grant additional share-based awards to our employees in the future. As a result, our expenses associated with share-based awards may increase, which may have an adverse effect on our results of operations.

Any failure by us or our business partners to comply with product safety, labor, tax or other laws, or to provide safe conditions for our or their workers may damage our reputation and brand and harm our business.

Our products are subject to regulation by various governmental authorities in China. Such products could be in the future subject to potential recalls and other remedial actions. Product safety, labeling and licensing concerns, including consumer disclosure and warning regarding chemical exposure, may result in recall or suspended offering of products, which in turn could result in a material adverse effect on our operating results.

We procure products from a variety of third-party suppliers, manufacturers and other business partners. If they fail to comply with applicable laws and regulations, we may also face or get involved in litigations, which could increase our legal costs. In addition, other misconduct of our business partners such as failure to provide safe and humane working conditions could harm our reputation and business as well.

Our use of licensed third-party or open source software could negatively affect our ability to provide consistent online experiences.

We use software licensed from third parties. Any interruptions that result from the unavailability of the software licensed from third parties may affect the quality of our services offered online. We may also encounter problems when software licensed from third parties is upgraded, and undetected programming errors could adversely affect the performance of the software we use to provide our services.

In addition, we use open source software in the applications we have developed to operate our business and will use open source software in the future. We could be required to seek licenses from third parties in order to continue using the open source software we are permitted to use currently, in which case licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our self-owned online stores or discontinue the use of portions of the functionality provided by our self-owned online stores. Our inability to use third-party software could result in disruptions to our business, or delays in the development of future offerings or difficulties in enhancing our operating platforms, which could materially and adversely affect our business and results of operations.

We rely on commercial banks and third-party online payment service providers for payment processing and escrow services on our platform. If these payment services are restricted or curtailed in any way or become unavailable to us or our users for any reason, our business may be materially and adversely affected.

All online payments for products sold on our platform are settled through commercial banks or third-party online payment service providers (collectively, the “Third-Party Payment Companies”). Our business depends on the billing and payment systems of these payment service providers to maintain accurate records of payments of sales proceeds by users and collect such payments. If the quality, utility, convenience or attractiveness of these payment processing and escrow services declines, or we have to change the pattern of using these payment services for any reason, the attractiveness of our platform could be materially and adversely affected.

In addition, we are susceptible to fraud, user data leakage and other illegal activities in connection with online payment. Further, we pay interchange and other fees for certain payment channels, which may increase our operating costs and thus reduce our profitability.

Certain commercial banks in China impose limits on the amounts that may be transferred by automated payment from users’ bank accounts to their linked accounts with third-party online payment services. We cannot

 

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predict whether these and any additional restrictions that could be put in place would have a material adverse effect on our platform.

In addition, the Third-Party Payment Companies that we work with are subject to the supervision of the People’s Bank of China, or the PBOC. The PBOC may publish rules, guidelines and interpretations from time to time regulating the operation of financial institutions and payment service providers, which may in turn affect how they provide payment services to us. For example, in November 2017, the PBOC published a notice, or the PBOC Notice, on the investigation and administration of illegal offering of settlement services by financial institutions and payment service providers to unlicensed entities. The PBOC Notice intends to prevent unlicensed entities from using licensed payment service providers as a conduit for conducting unlicensed payment settlement service business, to safeguard the fund security and information security.

In practice, we use licensed Third-Party Payment Companies to distribute payments in consideration for services rendered by O’Partners, marketing partners and KOCs. We provide information on payment amounts, account details and other transaction related documents to the Third-Party Payment Companies before such payments are distributed by them. As of the date of the prospectus, we have not received any notification from the relevant government authorities, including PBOC, requiring us to adjust our payment settlement model. Although we do not involve directly with receiving or making such payments through any of our accounts in such payment settlement model, we cannot assure you that the PBOC or other governmental authorities will find our cooperation model with the Third-Party Payment Companies with respect to our online platform sales business model to be in compliance with the PBOC Notice. If required by the PBOC or other relevant governmental authorities in the future, we may need to adjust or suspend our cooperation model with the Third-Party Payment Companies, and be subject to fines and other sanctions.

We are also subject to other general rules, regulations and regulatory requirements governing electronic fund transfer, which may change or be reinterpreted by relevant governmental authorities from time to time. If we fail to comply with these rules, regulations and regulatory requirements, we may be subject to fines, have to pay higher transaction fees, or even lose our ability to process electronic fund transfers, any of which could materially and adversely affect our business, financial condition and results of operations.

Certain of our key performance indicators are subject to inherent challenges in measurement, and actual or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

We track certain key operating metrics based on raw data, such as number of orders and active buyers and GMV, including third-party social media and e-commerce platforms. Data from such sources may include information relating to fraudulent accounts and interactions with our online platform or the social media accounts of our KOCs, including as a result of the use of bots or other automated or manual mechanisms to generate false impressions. We have only a limited ability to verify data from third parties, and perpetrators of fraudulent impressions may change their tactics and use more sophisticated technologies, which would make it more difficult for us to detect such activities. In addition, we cannot guarantee third-party social media and e-commerce platforms will continue to provide us raw data in the future.

We track certain key operating metrics using internal data analytics tools, which have certain limitations. If we miscount operating metrics due to the errors of internal data analytics tools, issues with the data received from third parties, or incorrect data results from our employees’ misconducts or omissions, the data we report may not be accurate or comparable with prior periods. Our methodologies for tracking metrics may also change over time, which could result in changes to the metrics we report. In addition, limitations, changes or errors with respect to how we measure data may affect our understanding of certain details of our business, which could affect our longer-term strategies.

If we discover material inaccuracies in raw data from third parties, or if we cannot calculate any of our key performance metrics with a sufficient degree of accuracy, or if our performance metrics cannot fairly represent our performance, our business, financial condition and operating results could be adversely affected.

 

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The estimates of market opportunity and forecasts of market growth in this prospectus may prove to be inaccurate. Even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The variables that go into the calculation of our addressable market size are subject to change over time, and there is no assurance that any target customers covered by our market opportunity estimates will purchase our products at all or generate any particular level of revenue for us. Any expansion in our market depends on a number of factors, including the cost, performance, competition and perceived value associated with our products and services. Even if the market in which we compete meets the size estimates and growth forecasted, our business could fail to grow at similar rates, if at all, due to various factors, including failure to execute our growth plan, ineffective management over operations and adverse impact from negative publicity. Accordingly, the forecasts of market growth should not be taken as indicators of our future growth.

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

The global macroeconomic environment is facing challenges. 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 over regional instability and tension, such as 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 outbreak of COVID-19 throughout the world could also result in an economic downturn globally. 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.

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, the growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing down in recent years and may materially decline in the future. We are an online fashion player and conduct substantially all of our operations in China; therefore, any deterioration of the PRC economy, decrease in disposable income and fear of a recession may lead to reductions of customers’ demand and their spending on fashion products with us and our brand partners. Any severe or prolonged slowdown in the global or PRC economy may materially and adversely affect our business, results of operations and financial condition.

Risks Related to Our Corporate Structure

We rely on contractual arrangements with our VIE to use, or otherwise benefit from, the foreign restricted licenses and permits, which may not be as effective as direct ownership in providing operational control.

We rely on contractual arrangements with our VIE to use, or otherwise benefit from, certain foreign restricted licenses and permits that we may need in the future as our business continues to expand, such as the internet content provider license, or the ICP license, held by a subsidiary of our VIE. However, these contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. For example, our VIE and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. If our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which may not be effective and may incur substantial costs. If the VIE’s shareholders breach the

 

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terms of these contractual arrangements and voluntarily liquidate our VIE, or our VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by the VIE, which could adversely affect our business, financial condition and results of operations. Furthermore, if our VIE undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of the assets of the VIE, thereby hindering our ability to operate our business as well as constraining our growth.

Uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Investment Law and how it may impact our business, financial condition and results of operations.

On March 15, 2019, the National People’s Congress of the PRC promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced a trio of laws regulating foreign investment in China, namely, the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The enacted Foreign Investment Law does not mention concepts such as “actual control” and “controlling PRC companies by contracts or trusts” that were included in the previous drafts, nor does it specify regulation on controlling through contractual arrangements, and thus this regulatory topic remains unclear under the Foreign Investment Law. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, though the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. See “Regulation—Regulations Relating to Foreign Investment.” Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment.

Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, such as unwinding our existing contractual arrangements and/or disposal of our related business operations, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. There is no guarantee that the contractual arrangements and our business will not be adversely affected in the future due to changes in PRC laws and regulations. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could adversely affect our current corporate structure, corporate governance and business operations.

The uncertainties in the PRC legal system may subject our contractual arrangements to different interpretations or enforcement challenges.

There may be uncertainties in the PRC legal system that could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and there is little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delays. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIE, and our ability to conduct our business may be negatively affected.

 

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The shareholders of our VIE may have actual or potential conflicts of interest with us and fail to perform their obligations under our contractual arrangements, which, in turn, may adversely affect our business and financial condition.

The shareholders of our VIE may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which would have a material and adverse effect on our ability to effectively control our VIE and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we may invoke the right under the equity pledge agreements with the shareholders of the VIE to enforce the equity pledge in the case of the shareholders’ breach of the contractual arrangements. For individuals who are also our directors, we rely on them to abide by the laws of the Cayman Islands, which provide that directors owe a fiduciary duty to the Company that requires them to act in good faith and in what they believe to be the best interests of the Company and not to use their position for personal gains. The shareholders of our VIE have executed shareholders’ power of attorney to appoint WFOE or a person designated by WFOE to vote on their behalf and exercise voting rights as shareholders of our VIE, which we have re-assigned to our board of directors or any officer authorized by the board of directors. If we cannot resolve any conflict of interest or dispute between us and these shareholders, 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 we or our VIE owes additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and the PRC tax authorities may adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be adversely affected if our VIE’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

Risks Related to Doing Business in China

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

We conduct substantially all of our operations in China and most of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are, to a significant degree, subject to economic, political and legal developments in China. The economy of China differs from the economies of most developed countries in many respects, including the extent of government involvement, its level of development, its growth rate and its control over foreign exchange. In recent years, the PRC government has implemented measures emphasizing market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises. However, a significant portion of

 

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productive assets in China is still owned by the PRC government. The PRC government continues to play a significant role in regulating industrial development. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policies, restricting the inflow and outflow of foreign capital and providing preferential treatment to particular industries or companies. The PRC government also has significant authority to exert influence on the ability of a China-based company, such as our company, to conduct its business. As the PRC economy has become increasingly linked with the global economy, China is affected in various respects by downturns and recessions of major economies around the world. The various economic and policy measures enacted by the PRC government to forestall economic downturns or bolster China’s economic growth could materially affect our business. Any adverse change in the economic conditions in China, policies of the PRC government or laws and regulations in China could have a material adverse effect on the overall economic growth of China and, in turn, our business.

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

Our operating subsidiaries are incorporated under and governed by the laws of the PRC. The PRC legal system is based on written statutes. 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 and regulations governing economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation and trade. As a significant part of our business is conducted in China, our operations are principally governed by PRC laws and regulations. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. Uncertainties due to evolving laws and regulations could also impede the ability of a China-based company, such as our company, to obtain or maintain permits or licenses required to conduct business in China. In the absence of required permits or licenses, governmental authorities could impose material sanctions or penalties on us. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other PRC government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, if China adopts more stringent standards with respect to environmental protection or corporate social responsibilities, we may incur increased compliance cost or become subject to additional restrictions in our operations.

Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

Uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft Anti-Monopoly Guidelines for Platform Economy and draft Personal Information Protection Law and how it may impact our business operations.

In November 2020, the State Administration for Market Regulation, or the SAMR, published for comments the draft Guidelines to Anti-Monopoly in the Field of Platform Economy, or the Draft Anti-Monopoly Guidelines for Platform Economy. The Draft Anti-Monopoly Guidelines for Platform Economy provides operational standards and guidelines to be applied in identifying certain monopolistic acts of internet platforms which are

 

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prohibited to restrict unfair competition and safeguard users’ interests, including without limitation, prohibiting personalized pricing using big data and analytics, selling products below cost without reasonable causes, actions or arrangements seen as exclusivity arrangements, using technology means to block competitors’ interface, using bundle services to sell services or products. In addition, internet platforms’ compulsory collection of user data may be viewed as abuse of dominant market position that may have the effect to eliminate or restrict competition. The Draft Anti-Monopoly Guidelines for Platform Economy further emphasizes that concentration of undertakings with the VIE structure will also be subject to the SAMR’s anti-monopoly review if the thresholds for notification are met. The SAMR is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. In October 2020, the Standing Committee of the National People’s Congress officially released the draft for the first reading of the Personal Information Protection Law, or the Draft Personal Information Protection Law. The Draft Personal Information Protection Law provides the basic regime for personal information protection, including without limitation, stipulating an expanded definition of personal information, providing a long-arm jurisdiction in cross-border scenarios, emphasizing individual rights, and prohibiting rampant infringement of personal information, such as stealing, selling, or secretly collecting personal information. If the Draft Anti-Monopoly Guidelines for Platform Economy or the Draft Personal Information Protection Law is promulgated as an effective regulation in the future, we cannot assure you that our business operations will comply with such regulation in all respects and we may be ordered to terminate certain of our business operations that are deemed illegal by the regulatory authorities and become subject to fines and/or other sanctions.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and as such, our investors are deprived of the benefits of such inspection. In addition, various legislative and regulatory developments related to U.S.-listed China-based companies due to lack of PCAOB inspection and other developments due to political tensions between the United States and China may have a material adverse impact on our listing and trading in the U.S. and the trading prices of our ADSs.

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 Public Company Accounting Oversight Board (United States), or 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 auditors are located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

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

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, the Holding Foreign Companies Accountable Act has been signed into law on December 18, 2020, which will require the SEC to propose rules within 90 days after its enactment to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over the counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective. On March 24, 2021, the SEC adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the HFCA Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an

 

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annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction (including China) and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Before any registrant will have to comply with the interim final amendments, however, the SEC must implement a process for identifying such a registrant. Thus, the SEC is currently seeking public comment on this identification process.

Consistent with the HFCA Act, the amendments will require any such identified registrant to submit documentation to the SEC establishing that the registrant is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant. The SEC staff is also currently assessing how best to implement other requirements of the HFCA Act, including the identification process and the trading prohibition requirements.

Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs could be adversely affected, and we could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time. It is unclear if and when any of such proposed legislations will be enacted. We could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time. See “—We could be delisted if we are unable to meet the PCAOB inspection requirements in time.”

In addition, political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the president executive orders in August 2020 that prohibit certain transactions with certain Chinese companies and their applications. Rising political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have material and adverse impact on the stock performance of China-based issuers listed in the United States.

We could be delisted if we are unable to meet the PCAOB inspection requirements in time.

On December 18, 2020, the Holding Foreign Companies Accountable Act was enacted. In essence, the act requires the SEC to prohibit securities of any foreign companies from being listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. Our independent registered public accounting firm is located in and organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, and therefore our auditors are not currently inspected by the PCAOB.

The enactment of the Holding Foreign Companies Accountable Act and any additional rulemaking efforts to increase U.S. regulatory access to audit information in China could cause investor uncertainty for affected SEC registrants, including us, and the market price of our ADSs could be materially adversely affected. Additionally, whether the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be delisted from the NYSE and our ADSs will not be permitted for trading “over-the-counter” either. 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 delisting would have a

 

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negative impact on the price of our ADSs. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.

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

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

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

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

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

We are an exempted company incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and all are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside China.

The recognition and enforcement of foreign judgments are basically provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the Cayman Islands or many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment if it is decided as having violated the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands.

 

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The SEC, U.S. Department of Justice and other U.S. authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including company directors and officers, in certain emerging markets, including China. Legal and other obstacles to obtaining information needed for investigations or litigation or to obtaining access to funds outside the United States, lack of support from local authorities, and other various factors make it difficult for the U.S. authorities to pursue actions against non-U.S. companies and individuals, who may have engaged in fraud or other wrongdoings. Additionally, public shareholders investing in our ADSs have limited rights and few practical remedies in emerging markets where we operate, as shareholder claims that are common in the United States, including class actions under securities law and fraud claims, generally are difficult or impossible to pursue as a matter of law or practicality in many emerging markets, including China. As a result of all of the above, you may have more difficulties in protecting your interests in your emerging market investments.

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

We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and services of any debt we may incur. Our PRC subsidiary’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries, our VIE and its subsidiaries are required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

To address the persistent capital outflow and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures in subsequent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or the SAFE Circular 3, issued on January 26, 2017, provides that the banks shall, when dealing with dividend remittance transactions from domestic enterprise to its offshore shareholders of more than US$50,000, review the relevant board resolutions (or resolutions of partners), original tax filing form and audited financial statements of such domestic enterprise based on the principal of genuine transaction. The PRC government may strengthen its capital controls from time to time and our PRC subsidiaries’ dividends and other distributions may be subject to tightened scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

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

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

Under PRC law, legal documents for corporate transactions, including agreements and contracts, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose

 

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designation is registered and filed with relevant PRC administration for market regulation. A company chop or seal may serve as the legal representation of the company towards third parties even when unaccompanied by a signature.

In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application, which will then be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries or our VIE. If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.

If the preferential tax treatments and government subsidies granted by PRC government become unavailable, our results of operation and financial condition may be adversely affected.

We currently enjoy preferential tax treatment granted by the PRC government to one of our VIE subsidiaries and benefit from subsidies granted by local governments, and such preferential tax treatments and government subsidies may become unavailable in the future. Any increase in the enterprise income tax rate applicable to our subsidiaries, our VIE or the subsidiaries of our VIE in China, or any discontinuation or reduction of any of the preferential tax treatments and local government subsidies currently enjoyed by us will negatively affect our results of operation and financial condition.

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

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, as well as any loans we provide to our VIE or its subsidiaries, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to our PRC subsidiaries are subject to registration with SAMR or its local counterpart and registration with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or its local branches and (ii) any of our PRC subsidiaries may not procure loans which exceed the difference between its total investment amount and registered capital or, as an alternative, they may only procure loans subject to the calculation approach and limitation as provided by the People’s Bank of China. Additionally, any medium or long-term loans to be provided by us to our VIE or its subsidiaries must be registered with the NDRC and the SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries or loans by us to our VIE or its subsidiaries. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19, which

 

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took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the renminbi fund converted from their foreign exchange capital for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. The SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective on June 9, 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including, but not limited, to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted renminbi shall not be provided as loans to its non-affiliated entities. On October 23, 2019, SAFE further issued the Circular of the State Administration of Foreign Exchange on Further

Promoting the Facilitation of Cross-Border Trade and Investment, or the Circular 28, which took effect on the same day. Circular 28 allows non-investment foreign-invested enterprises to use their capital funds to make equity investments in China as long as such investments do not violate then effective negative list for foreign investments and the target investment projects are genuine and in compliance with laws. In addition, Circular 28 stipulates that qualified enterprises in certain pilot areas may use their capital income from registered capital, foreign debt and overseas listing, for the purpose of domestic payments without providing authenticity certifications to the relevant banks in advance for those domestic payments. As this circular is relatively new, there remains uncertainty as to its interpretation and application and any other future foreign exchange-related rules. Violations of these circulars could result in severe monetary or other penalties.

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

The value of the renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s foreign exchange policies. Since June 2010, the renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. Since October 1, 2016, renminbi has joined the International Monetary Fund’s basket of currencies that make up the Special Drawing Right (SDR) along with the U.S. dollar, the euro, the Japanese yen and the British pound. In the fourth quarter of 2016 the renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the renminbi and the U.S. dollar in the future.

There remains significant international pressure on the Chinese government to adopt a flexible currency policy to allow the renminbi to appreciate against the U.S. dollar. Significant revaluation of the RMB may have a material adverse effect on your investment. Substantially all of our net revenues and costs are denominated in renminbi. Any significant revaluation of RMB may adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, the ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars into renminbi for capital expenditures and working capital and other business purposes, appreciation of renminbi against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs, and if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our Class A ordinary shares or ADSs, strategic acquisitions or investments or other business purposes,

 

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appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

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

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

The PRC government imposes controls on the convertibility of the renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and VIE to pay off their respective debt in a currency other than renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the ADSs.

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

Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, establish additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the SAMR should be notified in advance of any concentration of undertaking if certain thresholds are triggered. Transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the SAMR before they can be completed. In addition, the PRC national security reviews rules which became effective in September 2011 requiring mergers and acquisitions by foreign investors of PRC companies engaged in military- related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM and the SAMR, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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PRC regulations relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future. See “Regulation—Offshore Investment”.

We are committed to complying with and to ensuring that our shareholders and beneficial owners who are subject to these regulations will comply with the relevant SAFE rules and regulations. However, due to inherent uncertainty in the implementation of the regulatory requirements by the PRC authorities, such registration might not be always practically available in all circumstances as provided in those regulations.

We have requested all shareholders or beneficial owners who directly or indirectly hold shares in our Cayman Islands holding company and are known to us as being PRC residents to complete their registration with or to obtain approval by the local SAFE, the National Development and Reform Commission, or the NDRC, or MOFCOM branches. However, we may not be informed of the identities of all the PRC individuals or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with the SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by SAFE, NDRC and MOFCOM regulations. In addition, one of our PRC subsidiaries incorporated a Hong Kong company without first obtaining relevant record-filing or registrations required under relevant SAFE, NDRC and MOFCOM regulations. Any failure or inability by such shareholders, beneficial owners or our subsidiaries to comply with SAFE, NDRC and MOFCOM regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

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

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007 and 2008. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas-listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions, and there may be additional restrictions on the ability of them to exercise their stock options or remit proceeds gained from sale of their stock

 

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into the PRC. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Employee Stock Incentive Plan.”

In addition, the State Administration of Taxation has issued circulars concerning employee share options or restricted shares. Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares or restricted share units vest, will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees related to their share options, restricted shares or restricted share units. In addition, the sales of our ADSs or shares held by such PRC individual employees after their exercise of the options, or the vesting of the restricted shares or restricted share units, are also subject to PRC individual income tax. If the employees fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC government authorities.

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

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe our company is not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that our company is a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we will be required to withhold a 10% withholding tax from dividends we pay to our shareholders (including our ADS holders) that are non-resident enterprises. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or Class A ordinary shares, if such gain is treated as derived from a PRC source. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the sale or other disposition of ADSs or Class A ordinary shares by such shareholders (including ADS holders) may be subject to PRC tax at a rate of 20% (which in the case of dividends may be withheld at source). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders

 

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(including ADS holders) of our company would, in practice, be able to obtain the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or Class A ordinary shares.

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

On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity securities through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets.

On October 17, 2017, the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these bulletins, or to establish that our company should not be taxed under these bulletins, which may have a material adverse effect on our financial condition and results of operations.

Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website.

The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be

 

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held liable for such censored information displayed on or linked to the websites. If our self-owned online store or content is found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected.

Risks Related to the ADSs and This Offering

An active trading market for our ordinary shares or the ADSs may not develop and the trading price for the ADSs may fluctuate significantly.

We have been approved to list the ADSs on the NYSE. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for the ADSs or our ordinary shares, and we cannot assure you that a liquid public market for the ADSs will develop. The initial public offering price for the ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of the ADSs after this offering will not 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.

In addition, investing in securities of issuers based in emerging market countries, including China, frequently involves a greater degree of risks and uncertainties when compared to investments in securities of issuers located in more established markets. These factors may affect your ability to sell the ADSs at your desired price and time. If an active and liquid market for the ADSs does not develop or is not maintained, the market price and liquidity of the ADSs may be materially and adversely affected.

Under our proposed dual-class share structure with different voting rights, holders of Class B ordinary shares will have complete control of the outcome of matters put to a vote of shareholders, which 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 the ADSs may view as beneficial.

We have adopted a dual-class share structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares, which will become effective immediately prior to the completion of this offering. In respect of matters requiring the votes of shareholders, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 10 votes. 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 sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person who is not an affiliate of Cong (Kenny) Li, or upon a change of ultimate beneficial ownership of any Class B ordinary share to a person who is not an affiliate of Cong (Kenny) Li, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. There is no limit on the circumstances where holders of Class B ordinary shares may transfer or otherwise dispose of their Class B ordinary shares. We will sell Class A ordinary shares represented by the ADSs in this offering.

Immediately upon the completion of this offering, our Founders will beneficially own all of our issued Class B ordinary shares, and they will in the aggregate hold approximately 56.7% of our total issued and outstanding share capital and 92.3% of the aggregate voting power of our total issued and outstanding share capital, assuming the underwriters do not exercise their over-allotment option.

As a result of this dual-class share structure, the holders of our Class B ordinary shares will have complete control over the outcome of matters put to a vote of shareholders and have significant influence over our business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. Assuming no exercise of the over-allotment options by the underwriters, immediately following the completion of this offering, the holders of Class B ordinary shares will continue to control the outcome of a shareholder vote (i) with respect to matters

 

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requiring an ordinary resolution which requires the affirmative vote of a simple majority of shareholder votes; and (ii) with respect to matters requiring a special resolution which requires the affirmative vote of no less than two-thirds of shareholder votes. The holders of Class B ordinary shares may take actions that are not in the best interest of us or our other shareholders or holders of the ADSs. It 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 the 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.

S&P Dow Jones and FTSE Russell have recently 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 will incur additional costs as a result of being a public company.

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the NYSE, may increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.

Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

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

The trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors 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

 

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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 net revenues, earnings and cash flows;

 

   

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

 

   

announcements of new offerings, solutions and expansions by us or our competitors;

 

   

changes in financial estimates by securities analysts;

 

   

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

 

   

announcements of new regulations, rules or policies relevant to our business;

 

   

additions or departures of key personnel;

 

   

our controlling shareholder’s business performance and reputation;

 

   

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

 

   

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 those 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 results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$5.87 per ADS, representing the difference between the initial public offering price of US$7.25 per ADS, and our pro forma as adjusted net tangible book value per ADS as of December 31, 2020, after giving effect to the net proceeds we receive from this offering. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon the completion of this offering.

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

 

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on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline.

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

Sales of substantial amounts of 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, 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 9,310,350 ADSs (representing 931,035 Class A ordinary shares) issued and outstanding immediately after this offering, or 10,706,900 ADSs (representing 1,070,690 Class A ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we, our directors, executive officers and existing shareholders have agreed, subject to certain exceptions, not to sell any ordinary shares or ADSs for 180 days (or 12 months in the case of Cong (Kenny) Li and Li Bai Global Limited). However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. 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 “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

Techniques employed by short sellers may drive down the market price of the ADSs.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.

Public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity have centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

It is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in the ADSs could be greatly reduced or even rendered worthless.

 

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Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on a price appreciation of the ADSs for a return on your investment.

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

Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may pay a dividend out of either profit or a share premium account, provided always that in no circumstances may a dividend be paid if this would result in the Company being unable to pay its debts as they fall due in the ordinary course of business.

Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in the ADSs.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

The M&A Rules purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC approval is required, it is uncertain how long it will take for us to obtain such approval, and any failure to obtain or a delay in obtaining CSRC approval for this offering may subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

JunHe LLP, our PRC counsel, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of this offering and the listing and trading of our ADSs on the NYSE because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; (ii) we established the WFOEs by means of direct investment and not through a merger or acquisition of the equity or assets of a “PRC domestic company” as such term is defined under the M&A Rules; and (iii) no provision in the M&A Rules classifies the contractual arrangements under the VIE agreements as a type of acquisition transaction falling under the M&A Rules.

However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal counsel, and hence, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. If it is determined in the future that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These regulatory agencies may impose

 

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fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. 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 settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of the ADSs.

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 and Wales, 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 may be narrower in scope or less developed than they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands have 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. In addition, while under Delaware law, controlling shareholders owe fiduciary duties to the companies they control and their minority shareholders, under Cayman Islands law, our controlling shareholders do not owe any such fiduciary duties to our company or to our minority shareholders. Accordingly, our controlling shareholders may exercise their powers as shareholders, including the exercise of voting rights in respect of their shares, in such manner as they think fit, subject only to very limited equitable constraints. One of the examples of such constraint is that the exercise of voting rights to amend the memorandum or articles of association of a Cayman Islands company must be exercised in good faith for the benefit of the Company as a whole.

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

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. If we choose to follow home country practice, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

 

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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 the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Act of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

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

Shareholder claims that are common in the United States, including securities law class actions and fraud claims, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the Unities States have not been efficient in the absence of a mutual and practical cooperation mechanism. 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. While detailed interpretation of or implementation of rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.

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

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.” However, the deposit agreement gives you the right to submit claims against us to binding arbitration, and arbitration awards may be enforceable against us and our assets in China even when court judgments are not.

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

Our post-offering memorandum and articles of association provide that the federal district courts of the United States are the exclusive forum within the United States (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than us. Our deposit agreement with the depositary bank also provides that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) will have jurisdiction to hear and determine any suit, action, or

 

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proceeding and to settle any dispute between the depositary bank and us that does not involve any other person or party that may arise out of or relate in any way to the deposit agreement, including claims under the Securities Act or the Exchange Act. Holders and beneficial owners of our ADSs, by holding an ADS or an interest therein, understand and irrevocably agree that any legal suit, action, or proceeding against or involving us or the depositary bank arising out of or related in any way to the deposit agreement, ADSs, or the transactions contemplated thereby or by virtue of ownership thereof, including without limitation claims under the Securities Act or the Exchange Act, may only be instituted in the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks jurisdiction or such designation of the exclusive forum is, or becomes, invalid, illegal, or unenforceable, in the state courts of New York County, New York). However, the enforceability of similar federal court choice of forum provisions has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such lawsuits. If a court were to find the federal choice of forum provision contained in our post-offering memorandum and articles of association or our deposit agreement with the depositary bank to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection clause in our post-offering memorandum and articles of association, as well as the forum selection provisions in the deposit agreement, may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary bank, and potentially others in his or her preferred judicial forum, and this limitation may discourage such lawsuits. In addition, the Securities Act provides that both federal and state courts have jurisdiction over suits brought to enforce any duty or liability under the Securities Act or the rules and regulations thereunder. Accepting or consent to this forum selection provision does not constitute a waiver by you of compliance with federal securities laws and the rules and regulations thereunder. You may not waive compliance with federal securities laws and the rules and regulations thereunder. The exclusive forum provision in our post-offering memorandum and articles of association will not operate so as to deprive the courts of the Cayman Islands from having jurisdiction over matters relating to our internal affairs.

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

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for 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 were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with 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 United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has nonexclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under 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 or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or

 

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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 outcomes that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver 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 the 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.

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 the voting of the Class A ordinary shares underlying your ADSs.

As an exempted company incorporated in the Cayman Islands, we are not obliged by the Companies Act to call shareholders’ annual general meetings. Our Amended and Restated Memorandum and Articles of Association provide that we may (but are not obliged to) each year hold a general meeting as our annual general meeting. As a holder of ADSs, you will not have any direct right to attend general meetings of our company or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the Class A ordinary shares underlying your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as holder of the Class A ordinary shares underlying your ADSs. Upon receipt of your voting instructions, the depositary may try to vote the Class A ordinary shares underlying your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with those 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 any right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the shares underlying your ADSs and become the registered holder of such shares prior to the record date for the general meeting 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 amended and restated articles of association that will become effective immediately prior to completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will notify you of the upcoming vote and deliver our voting materials to you, if we ask it to. We cannot assure you that you will receive the voting materials in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

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 it expedient in connection with the performance of its duties. The depositary may close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our 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

 

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requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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 of 2002 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.

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

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

 

   

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q, quarterly certifications by the principal executive and financial officers or current reports on Form 8-K;

 

   

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

 

   

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

 

   

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

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. 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. For example, U.S. domestic issuers are required to file annual reports within 60 to 90 days from the end of each fiscal year. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

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

As an exempted company incorporated in the Cayman Islands and listed on the NYSE, we are subject to corporate governance listing standards of NYSE. However, NYSE 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 NYSE corporate governance listing standards. We currently intend to follow Cayman Islands corporate governance practices in lieu of the corporate governance requirements of the NYSE that listed companies must have: (i) a majority of independent directors; (ii) a nominating/corporate governance committee composed entirely of independent directors; and (iii) an audit committee that consists of at least three members. To the extent that we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under NYSE corporate governance listing standards applicable to U.S. domestic issuers.

 

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There can be no assurance that we will not be a passive foreign investment company, or PFIC, for the current or any future taxable year, which could result in adverse U.S. federal income tax consequences to U.S. investors in the ADSs or our Class A 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 (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 treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties, and certain investment gains. Cash is generally a passive asset 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 the manner in which we conduct our business, the expected composition of our income and assets and the expected value of our assets (including goodwill, which is based on the expected price of the ADSs in this offering), we do not expect to be a PFIC for our current taxable year or the foreseeable future. However, our PFIC status for any taxable year is an annual factual determination that can be made only after the end of that year. Our PFIC status for any taxable year will depend on the composition of our income and assets and the value of our assets from time to time, including the value of our goodwill (which may be determined, in large part, by reference to our market capitalization, which could be volatile). Therefore, our risk of being or becoming a PFIC will increase if our market capitalization declines while we hold a substantial amount of cash (including cash raised in this offering) and financial investments. Moreover, it is not entirely clear how the contractual arrangements between us, our VIE and its nominal shareholders 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. Because of these uncertainties, there can be no assurance that we will not be a PFIC for our current or any future taxable year. If we were a PFIC for any taxable year during which a U.S. taxpayer held ADSs or Class A ordinary shares, the U.S. taxpayer generally would be subject to adverse U.S. federal income tax consequences, including increased tax liability on disposition gains and “excess distributions” (subject to alternative treatment if the U.S. taxpayer is able to and does make a valid mark-to-market election) and additional reporting requirements. See “Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.

Forward-looking statements appear in a number of places in this prospectus and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified under the section entitled “Risk Factors” in this prospectus. These risks and uncertainties include factors relating to:

 

   

general economic, political, demographic and business conditions in China and globally;

 

   

fluctuations in inflation and exchange rates in China and globally;

 

   

our ability to implement our growth strategy;

 

   

our ability to maintain and expand our brand portfolio, including our network of brand partners and third-party product suppliers, as well as our private label offerings;

 

   

our ability to maintain the popularity of or any loss of any of our leading brand partners;

 

   

our ability to maintain KOC loyalty or sustain growth of our KOC community;

 

   

our ability to compete and conduct our business in the future;

 

   

the availability of qualified personnel and the ability to retain such personnel;

 

   

the expected growth and competition in the lifestyle brand industry in China;

 

   

changes in government policies and regulation;

 

   

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

 

   

other risk factors discussed under “Risk Factors.”

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

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USE OF PROCEEDS

We expect to receive total estimated net proceeds from this offering of approximately US$59.1 million, or approximately US$68.7 million if the underwriters exercise their option to purchase additional ADSs in full, based on the initial public offering price at US$7.25 per ADS, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

We plan to use the net proceeds of this offering primarily for the following purposes:

 

   

approximately 50% for development of private label brands and brand partnerships;

 

   

approximately 20% for expansion and diversification of our marketing and distribution channels;

 

   

approximately 15% for enhancement of our technological capabilities; and

 

   

approximately 15% for working capital and other general corporate purposes, including potential strategic investments and acquisitions.

We have no present understandings, commitments or agreements to enter into any acquisitions or investments. The actual amount and timing of the planned spending for the purposes listed above will depend upon a number of factors, including the growth of our sales, competitive developments in lifestyle brands market and e-commerce, the actual capital expenditures and our cash flow from operations and the growth of our business and other factors described in “Risk Factors.” Accordingly, we will have broad discretion in deploying the net proceeds of this offering.

If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and to our consolidated VIE only through loans, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may restrict or delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries and making loans to our VIE or its subsidiaries, which could adversely affect our liquidity and our ability to fund and expand our business.” Additionally, while there is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, loans provided to our PRC subsidiaries and VIE in the PRC are subject to certain statutory limits. See “Regulation—Regulation on Foreign Debt” for more information about such statutory limits.

We are able to use all of the net proceeds from this offering for investment in our operations in the PRC by funding our PRC subsidiaries through capital contributions which is not subject to any statutory limit on the amount under PRC laws and regulations. We expect that the net proceeds from this offering to be used in the PRC will be in the form of RMB and, therefore, our PRC subsidiaries 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 the laws and regulations on the conversion from U.S. dollars into Renminbi.

 

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DIVIDEND POLICY

We have not previously declared or paid any cash dividend or dividend in kind and we have no plan to declare or pay any dividends in the near future on our shares or the ADSs representing our Class A ordinary shares. 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 rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation—Regulations on Dividend Distribution.” and “Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”

Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to 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. If we pay any dividends on our Class A 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 Class A ordinary shares, and the depositary then will pay such amounts to the 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.”

 

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CAPITALIZATION

The table below sets forth our capitalization as of December 31, 2020:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis to give effect to (i) the re-designation of 4,840,000 ordinary shares into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering; (ii) the re-designation of all of the remaining issued and outstanding ordinary shares into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and (iii) the issuance and sale of 931,035 Class A ordinary shares in this offering, and the receipt of approximately US$59.1 million in estimated net proceeds by us at the initial public offering price of US$7.25 per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, and the use of proceeds therefrom (assuming the underwriters do not exercise their option to purchase additional ADSs).

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

 

     Actual     Pro forma as adjusted(1)  
     RMB     US$     RMB     US$  
     (in thousands)  

Ordinary shares (par value of US$0.0001 per share; 500,000,000 shares authorized; 9,109,312 shares issued and 7,993,846 shares outstanding on an actual basis)

     5       1       —         —    

Class A ordinary shares (par value of US$0.0001 per share; 254,269,312 shares authorized; 4,084,881 shares issued and outstanding on a pro forma as adjusted basis)

     —      

 

—  

 

    3       —    

Class B ordinary shares (par value of US$0.0001 per share; 4,840,000 shares authorized; 4,840,000 shares issued and outstanding on a pro forma as adjusted basis)

     —      

 

—  

 

    3       1  

Additional paid-in capital

     833,855       127,794       1,219,344       186,873  

Statutory reserves

     9,984       1,530       9,984       1,530  

Accumulated deficit

     (408,099     (62,544     (408,099     (62,544

Accumulated other comprehensive income

     566       87       566       87  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Onion Global Limited shareholders’ equity

     436,311       66,868       821,801       125,947  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interests

     5,595       857       5,595       857  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     441,906       67,725       827,396       126,804  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

     441,906       67,725       827,396       126,804  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

The pro forma as adjusted information discussed above is illustrative only.

 

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DILUTION

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

Our net tangible book value as of December 31, 2020 was approximately US$64.2 million, or US$8.04 per ordinary share as of that date and US$0.80 per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our goodwill and total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share as adjusted from the initial public offering price per ordinary shares. Because holders of the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in such net tangible book value after December 31, 2020, other than to give effect to our issuance and sale of 9,310,350 ADSs offered in this offering (assuming the underwriters do not exercise their over-allotment option) at the initial public offering price of US$7.25 per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been approximately US$123.3 million, or US$13.82 per ordinary share and US$1.38 per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$58.68 per ordinary share, or US$5.87 per ADS, to purchasers of ADSs in this offering.

The following table illustrates the dilution at the initial public offering price of US$7.25 per ADS, and all ADSs are exchanged for Class A ordinary shares:

 

Initial public offering price per Class A ordinary share

     US$72.50  

Net tangible book value per ordinary share as of December 31, 2020

     US$  8.04  

Pro forma net tangible book value per ordinary share as adjusted to give effect to this offering

     US$13.82  

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

     US$58.68  

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

     US$  5.87  

The pro forma information discussed above is illustrative only.

The following table summarizes, on a pro forma basis as of December 31, 2020, the differences between the existing shareholders and the new investors with respect to the number of Class A ordinary shares purchased from us in this offering, the total consideration paid and the average price per Class A ordinary share paid at the initial public offering price of US$7.25 per ADS, before deducting underwriting discounts and commissions and estimated offering expenses. The total number of Class A ordinary shares does not include 139,655 Class A ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option to purchase additional ADSs granted to the underwriters.

 

                  Total Consideration               
     Class A Ordinary
shares Purchased
    Amount (in
thousands of
US$)
           Average Price
Per Class A
Ordinary Share
     Average Price
Per ADS
 
     Number      Percent      Percent     US$      US$  

Existing shareholders

     7,993,846        90     127,795        65     16.00        1.60  

New investors

     931,035        10     67,500        35     72.50        7.25  

Total

     8,924,881        100     195,295        100     

 

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The discussion and tables above also assume no exercise of any stock options outstanding as of the date of this prospectus. As of the date of this prospectus, we have granted 1,109,697 RSUs corresponding to 1,109,697 ordinary shares under the 2019 RSU Scheme, excluding awards that were forfeited, cancelled or exercised after the relevant grant dates, and all of such RSUs remain outstanding and unvested as of the date of this prospectus. Such ordinary shares will be redesignated as Class A ordinary shares on a one-on-one basis immediately prior to the completion of this offering. To the extent that any of these RSUs become vested, there will be further dilution to new investors in our company.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

We were incorporated in the Cayman Islands in order to enjoy the following benefits:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

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

 

   

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; and

 

   

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

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

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and a substantial portion 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 persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Cogency Global Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, and JunHe LLP, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

   

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

 

   

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

Maples and Calder (Hong Kong) LLP has informed us that it is uncertain whether the courts of the Cayman Islands will allow shareholders of our company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. Maples and Calder (Hong Kong) LLP has

 

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informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

PRC

We have been advised by JunHe LLP, our PRC legal counsel, that there is uncertainty as to whether the courts of the PRC would enforce judgments of United States courts or Cayman courts obtained against us or these persons predicated upon the civil liability provisions of the United States federal and state securities laws. JunHe LLP has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on 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. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. However, it would be difficult for foreign shareholders to establish sufficient nexus to the PRC by virtue only of holding the ADSs or Class A ordinary shares.

 

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CORPORATE HISTORY AND STRUCTURE

Our Corporate History

Guangzhou Onion Vogue Group Co., Ltd. (formerly known as Guangzhou Liangkeshu Network Technology Co., Ltd.), or Guangzhou Onion was incorporated in July 2009. We formally commenced our operations via Guangzhou Onion starting in September 2015. In June 2018, Onion Global Limited, our current ultimate holding company, was incorporate under the laws of the Cayman Islands. In July 2018, Guangzhou Transasia Trading Co., Ltd. (formerly known as Guangzhou He Shanshan Investment Co., Ltd.) was established as our wholly foreign owned entity, or WFOE, to control Guangzhou Onion. From 2017 to 2020, we also established a number of overseas entities (which are currently not material to our group as a whole) in South Korea, Japan, Thailand and Malaysia, with a view to expand our overseas business in the future.

Each of Guangzhou Onion and several of its subsidiaries is holding an ICP license to operate our online data and transaction processing business, which falls into the category of value-added telecommunications services. Because of the restrictions on foreign ownership of companies providing value-added telecommunications services and to ensure compliance with the PRC laws and regulations, WFOE entered into a series of contractual arrangements with Guangzhou Onion and each of its shareholders, as amended and restated, through which we obtained control over Guangzhou Onion. We also delivered a financial support letter to Guangzhou Oinion, pursuant to which we undertake to provide unlimited financial support to Guangzhou Onion, including provision of cash, entrusted loans and borrowings, to the extent permissible under the applicable PRC laws and regulations. As a result of these contractual arrangements, we exert effective control over, and are considered the primary beneficiary of, Guangzhou Onion. We treat Guangzhou Onion and its subsidiaries as our consolidated affiliated entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP. For more details and risks related to our VIE structure, please see “Our History and Corporate Structure—Contractual Arrangements with Our VIE and Its Shareholders” and “Risk Factors—Risks Relating to Our Corporate Structure.”

 

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Our Corporate Structure

The following diagram illustrates our corporate structure, including our significant subsidiaries and VIE, immediately upon the completion of this offering.

 

 

Notes:

(1)

Shareholders of Guangzhou Onion Vogue Group Co., Limited are: Purple Gas Was Shawn Limited Partnership, Hangzhou Xianfeng Qiyun Investment Limited Partnership, Guangzhou Yilian Equity Investment Partnership (Limited Partnership), Shenzhen Futian SAIF Dynamiques Equity Investment Fund Partnership (Limited Partnership), Xiamen SAIF Equity Investment Partnership (Limited Partnership), Beijing Liangjun Junze Management Center (Limited Partnership), Beijing Liangjun Huize Management Center (Limited Partnership), Beijing Liangjun Ruize Management Center (Limited Partnership), Goldjet Logistics Group Co., Ltd. and Beijing Liangjun Hongze Management Center (Limited Partnership), all of whom are also shareholders of Onion Global Limited.

(2)

Nine subsidiaries of Guangzhou Onion are: Guangzhou Onion Fans Technology Co., Ltd., Doubletree (Tibet) Trading Co., Ltd., Guangzhou Lifestyle Co., Ltd., Guangzhou Peacheese Information Technology Co., Ltd., Guangzhou Ocean Unbounded Technology Co., Ltd., Guangzhou Young Internet Co., Ltd., Zhuhai Young Supply Chain Technology Co., Ltd., Guangzhou EQuick Technology Co., Ltd., and VOYAGE OF THE DAWN TRADING LIMITED (a Hong Kong company).

 

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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 and related businesses. We are a company registered in the Cayman Islands, our PRC subsidiaries, are considered as foreign-invested enterprises. To comply with PRC laws and regulations, we use Guangzhou Onion, our VIE in the PRC, to provide internet information services. Through a series of contractual arrangements, we exercise effective control over, and are considered the primary beneficiary of, our VIE and consolidate its operating results in our financial statements under the U.S. GAAP.

In the opinion of JunHe LLP, our PRC legal counsel, (i) the ownership structure of WFOE, our VIE and subsidiaries of the VIE are not in violation with applicable PRC laws and regulations currently in effect and (ii) each of the contractual arrangements described below are valid, binding and enforceable, and do not result in any violation of PRC laws or regulations currently in effect. However, these contractual arrangements may not be as effective in providing control as direct ownership. There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. We have been further 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.”

The following is a summary of the contractual arrangements by and among WFOE, our VIE and its shareholders. For the complete text of these contractual arrangements, please see the copies filed as exhibits to the registration statement filed with the SEC of which this prospectus forms a part.

Exclusive Business Cooperation Agreement

Guangzhou Onion entered into an exclusive business cooperation agreement on September 19, 2018, as amended and restated on September 26, 2020 with WFOE (the “Exclusive Business Cooperation Agreement”). Pursuant to the Exclusive Business Cooperation Agreement, WFOE has the exclusive right to provide technical support, business support and consulting services related to Guangzhou Onion and its subsidiaries. In exchange for these services, Guangzhou Onion and its subsidiaries pay service fees to WFOE in an amount equal to 100% of the consolidated net profit and other service fees based on the nature of the services rendered to Guangzhou Onion. The service fees can be adjusted at the sole discretion of WFOE. Without the prior written consent of WFOE, Guangzhou Onion and its subsidiaries may not procure services from any third party or enter into similar service arrangements with any other third party, while WFOE has the right to designate any party to provide such services. The agreement will remain in effect for ten years and will be automatically renewed for another ten years unless WFOE unilaterally terminates the agreement by giving written notification, or until all the equity interests in or assets of Guangzhou Onion have been acquired by WFOE, whereas under no circumstances may Guangzhou Onion terminate this agreement.

Exclusive Call Option Agreement

Each of the shareholders of Guangzhou Onion entered into an exclusive call option agreement with WFOE and Guangzhou Onion on September 19, 2018, as amended and restated on September 26, 2020 (the “Exclusive Call Option Agreement”). Under the Exclusive Call Option Agreement, each of shareholders of Guangzhou Onion irrevocably and unconditionally granted WFOE, or its designee(s) an option to purchase all or a portion of its respective equity interest in Guangzhou Onion at the minimum price permitted by applicable PRC laws. In addition, Guangzhou Onion irrevocably and unconditionally granted WFOE, or its designee(s) an option to purchase all or a portion of its assets at the minimum price permitted by applicable PRC laws. Any proceeds received by the shareholders from the exercise of the right shall be remitted to the WFOE or its designee(s). Each

 

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of the shareholders of Guangzhou Onion agreed that without WFOE’s written consent, among others, it shall not transfer, mortgage or create any security interest on any of its equity interest in Guangzhou Onion. Additionally, each of the shareholders of Guangzhou Onion further agreed that without WFOE’s written consent, among other things, it shall not transfer or dispose any of its equity interest in its subsidiaries. The shareholders cannot request any dividends or other form of assets. If dividends or other form of assets were distributed, the shareholders are required to transfer all received distribution to the WFOE or its designee(s). The Exclusive Call Option Agreement shall remain binding and effective until the termination of the Equity Interest Pledge Agreement either upon the request of WFOE or when all of the equity interest in or assets of Guangzhou Onion’s have been transferred to WFOE under the Exclusive Call Option Agreement.

Voting Rights Proxy Agreement

Each of the shareholders of Guangzhou Onion has signed a voting rights proxy agreement with WFOE and Guangzhou Onion on September 19, 2018, as amended and restated on September 26, 2020 (the “Voting Rights Proxy Agreement”). Under the Voting Rights Proxy Agreement, Guangzhou Onion and its shareholders agreed to irrevocably entrust WFOE to represent his, her or its to exercise all the voting rights to which it is entitled to as a shareholder of Guangzhou Onion, including but not limited to proposing to convene or attend shareholder meetings, signing resolutions and minutes of such meetings, exercising all the rights as shareholders in such meeting (including but not limited to voting rights, nomination rights and appointment rights), and the right to sell, transfer, pledge or dispose of all the equity held in part or in whole, and exercising all other rights as shareholders. WOFE has the right to reassign or transfer rights related to Guangzhou Onion’s equity interest to any other person or entity at any time upon written notice without consent from our VIE’s shareholders. The Voting Rights Proxy Agreement shall remain effective until the termination of this agreement either at WFOE’s sole discretion or when all of the equity interest or all of the assets of Guangzhou Onion have been transferred to WFOE.

Equity Interest Pledge Agreement

Guangzhou Onion and each of its shareholders entered into an equity interest pledge agreement with WFOE, dated September 19, 2018, as amended and restated on September 26, 2020 (the “Equity Interest Pledge Agreement”). Under the Equity Interest Pledge Agreement, each shareholder of Guangzhou Onion has irrevocably and unconditionally pledged its equity interest in Guangzhou Onion to WFOE to secure their obligations under the Exclusive Business Cooperation Service Agreement, the Exclusive Call Option Agreement and the Voting Rights Proxy Agreement. The WFOE or its designee(s) will have the right to receive all of Guangzhou Onion’s dividends and profits distributed on the pledged equity. If Guangzhou Onion or any of its shareholders breaches its contractual obligations, the WFOE is entitled to certain rights regarding the pledged equity interests, including the right to receive proceeds from the auction or sale of all or part of the pledged equity interests of Guangzhou Onion in accordance with PRC law. Each shareholder of Guangzhou Onion further agreed to not transfer or pledge their respective equity interest in Guangzhou Onion without the prior written consent of WFOE. The Equity Interest Pledge Agreement will remain binding until the pledgors discharged all of their obligations under the Exclusive Business Cooperation Service Agreement, the Exclusive Call Option Agreement and the Voting Rights Proxy Agreement. The Equity Interest Pledge Agreement may also be terminated either at WFOE’s sole discretion or when all of the equity interest in or assets of Guangzhou Onion have been transferred to WFOE under the Exclusive Call Option Agreement.

Financial Support Letter

We executed a financial support letter dated September 19, 2018, addressed to Guangzhou Liangkeshu Network Technology Co., Ltd., the predecessor of Guangzhou Onion (the “Financial Support Letter”). Pursuant to the Financial Support Letter, we undertake to provide unlimited financial support to Guangzhou Onion, including provision of cash, entrusted loans and borrowings, to the extent permissible under the applicable PRC laws and regulations. We will not request repayment of the loans or borrowings if Guangzhou Onion or their

 

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shareholders do not have sufficient funds or are unable to repay. The Financial Support Letter may be terminated until the earlier of (1) the date on which all of the equity interests of Guangzhou Onion have been acquired directly or indirectly by us or our designated representative (individual or legal person); or (2) the date of unilateral termination by us, at our sole and absolution discretion, or (3) by giving thirty (30) days prior written notice to Guangzhou Onion of our intention to terminate this letter.

We expect to provide the financial support if and when required with a portion of the proceeds from this offering and proceeds from the issuance of equity or debt securities in the future.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

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

The following table presents our selected consolidated statements of comprehensive (loss)/income data for the years ended December 31, 2018, 2019 and 2020.

 

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

Summary Consolidated Statement of Comprehensive (Loss)/Income Data:

       

Revenues:

       

Total revenues

    1,805,220       2,850,724       3,810,660       584,009  

Operating cost and expenses:

       

Cost of revenues

    (1,437,612     (2,308,004     (3,032,110     (464,691

Fulfillment expenses

    (225,066     (212,183     (201,635     (30,902

Technology and content expenses

    (17,395     (19,889     (24,316     (3,727

Selling and marketing expenses

    (113,016     (127,160     (243,784     (37,362

General and administrative expenses(1)

    (77,084     (50,597     (63,151     (9,678
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating cost and expenses

    (1,870,173     (2,717,833     (3,564,996     (546,360
 

 

 

   

 

 

   

 

 

   

 

 

 

Other operating income

    1,100       13,105       10,238       1,569  
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from operations

    (63,853     145,996       255,902       39,218  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other (expenses)/income:

       

Interest income

    3,613       1,529       6,758       1,036  

Interest expense

    (673     (87     (755     (116

Foreign exchange loss

    (12,704     (21,240     (20,168     (3,091

Other (expenses)/income, net

    (7,234     (4,369     14,992       2,298  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expenses)/income

    (16,998     (24,167     827       127  
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income taxes and share of losses from equity method investments

    (80,851     121,829       256,729       39,345  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

    (13,370     (15,067     (29,848     (4,574
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before share of losses from equity method investments

    (94,221     106,762       226,881       34,771  
 

 

 

   

 

 

   

 

 

   

 

 

 

Share of losses from equity method investments

    (529     (3,928     (18,879     (2,893
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (94,750     102,834       208,002       31,878  
 

 

 

   

 

 

   

 

 

   

 

 

 

Less: net loss attributable to non-controlling interests

    (346     (361     (1,657     (254
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to Onion Global Limited

    (94,404     103,195       209,659       32,132  

Accretion to redemption value of redeemable preferred shares

    (17,167     —         —         —    

Deemed dividend—extinguishment of redeemable preferred shares

    (511,190     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to ordinary shareholders

    (622,761     103,195       209,659       32,132  

 

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

(Loss)/earnings per share:

       

Basic and diluted

    (109     13       26       4  

Weighted average shares outstanding used in (loss)/earnings per share computation:

       

Basic and diluted

    5,738,630       7,993,846       7,993,846       7,993,846  

Other comprehensive income/(loss)

       

Foreign currency translation adjustment net of tax of nil

    665       (70     737       113  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income/(loss), net of tax

    665       (70     737       113  
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income

    (94,085     102,764       208,739       31,991  

Less: Comprehensive loss attributable to non-controlling interests

    (202     (308     (1,536     (235
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income attributable to Onion Global Limited

    (93,883     103,072       210,275       32,226  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the Year Ended December 31,  
     2018      2019      2020  
     RMB      RMB      RMB      US$  
     (in thousands, except for percentages,
shares and per share data)
 

Share-based compensation expenses:

           

General and administrative expenses

     39,515        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     39,515        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents our selected consolidated balance sheet data as of December 31, 2018, 2019 and 2020.

 

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

Summary Consolidated Balance Sheet Data:

           

Cash and cash equivalents

     99,802        230,632        241,706        37,403  

Restricted cash

     —          —          8,014        1,228  

Short-term investments

     —          67,600        103,217        15,819  

Accounts receivable, net

     1,885        1,437        9,433        1,446  

Inventories, net

     261,986        468,668        442,628        67,836  

Loan receivable, net

     —          —          5,575        854  

Prepayments and other current assets

     100,765        94,005        189,812        29,092  

Amounts due from related parties

     4,951        9,539        9,358        1,434  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     469,389        871,881        1,009,743        154,752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     510,973        909,324        1,059,312        162,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term bank loans

     —          1,924        24,200        3,709  

Accounts payable

     21,840        68,730        145,995        22,375  

Customer advances and deferred revenue

     228,556        378,307        174,456        26,737  

Amounts due to related parties

     770        869        —          —    

Income tax payable

     7,853        20,694        37,969        5,819  

Accrued expenses and other liabilities

     125,492        207,141        233,587        35,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     384,511        677,665        616,207        94,440  
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term loan

     —          —          1,199        184  

Customer advances and deferred revenue

     —          2,121        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     384,511        679,786        617,406        94,624  
  

 

 

    

 

 

    

 

 

    

 

 

 

Onion Global Limited shareholders’ equity

     123,416        226,036        436,311        66,868  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

     126,462        229,538        441,906        67,725  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ equity

     510,973        909,324        1,059,312        162,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents our selected consolidated cash flow data for the years ended December 31, 2018, 2019 and 2020.

 

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

Summary Consolidated Cash Flow Data:

   

Net cash (used in)/generated from operating activities

    (2,595     199,828       55,243       8,465  

Net cash generated from/(used in) investing activities

    8,157       (71,164     (60,070     (9,207

Net cash (used in)/generated from financing activities

    (89,769     2,236       23,395       3,586  

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

    665       (70     520       81  

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

    (83,542     130,830       19,088       2,925  

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

    183,344       99,802       230,632       35,346  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    99,802       230,632       249,720       38,271  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a lifestyle brand platform that incubates, markets and distributes the world’s fresh, fashionable and future brands to young people in China and across Asia.

As of December 31, 2020, products of 4,001 brands were offered on our platform, including brands from our 86 brand partners, brands procured from hundreds of authorized distributors and resellers around the globe, as well as 21 private label brands. The GMV generated by sales of products from our brand partners that directly work with us on our self-operated retail platform, O’Mall, increased by 125.5% from RMB428.8 million in 2018 to RMB966.8 million in 2019, and further by 35.5% to RMB1,309.9 million in 2020 from 2019. The GMV generated by sales of our private label products on O’Mall reached RMB50.9 million in 2020 despite only having launched our private label business in 2018. GMV is one of the key operating metrics which we use to measure our business growth and the attractiveness of our platform as compared with our peers. Additionally, we use GMV as one of the metrics in evaluating the performance of our employees and other stakeholders of our business for purposes related to compensation, bonus and others.

Our omni-channel marketing and distribution empowers brands with the technology and services to reach the widest and most relevant consumer base. We help brands build a large, loyal following through over 516 thousand active KOCs we had as of December 31, 2020 that promote our products and share their shopping experience through social media.

Through our advanced technology and global supply chain capabilities, we enable seamless delivery of products manufactured and sourced around the world to Chinese consumers at competitive prices. We have processed 5.5 million, 10.3 million and 15.8 million orders for the years ended December 31, 2018, 2019 and 2020, respectively. The delivery time for these orders were generally around ten days for products shipped directly from overseas to China and one to four days for products we pre-stocked in our bonded warehouses in China and Hong Kong hub facility, compared to an industry average of approximately 15 days and five days, respectively, in China’s cross-border online retail industry.

We have achieved rapid profit growth at scale. Within five years since the commencement of our operations, we achieved RMB3,810.7 million (US$584.0 million) revenues in 2020. Our net income increased from net loss of RMB94.8 million in 2018 to net income of RMB102.8 million in 2019, and further grew by 102.3% from 2019 to net income of RMB208.0 million (US$31.9 million) in 2020. At the same time, our net margin as measured by net income as a percentage of total revenues increased from 3.6% in 2019 to 5.5% in 2020.

Our results of operations and financial condition are affected by the general factors affecting China’s retail industry, including, among others, China’s overall economic growth, the increase in per capita disposable income, the growth in consumer spending and consumption upgrade, and the competitive environment in China. In addition, they are also affected by factors driving online retail in China, such as the growing number of online shoppers, the improved logistics infrastructure and the increasing adoption of mobile payments. Unfavorable changes in any of these general factors could materially and adversely affect our results of operations.

Since January 2020, the emergence and wide spread of COVID-19 has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in the United States and China and elsewhere.

 

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Substantially all of our operating and workforce are based in China. Consequently, our business operations had been adversely affected by the foregoing measures for a temporary period of time. Since the outbreak of the COVID-19 pandemic in late January and until it peaked in March in China, we had experienced temporary disruptions to our business operations, such as temporary closure of office facilities and shortage of human resources. During such short period of time, the COVID-19 outbreak resulted in temporary factory closures, supply chain disruptions and disruption of transportation of goods produced in China and other affected regions, impacting our suppliers’ manufacturing and product sourcing activities. Also, since some our third-party suppliers and manufacturers are based overseas, we may continue to experience supply chain disruptions and delayed delivery of products. Although most of our product marketing and customer engagement operations are online which were affected by the COVID-19 outbreak to a much less extent, we cannot assure you that our business will not suffer from a general downturn of the lifestyle brands industry caused by the outbreak. Additionally, the recoverability of long-term investments and balances due from equity investee may be negatively affected by COVID-19 due to the disruptions it caused. Despite such limited impacts, the COVID-19 outbreak had not resulted in any material adverse impact on our financial performance as a whole, which was evidenced by our financial condition including profitability, liquidity and cash flows in 2020 compared to the same period in 2019. Nevertheless, any potential impact to our business will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by government authorities and other entities to contain COVID-19 or treat its impact, almost all of which are beyond our control. See “Risk Factors—Risks related to Our Business and Industry—Any occurrence of a natural disaster or widespread health epidemic, including the recent COVID-19 outbreak, could have a material adverse effect on our business, financial condition and results of operations.” We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, or that we determine are in the best interests of our employees, business partners and shareholders. At this point, the extent to which the COVID-19 pandemic may impact our business, operations and regulatory and commercialization timelines remains uncertain

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

Our ability to further develop our brand portfolio and promote private label products

We will continue to further develop our brand and product offerings and optimize our product mix catering to customers’ demands and drive customer spending and profitability. As of December 31, 2020, we offered more than 61.3 thousand SKUs covering 4,001 brands. We review and continually monitor the performance of each of the third-party brands and private label brands and carefully manage the mix of brands and products we offer, based on a number of metrics such as customer preferences, revenue contributions and gross margin performances. As our business further grows in scale, we strive to obtain more favorable terms from our product suppliers, which include our brand partners as well as authorized distributors and resellers of third-party brands around the globe. In addition, we aim to create value for our product suppliers, particularly those 86 brand partners that we directly work with to market and distribute their products, by providing an effective sales and distribution channel, offering them valuable insights into customer preferences and demand trends, and ensuring the high quality of fulfillment services.

Through further developing our brand portfolio, we will continue to support the growth of third-party brands with attractive margin profiles and large customer base, providing them with access to our growing bases of users and KOCs and reliable and efficient fulfillment infrastructure. The GMV generated by sales of products of third-party brands sourced from authorized distributors and resellers of third-party brands on O’Mall increased from RMB1,633.9 million in 2018 to RMB2,539.8 million in 2019, and further to RMB2,649.2 million in 2020. The GMV generated by sales of products from our brand partner on O’Mall increased rapidly from RMB428.8 million in 2018 to RMB966.8 million in 2019, and further to RMB1,309.9 million in 2020.

In addition to third-party brands, we will further promote private label brands and products portfolio, from which we can realize higher gross margin compared to third-party brands. We have launched a number of private

 

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labels and will continue to accumulate data insights on customer behavior and tailor our private label product offerings accordingly. The GMV generated by sales of our private label products on O’Mall reached RMB50.9 million in 2020 despite only having launched our private label business in 2018. Through working closely with our manufacturing partners, we expect to further improve the profitability of our private label products while achieving sales at scale.

Our ability to drive the growth and engagement of our customers and active KOCs

Attracting, engaging and retaining customers and active KOCs have been one of our key focuses since our inception. We measure our effectiveness in attracting, engaging and retaining customers and active KOCs through several key performance indicators, including the number of active buyers and active KOCs on our platform and the number of orders we fulfill. The total number of orders fulfilled by us increased rapidly from approximately 5.5 million in 2018 to 10.3 million in 2019 and further to 15.8 million in 2020.

Our ability to attract and retain customers and KOCs and increase their levels of engagement depends on our ability to continue to offer carefully curated products at attractive prices, provide superior shopping and social experience, and promote and enhance our community value as a whole.

We significantly depend on our active KOCs’ ability to promote and distribute products to potential customers. We have been able to build a large base of KOCs through, among other means, word-of-mouth referrals via our active KOCs’ social networks. The total number of our active KOCs grew from approximately 254.0 thousand as of the end of 2018 to 385.2 thousand as of the end of 2019 and further to 516.3 thousand as of the end of 2020. To grow our KOCs community and keep them engaged, we offer them a broad coverage of product categories with the goal of catering to the various daily needs of our customers and their households, and provide our KOCs with effective sales and marketing support to drive their sales efficiency and results.

Our ability to efficiently execute our sales and marketing strategies to promote brands and products

The growth of our business partly depends on, among others, our ability to expand and broaden marketing and distribution channels. We have developed a unique and comprehensive suite of marketing and distribution solutions to facilitate brands’ engagement with a wider audience in today’s digit and global shopping environment. As part of our organic growth strategy, we will strengthen our marketing capabilities and continue to expand our distribution channels efficiently. We expect our sales and marketing expenses to increase in absolute amounts in the foreseeable future as our business scale grows and as we seek to promote our brand partners and private labels and increase the brand awareness of our customers. Our selling and marketing expenses were RMB113.0 million in 2018, RMB127.2 million in 2019 and RMB243.8 million (US$37.4 million) in 2020. The selling and marketing expenses as a percentage of total revenues was 6.3%, 4.5% and 6.4% in 2018, 2019 and 2020, respectively. In anticipation of economic activity disruption caused by COVID-19, we specially increased our investment in marketing and promotion in order to solidify and increase our market share. Our ability to maintain and expand marketing and distribution channels and to conduct sales and marketing efficiently is critical to our continuing success.

Our ability to fulfill orders cost-effectively

Our results of operations depend in part on our ability to fulfill orders quickly and accurately, as it is an important part of a compelling customer experience. We provide centralized and comprehensive fulfillment and customer service to users primarily through collaboration with contracted third-party vendors. We have historically primarily relied on third-party logistics service providers to connect our warehouses and provide last-mile delivery and third-party online payment platforms to provide various payment options. Our fulfillment expenses decreased from RMB225.1 million in 2018 to RMB212.2 million in 2019, and further to RMB201.6 million (US$30.9 million) in 2020. The fulfillment expenses as a percentage of total revenues was 12.5% in 2018, 7.4% in 2019 and 5.3% in 2020. The improved cost efficiency shown in the decrease of such percentages

 

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was mainly attributable to our strategy to cooperate with more logistics services providers to secure competitive pricing, and our effort to optimize our own smart logistics system to manage our warehouse storage more efficiently.

We plan to expand the fulfillment infrastructure over the next several years to accommodate our future expansion plans and enhance customer experience. As our customer base grows and business evolves, we may invest more resources in building, upgrading and operating fulfillment facilities and hiring our own personnel to better meet the demands of our anticipated growth, and we plan to make such investments in a cost-effective manner.

Our ability to effectively invest in technology

We have invested, and will continue to invest, in research and development and technology. As our business grows, and as we continue to expand and enhance our platform, we will invest in personnel with expertise in data analytics and AI technologies, and other research and development personnel. In addition, we have dedicated and will continue to dedicate significant resources to research and development efforts, focusing on developing innovative applications and solutions aimed at providing more convenience to users, further enhancing our supply chain management capabilities and increasing our operational efficiency. Moreover, we will also continue to invest resources in the expansion and enhancement of our technology infrastructure to support the growth of our business. We expect that our research and development expenses will increase significantly in the near future.

Key Components of Results of Operations

Revenues

The following table sets forth a breakdown of our revenues, in absolute amounts and as a percentage of total revenues, for the periods indicated:

 

     For the Year Ended December 31,  
     2018     2019     2020  
     RMB      %     RMB      %     RMB      US$      %  
    

(in thousands, except for percentages)

 

Revenues

                  

Product revenues

     1,642,263        91.0     2,609,922        91.6     3,572,192        547,462        93.7

Services revenues

     162,957        9.0     240,802        8.4     238,468        36,547        6.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     1,805,220        100.0     2,850,724        100.0     3,810,660        584,009        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Product revenues. We generate a vast majority of our revenues from sale of products through our e-commerce platforms, including from (i) products sourced from third-party product suppliers (including both (1) authorized resellers and distributors of third-party brands and (2) third-party brand partners from whom we directly procure products), and to a lesser extent, (ii) products of our own private labels. Revenues generated from sales of products via our e-commerce platforms are recorded as revenues from sale of merchandise, net of sales taxes and other similar taxes and cash discount offers, when accepted by the customers. We also periodically provide incentives and coupons to our customers to encourage purchases. As the customers are required to make future purchases to redeem coupons, the coupons are recognized net of revenues when the future transactions take place. In addition, we launched a customer loyalty program in January 2019, under which we issue loyalty points to customers when they purchase products from us. Loyalty points are not redeemable for cash but can be offset against payments when customers make their future purchases or exchange for a 12-month trial of a KOC account. We consider loyalty points as a separate performance obligation and allocate the transaction price proportionally between the products sold and the loyalty points granted on a relative standalone selling price basis in consideration of the likelihood of future redemption and the equivalent value per loyalty points when it is redeemed. We expect revenues generated from sale of merchandise will continue to account for a substantial majority of our total revenues in the near future.

 

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Services revenues. We also generate a small portion of our revenues from our provision of (i) subscription services and (ii) marketplace services. We earn subscription service revenues from our KOCs, who paid a non-refundable upfront subscription fee in exchange for the registration of their KOC accounts with our platform. We initially recorded subscription fees as deferred revenues which are recognized as revenues over the period of the estimated active KOC subscription period, which we estimate to be no more than two years. In addition, before July 2019, we also provided marketplace services where we acted as an agent to certain product suppliers to facilitate the sales or display of their products on our platform. We receive service fees from such product suppliers based on an agreed-upon rate of net sales (net of sales return) of their products upon delivery to and acceptance by the product buyers.

Operating Cost and Expenses

The following table sets forth a breakdown of our total operating cost and expenses, in absolute amounts and as a percentage of total operating expenses, for the periods indicated:

 

     For the Years Ended December 31,  
     2018      2019      2020  
     RMB     %      RMB     %      RMB     US$     %  
    

(in thousands, except for percentages)

 

Operating cost and expenses:

                

Cost of revenues

     (1,437,612     77.0        (2,308,004     84.9        (3,032,110     (464,691     85.0  

Fulfillment expenses

     (225,066     12.0        (212,183     7.8        (201,635     (30,902     5.7  

Technology and content expenses

     (17,395     0.9        (19,889     0.7        (24,316     (3,727     0.7  

Selling and marketing expenses

     (113,016     6.0        (127,160     4.7        (243,784     (37,362     6.8  

General and administrative expenses

     (77,084     4.1        (50,597     1.9        (63,151     (9,678     1.8  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating cost and expenses

     (1,870,173     100.0        (2,717,833     100.0        (3,564,996     (546,360     100.0  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cost of Revenues

Cost of revenues mainly consists of cost associated with procuring products, KOC incentives, and others such as inventory provisions. Cost associated with procuring products for sales on our platform constituted substantially all of our cost of revenues during the indicated periods. KOC incentives are commissions paid by us to active KOCs based on a completed sales transaction referred by such active KOCs. Below is a breakdown of our cost of revenues by nature, in absolute amounts and as percentage of total cost of revenues.

 

     For the Years Ended December 31,  
     2018      2019      2020  
     RMB     %      RMB     %      RMB     US$     %  
     (in thousands, except for percentages)  

Cost of revenues:

                

Cost associated with procuring products

     (1,066,079     74.2        (1,758,380     76.2        (2,431,228     (372,601     80.2  

KOC incentives

     (368,129     25.6        (543,498     23.5        (596,102     (91,357     19.6  

Others

     (3,404     0.2        (6,126     0.3        (4,780     (733     0.2  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     (1,437,612     100.0        (2,308,004     100.0        (3,032,110     (464,691     100.0  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Payment processing, packaging material and product delivery costs are classified as fulfillment expenses in the consolidated statements of comprehensive (loss)/income. The cost of revenues does not include outbound shipping and handling expenses, payroll, bonus and benefits of logistic staff or logistic centers rental expenses, therefore our cost of revenues may not be comparable to other companies which include such costs and expenses in their cost of revenues.

Fulfillment expenses. Fulfillment expenses mainly consist of (i) expenses incurred in operating our warehouses, including rental and personnel costs, (ii) expenses charged by external logistic service providers for

 

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dispatching and delivering our products, and (iii) payment processing and related transaction costs charged by third-party payment platforms.

Technology and content expenses. Technology and content expenses mainly consist of payroll and related expenses for our employees involved in research and development, designing, developing and maintaining our editorial content and social e-commerce platforms and developing and improving our data technologies. Technology and content expenses also include equipment and software depreciation, bandwidth costs and other expenses which are necessary to support our business. To date, expenditures incurred between when the application has reached the development stage and when it is substantially complete and ready for its intended use have been insignificant and as a result, we did not capitalize any qualifying software development costs. We expense technology and content expenditures as they were incurred.

Selling and marketing expenses. Selling and marketing expenses primarily consist of staff cost, promotion and marketing expenses, and others. We expect our sales and marketing expenses to increase in absolute amounts in the foreseeable future as our business scale grows and as we seek to promote our brand partners and private labels to increase their brand awareness.

General and administrative expenses. General and administrative expenses mainly consist of payroll and related costs for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources, professional fees and other general corporate expenses, as well as costs associated with the use by these functions of facilities and equipment, such as depreciation and operating lease costs. We expect our general and administrative expenses to increase in absolute amounts in the foreseeable future due to the anticipated growth of our business as well as accounting, insurance, investor relations and other public company costs.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to tax on income or capital gains arising from the Cayman Islands. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

Hong Kong

Our subsidiaries in Hong Kong are subject to the Hong Kong profits tax of 16.5% on their activities conducted in Hong Kong. Under the Hong Kong tax law, our subsidiaries in Hong Kong are exempted from income tax on their foreign derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

PRC

Our subsidiaries incorporated in China and our VIE are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. For example, enterprises qualified as “High and New Technology Enterprises” are entitled to a 15% enterprise income tax rate rather than the 25% uniform statutory tax rate. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

Our PRC subsidiaries are subject to value-added taxes, or VAT, at a rate from 6% to 16% on our products and services, less any deductible VAT we have already paid or borne. They are also subject to surcharges on

 

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VAT payments in accordance with PRC laws. As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries. The PRC EIT Law and its implementing rules provide that dividends paid by a PRC entity to a nonresident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In October 2019, the State Administration of Taxation revised the Administrative Measures for Nonresident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 35, which became effective on January 1, 2020. SAT Circular 35 provides that nonresident enterprises are not required to obtain preapproval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, we may be able to benefit from the 5% withholding tax rate for the dividends received from PRC subsidiaries if we satisfy the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 35, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a PRC resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. We believe our company is not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with us. If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.”

 

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Results of Operations

The following table sets forth our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of total revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

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

Summary Consolidated Statement of Comprehensive (Loss)/Income Data:

       

Revenues:

       

Total revenues

    1,805,220       2,850,724       3,810,660       584,009  

Operating cost and expenses:

       

Cost of revenues

    (1,437,612     (2,308,004     (3,032,110     (464,691

Fulfillment expenses

    (225,066     (212,183     (201,635     (30,902

Technology and content expenses

    (17,395     (19,889     (24,316     (3,727

Selling and marketing expenses

    (113,016     (127,160     (243,784     (37,362

General and administrative expenses(1)

    (77,084     (50,597     (63,151     (9,678
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating cost and expenses

    (1,870,173     (2,717,833     (3,564,996     (546,360
 

 

 

   

 

 

   

 

 

   

 

 

 

Other operating income

    1,100       13,105       10,238       1,569  
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from operations

    (63,853     145,996       225,902       39,218  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other (expenses)/income:

       

Interest income

    3,613       1,529       6,758       1,036  

Interest expense

    (673     (87     (755     (116

Foreign exchange loss

    (12,704     (21,240     (20,168     (3,091

Other (expenses)/income, net

    (7,234     (4,369     14,992       2,298  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expenses)/income

    (16,998     (24,167     827       127  
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income taxes and share of losses from equity method investments

    (80,851     121,829       256,729       39,345  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

    (13,370     (15,067     (29,848     (4,574
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before share of losses from equity method investments

    (94,221     106,762       226,881       34,771  
 

 

 

   

 

 

   

 

 

   

 

 

 

Share of losses from equity method investments

    (529     (3,928     (18,879     (2,893
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (94,750     102,834       208,002       31,878  
 

 

 

   

 

 

   

 

 

   

 

 

 

Less: net loss attributable to non-controlling interests

    (346     (361     (1,657     (254
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to Onion Global Limited

    (94,404     103,195       209,659       32,132  

Accretion to redemption value of redeemable preferred shares

    (17,167     —         —         —    

Deemed dividend—extinguishment of redeemable preferred shares

    (511,190     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to ordinary shareholders

    (622,761     103,195       209,659       32,132  

(Loss)/earnings per share:

       

Basic and diluted

    (109     13       26       4  

Weighted average shares outstanding used in (loss)/earnings per share computation:

       

Basic and diluted

    5,738,630       7,993,846       7,993,846       7,993,846  

Other comprehensive income/(loss)

       

Foreign currency translation adjustment net of tax of nil

    665       (70     737       113  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income/(loss), net of tax

    665       (70     737       113  
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income

    (94,085     102,764       208,739       31,991  

Less: Comprehensive loss attributable to non-controlling interests

    (202     (308     (1,536     (235
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income attributable to Onion Global Limited

    (93,883     103,072       210,275       32,226  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the Year Ended December 31,  
     2018      2019      2020  
     RMB      RMB      RMB      US$  
     (in thousands, except for percentages,
shares and per share data)
 

Share-based compensation expenses:

           

General and administrative expenses

     39,515        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     39,515        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Pursuant to the 2019 RSU Scheme, the performance condition for awards granted thereunder will be satisfied upon completion of this offering; and as a result, we expect to, upon the date of the completion of this offering, record a significant amount of cumulative share-based compensation expenses for those awards for which the vesting conditions have been satisfied as of such date. Had all vesting conditions been satisfied as of December 31, 2020, we would have recognized share-based compensation expenses of RMB354.8 million (US$54.5 million) for those awards, related to a total of 1,109,697 RSUs representing 1,109,697 underlying Class A ordinary shares granted to the participants under the 2019 RSU Scheme as of the date of this prospectus (excluding awards that were forfeited, cancelled or exercised after the relevant grant dates).

Year Ended December 31, 2020 compared to year ended December 31, 2019

Revenues

Our total revenues were RMB3,810.7 million (US$584.0 million) in 2020, representing a 33.7% increase from RMB2,850.7 million in 2019. The significant revenue growth was primarily due to (i) the growth of product revenues from RMB2,609.9 million in 2019 to RMB3,572.2 million (US$547.5 million) in 2020, which was mainly attributable to a significant increase in the total number of orders placed from approximately 10.3 million in 2019 to 15.8 million in 2020 as a result of an increase in the total number of active buyers from 963.9 thousand as of 2019 to 2,239.5 thousand as of December 31, 2020 and the total number of brands from 2.9 thousand as of December 31, 2019 to 4.0 thousand as of December 31, 2020 primarily due to the expansion of our platform in terms of brand and product selections and our increased sales and marketing efforts, despite the decreased average order value from RMB342 in 2019 to RMB254 in 2020. The revenue generated from provision of services remained stable at RMB240.8 million in 2019 and RMB238.5 million (US$36.5 million) in 2020, mainly as a result of an increase in revenue generated from subscription services from an increased number of KOCs, which offset the negative impact of the discontinuation of marketplace services. The subscription fee we charged each KOC remained stable and the number of KOCs on our platform increased from 492.5 thousand as of December 31, 2018 to 691.4 thousand as of December 31, 2020. The decrease in service revenue as percentage of total revenues from 8.4% in 2019 to 6.3% in 2020 was primarily attributable to our strategic decision to prioritize our merchandising business.

Operating cost and expenses

Our total operating cost and expenses were RMB3,565.0 million (US$546.4 million), or 93.6% of our total revenues, in 2020, compared to RMB2,717.8 million, or 95.3% of our total revenues, in 2019. The increase of our total operating cost and expenses was primarily attributable to an increase in all components of our operating expenses. The proportion of total operating cost and expenses over total revenues decreased largely due to decrease of fulfillment expenses over total revenues, which was mainly attributable to the decrease in charge rates for shipping and packaging services. The decrease in charge rates for shipping and packaging services was primarily attributable to our strategy to cooperate with more logistics services providers to secure competitive pricing, and our effort to optimize our own smart logistics system to manage our warehouse storage more cost-effective.

 

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Cost of revenues

Our cost of revenues was RMB3,032.1 million (US$464.7 million) in 2020, representing a 31.4% increase from RMB2,308.0 million in 2019. The increase was largely in line with the growth of revenues generated during such periods.

Fulfillment expenses

Our fulfillment expenses were RMB201.6 million (US$30.9 million) in 2020, compared to RMB212.2 million in the 2019. The decrease was attributable to the decrease in charge rates for shipping and packaging services, which were primarily attributable to our strategy to cooperate with more logistics services providers to secure competitive pricing, and our effort to optimize our own smart logistics system to manage our warehouse storage more efficiently. Such decreases were partially offset by the increase in (i) third-party payment platform charges, which was mainly attributable to an increase in the number of orders placed and their associated monetary value, (ii) an increase in staff costs primarily due to an increase in the number of employees responsible for the fulfillment functions and an increase in the level of compensation, and (iii) an increase in warehousing expenses, which was mainly attributable to the increase in the number of warehouses, consistent with the growth of our business scales.

Technology and content expenses

Our technology and content expenses were RMB24.3 million (US$3.7 million) in 2020, compared to RMB19.9 million in 2019. The increase was primarily attributable to an increase in staff costs from RMB16.9 million in 2019 to RMB20.5 million (US$3.1 million) in 2020 primarily attributable to an increase in the number of employees responsible for the technology and content functions and an increase in the level of compensation.

Selling and marketing expenses

Our selling and marketing expenses were RMB243.8 million (US$37.4 million) in 2020, compared to RMB127.2 million in 2019. The increase in sales and marketing expenses was primarily attributable to (i) an increase in promotion and marketing expenses from RMB105.6 million in 2019 to RMB199.5 million (US$30.6 million) in 2020, which was primarily attributable to our increased efforts in marketing and promotion and (ii) an increase in staff costs from RMB16.4 million in 2019 to RMB32.7 million (US$5.0 million) in 2020, which was primarily due to an increase in both the number of employees responsible for selling and marketing and the levels of their compensation.

General and administrative expenses

Our general and administrative expenses were RMB63.2 million (US$9.7 million) in 2020, compared to RMB50.6 million in 2019. The increase in general and administrative expenses was mainly driven by an increase in staff costs from RMB16.4 million in 2019 to RMB24.8 million (US$3.8 million) in 2020, which was primarily due to an increase in both the number of employees and their levels of compensation.

Other operating income

Our other operating income was RMB10.2 million (US$1.6 million) in the 2020, compared to RMB13.1 million in 2019. The decrease in other operating income was primarily attributable to a decrease in government subsidies received.

Interest income

Our interest income was RMB6.8 million (US$1.0 million) in 2020, compared to RMB1.5 million in 2019, primarily because of an increase of short-term investments.

 

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Foreign exchange loss

Our foreign exchange loss was RMB20.2 million (US$3.1 million) in 2020, compared to RMB21.2 million in 2019, primarily because of the stabilization in exchange rate of RMB against multiple currencies that we used for global procurement.

Other (expenses)/income, net

Our other income, net was RMB15.0 million (US$2.3 million) in 2020, compared to other expenses, net of RMB4.4 million in 2019, primarily due to (i) a decrease in impairment losses recognized for equity investments from RMB4.2 million in 2019 to nil in 2020, and (ii) fair value gain of RMB11.9 million on the settlement of preexisting loan receivables with respect to our acquisition of an affiliated entity.

Income tax expense

We recorded income tax expense of RMB29.8 million (US$4.6 million) in 2020, compared to RMB15.1 million in 2019, primarily because of the increase in taxable income.

Net (loss)/income

As a result of the foregoing, we recorded a net income of RMB208.0 million (US$31.9 million) in 2020, compared to a net income of RMB102.8 million in 2019.

Year Ended December 31, 2019 Compared to year ended December 31, 2018

Revenues

Our total revenues were RMB2,850.7 million in 2019, representing a 57.9% increase from RMB1,805.2 million in 2018. The significant revenue growth was primarily due to (i) the growth of product revenues from RMB1,642.3 million in 2018 to RMB2,609.9 million in 2019, which was mainly attributable to a significant increase in the total number of orders placed from approximately 5.5 million in 2018 to 10.3 million in 2019 as a result of an increase in the total number of active buyers from 737.5 thousand as of 2018 to 963.9 thousand as of December 31, 2019 and the total number of brands from 1.8 thousand as of December 31, 2018 to 2.9 thousand as of December 31, 2019 primarily due to the expansion of our platform in terms of brand and product selections and our increased sales and marketing efforts, despite the decreased average order value from RMB378 in 2018 to RMB342 in 2019, and (ii) an increase in the services revenue from RMB163.0 million in 2018 to RMB240.8 million in 2019 mainly as a result of increased subscription fees charged to our increasing number of KOCs. The subscription fee we charged each KOC remained stable and the number of KOCs on our platform increased from 310.3 thousand as of December 31, 2018 to 492.5 thousand as of December 31, 2019. The decrease of services revenue as percentage of total revenues from 9.0% in 2018 to 8.4% in 2019 was primarily attributable to our strategic decision to prioritize our merchandising business.

Operating cost and expenses

Our total operating cost and expenses were RMB2,717.8 million, or 95.3% of the total revenues, in 2019, compared to RMB1,870.2 million, or 103.6% of the total revenues, in 2018. The increase of our total operating cost and expenses was primarily attributable to an increase in all components of our operating expenses other than fulfillment expenses and general and administrative expenses. The proportion of total operating cost and expenses over total revenues decreased primarily because of (i) our improved economies of scale as we achieved significant increase in our total revenues, and (ii) a decrease in share-based compensation expenses incurred in 2019.

 

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Cost of revenues

Our cost of revenues was RMB2,308.0 million in the year ended December 31, 2019, representing a 60.5% increase from RMB1,437.6 million in 2018. The increase was largely in line with the increase in sales of products on our platform and was in line with the growth of revenues generated during such periods.

Fulfillment expenses

Our fulfillment expenses were RMB212.2 million in 2019, compared to RMB225.1 million in the 2018. The decrease was attributable to a decrease in our shipping and packaging expense and warehousing expense, which were primarily due to our strategy to introduce more logistics services providers to secure competitive pricing, and our effort to optimize our smart logistics system to manage our warehouse storage more efficiently. Such decrease was partially offset by (i) an increase in staff costs from RMB9.8 million in 2018 to RMB16.7 million in 2019 primarily due to an increase in the number of employees responsible for the fulfillment functions and an increase in the level of compensation and (ii) an increase in third party payment platform charges from RMB16.4 million in 2018 to RMB23.9 million in 2019, mainly attributable to an increase in the number of orders placed and their aggregate monetary value.

Technology and content expenses

Our technology and content expenses were RMB19.9 million in 2019, compared to RMB17.4 million in 2018. The increase was primarily attributable to an increase in staff costs from RMB12.9 million in 2018 to RMB16.9 million in 2019 primarily attributable to an increase in the number of employees responsible for the technology and content functions and an increase in the level of compensation.

Selling and marketing expenses

Our selling and marketing expenses were RMB127.2 million in 2019, compared to RMB113.0 million in 2018. The increase in sales and marketing expenses was primarily attributable to (i) an increase in promotion and marketing expenses from RMB94.1 million in 2018 to RMB105.6 million in 2019, which was primarily attributable to our increased efforts in marketing and promotional events and (ii) an increase in staff costs from RMB14.4 million in 2018 to RMB16.4 million in 2019, which was primarily due to an increase in both the number of employees responsible for selling and marketing and the levels of their compensation.

General and administrative expenses

Our general and administrative expenses were RMB50.6 million in 2019, compared to RMB77.1 million in 2018. The decrease in general and administrative expenses was mainly driven by (i) a decrease in share-based payment expense from RMB39.5 million in 2018 to nil in 2019, partially offset by (i) an increase in staff cost from RMB12.0 million in 2018 to RMB16.4 million in 2019 primarily attributable to an increase in both the number of related employees and the levels of their compensation and (ii) an increase of RMB7.2 million of general corporate expenses and depreciations in line with the our business growth.

Other operating income

Our other operating income was RMB13.1 million in the 2019, compared to RMB1.1 million in 2018. The increase in other operating income was primarily because we received more government subsidies in 2019.

Interest income

Our interest income was RMB1.5 million in 2019, compared to RMB3.6 million in 2018, primarily because of a decrease in the average balance in our short-term investments during the year of 2019, albeit the increased amount of short-term investment balance as of December 31, 2019.

 

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Foreign exchange loss

Our foreign exchange loss was RMB21.2 million in 2019, compared to RMB12.7 million in 2018, primarily because the fluctuation of RMB against multiple currencies that we used for global procurement.

Others, net

Our other loss, net was RMB4.4 million in 2019, compared to other loss, net of RMB7.2 million in 2018, primarily because of an increase in impairment losses of equity investments in 2019.

Income tax expense

We recorded income tax expense of RMB15.1 million in 2019, compared to RMB13.4 million in 2018, primarily because of the increase in taxable income.

Net (loss)/income

As a result of the foregoing, we recorded a net income of RMB102.8 million in 2019, compared to a net loss of RMB94.8 million in 2018.

Seasonality

We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and traditional retail seasonality patterns. For example, we generally experience lower sales volume during the Chinese New Year holiday season in the first quarter of each year. Furthermore, sales are significantly higher in the third and fourth quarter of each calendar year. E-commerce companies in China hold special promotional campaigns on November 11 each year that boost sales in the fourth quarter relative to other quarters, and we hold a special promotional campaign, Beauty Carnival, in September of each year. Therefore, our inventory balances typically increase when we prepare for special promotion events, such as the special promotional campaign, Beauty Carnival, in September and the annual online shopping festivals on November 11.

Overall, the historical seasonality of our business has been relatively mild due to our rapid growth but may increase further in the future. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.

Selected Balance Sheet Items

Inventories, net

Our inventories had increased significantly from RMB262.0 million as of December 31, 2018 to RMB468.7 million as of December 31, 2019 and decreased to RMB442.6 million (US$67.8 million) as of December 31, 2020. Our inventory provision amounted to RMB4.0 million, RMB10.1 million and RMB14.8 million (US$2.3 million), respectively as of December 31, 2018, 2019 and 2020. These increases in inventory provision reflected the fact that more diversified inventories were required to support our substantially expanded sales volumes. Our inventory turnover days were 58, 58 and 55 days for the years ended December 31, 2018, 2019 and 2020, respectively. Inventory turnover days for a given period are computed using our average inventory balances at the beginning and the end of the period divided by cost of revenues during the period and then multiplied by the number of days during the period. The fluctuations in inventory balances were due to a number of factors, including changes in our product mix and the growing operational efficiency of our supply chain.

Accounts payable

Our accounts payable include trade payables. As of December 31, 2018, 2019 and 2020, our accounts payable was RMB21.8 million, RMB68.7 million and RMB146.0 million (US$22.4 million), respectively. Such increases were primarily due to the relaxation of our product suppliers’ credit policy in favor of us as we continued to improve our bargaining power over time.

 

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Customer advances and deferred revenue

Our customer advances and deferred revenue represent (i) upfront payments received for subscription services, (ii) cash collected from the sales of products for which the corresponding products have not yet been provided to customers, and (iii) loyalty points granted to our customers. As of December 31, 2018, 2019 and 2020, our advances from customers were RMB228.6 million, RMB378.3 million and RMB174.5 million (US$26.7 million), respectively. The increase in 2019 was primarily attributable to the increase in upfront payment received for our subscription services, which is amortized within two years. The decrease in 2020 was primarily attributable to the change in estimated active KOC subscription period during 2020.

Accrued expenses and other liabilities

Our accrued expenses and other liabilities mainly include, among others, accrued KOC incentives, payables to our product suppliers and logistic service providers, and other tax payables. As of December 31, 2018, 2019 and 2020, our accrued expenses and other liabilities were RMB125.5 million, RMB207.1 million and RMB233.6 million (US$35.8 million), respectively. The increase was primarily due to (i) an increase in the KOC incentives, and (ii) an increase in other tax payables, both of which were mainly due to the increase of our sales volume.

Liquidity and Capital Resources

We have financed our operations primarily through proceeds from profit generated from our business operations and private placements of our shares in the past.

We had cash and cash equivalents and restricted cash of RMB99.8 million, RMB230.6 million and RMB249.7 million (US$38.3 million) as of December 31, 2018, 2019 and 2020. Our cash and cash equivalents increased in 2019 and 2020 primarily due to an increase in our working capital to support substantially expanded sales volumes. In addition to cash and cash equivalents, we also have short-term investments primarily consisting of highly liquid investments in certain wealth management products procured from reputable financial institutions in China with maturities of greater than three months but less than twelve months. We had short-term investments of RMB nil, RMB67.6 million and RMB103.2 million (US$15.8 million) as of December 31, 2018, 2019 and 2020. The continued increase in short-term investments reflected our decision to more effectively manage our cash and cash equivalents by prudently investing them in investment products to generate higher returns. Our working capital turnover days were 24, 18 and 28 days for the years ended December 31, 2018, 2019 and 2020. For purposes of this calculation, working capital turnover days for a given period are computed using our average working capital at the beginning and the end of the period divided by total revenues during the period and then multiplied by the number of days during the period; whereas working capital is defined as the difference between our total current assets and total current liabilities.

We believe that our current level of cash balances and cash flows will be sufficient for our anticipated cash needs for at least the next 12 months. However, we may need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If we determine that our cash requirements exceed our amounts of cash on hand or if we decide to further optimize our capital structure, we may seek to issue debt or equity securities or obtain additional credit facilities or other sources of funding.

We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to issue debt or equity securities or obtain additional credit facilities. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. Issuance of additional equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

 

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

 

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

Summary Consolidated Cash Flow Data:

   

Net cash (used in)/generated from operating activities

    (2,595     199,828       55,243       8,465  

Net cash generated from/(used in) investing activities

    8,157       (71,164     (60,070     (9,207

Net cash (used in)/generated from financing activities

    (89,769     2,236       23,395       3,586  

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

    665       (70     520       81  

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

    (83,542     130,830       19,088       2,925  

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

    183,344       99,802       230,632       35,346  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    99,802       230,632       249,720       38,271  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating activities

Net cash generated from operating activities was RMB55.2 million (US$8.5 million) for the year ended December 31, 2020. The difference between our net income of RMB208.0 million (US$31.9 million) and the net cash used in operating activities was primarily attributed to (i) an increased in RMB94.8 million (US$14.5 million) of prepayments and other current assets mainly due to an increase in the prepayment for procurements of goods and custom security deposit to ensure steady supply of goods in view of our substantially expanded sales volumes and (ii) a decrease of RMB206.0 million (US$31.6 million) in customer advances and deferred revenue mainly due to the transaction volume was relatively lower in the first half of each year due to seasonality of our business, partially offset by (i) a decrease of RMB24.1 million (US$3.7 million) in inventories mainly due to improved efficiencies of our supply chain and (ii) an increase of RMB76.8 million (US$11.8 million) of accounts payable mainly due to improved bargain power with our suppliers.

Net cash generated from operating activities was RMB199.8 million for the year ended December 31, 2019. The difference between our net income of RMB102.8 million and the net cash generated from operating activities was primarily attributed to (i) an increase of RMB46.9 million in accounts payable primarily due to the relaxation of our product suppliers’ credit policy, (ii) an increase of RMB151.9 million in customer advances and deferred revenue primarily due to an increase in upfront payments received for our subscription services, and (iii) an increase of RMB81.1 million in accrued expenses and other current liabilities primarily due to increases in KOC incentives and tax payables due to our sales growth, partially offset by an increase of RMB212.8 million in inventories primarily to support our substantially expanded sales volumes.

Net cash used in operating activities was RMB2.6 million for the year ended December 31, 2018. The difference between our net loss of RMB94.8 million and the net cash used in operating activities was primarily attributed to (i) RMB39.5 million of share-based compensation expenses recognized, (ii) a decrease in amounts due from related parties of RMB58.2 million primarily due to settlement of amounts owed to us during the year, (iii) an increase of RMB73.5 million in customer advances and deferred revenue primarily due to an increase in upfront payments received for our subscription services in line with our business growth and (iv) an increase of RMB19.6 million in accrued liabilities and other current liabilities, partially offset by (i) an increase of RMB72.9 million in inventories primarily to support our substantially expanded sales volumes, (ii) an increase of RMB69.9 million in prepayments and other current assets mainly due to an increase in the prepayments for procurements of goods and custom security deposit to ensure steady supply of goods to support our business expansion.

Investing activities

Net cash used in investing activities was RMB60.1 million (US$9.2 million) for the year ended December 31, 2020, which was primarily attributable to purchase of short-term investments of RMB575.0

 

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million (US$88.1 million), partially offset by the proceeds from maturity of short-term investments of RMB539.6 million (US$82.7 million).

Net cash used in investing activities was RMB71.2 million for the year ended December 31, 2019, which was primarily attributable to purchase of short-term investments of RMB194.6 million, partially offset by the proceeds from maturity or redemption of short-term investments of RMB127.0 million.

Net cash generated from investing activities was RMB8.2 million for the year ended December 31, 2018, which was primarily attributable to the proceeds from maturity or redemption of short-term investments of RMB562.8 million, partially offset by the purchase of short-term investments of RMB523.8 million.

Financing activities

Net cash generated from financing activities was RMB23.4 million (US$3.6 million) for the year ended December 31, 2020, which was primarily attributable to proceeds from short-term loans of RMB113.1 million (US$17.3 million), partially offset by the repayment of short-term loans of RMB91.7 million (US$14.0 million).

Net cash generated from financing activities was RMB2.2 million for the year ended December 31, 2019, which was primarily attributable to the receipt of proceeds from short-term loans of RMB2.9 million.

Net cash used in financing activities was RMB89.8 million for the year ended December 31, 2018, which was primarily attributable to repayment of short-term loans of RMB90.6 million.

Capital Expenditures

Our capital expenditures, representing purchases of property and equipment, were RMB8.9 million, RMB3.0 million and RMB11.7 million (US$1.8 million) for the years ended December 31, 2018, 2019 and 2020, respectively. We do not have any outstanding commitments for capital expenditures as of December 31, 2020. We intend to fund our future capital expenditures with cash generated and to be generated from our operations and proceeds from this offering.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2020. Other than these, we did not have any significant capital and other commitments, long-term obligations or guarantees as of December 31, 2020.

 

     Payment due by December 31  
     Total      2021      2022      2023 and
thereafter
 
     (in RMB thousands)  

Operating lease commitments(1)

     15,326        15,290        36        —    

Long-term loan(2)

     1,199        —          301        898  

Short-term bank loans

     24,200        24,200        —          —    

 

Notes:

(1)

Represents future minimum payments under non-cancelable operating leases with initial terms in excess of one year related to offices and warehouses.

(2)

In February 2020, we entered into a long-term loan agreement with Korea SMEs and Startups Agency, pursuant to which we are entitled to borrow KRW200,000 (equivalent to RMB1.2 million). As of December 31, 2020, RMB1.2 million (US$0.2 million) was drawn down.

 

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Off-Balance Sheet Commitments and Arrangements

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

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

Revenue recognition

Our revenues are primarily derived from product sales through our e-commerce platforms and the provision of subscription and marketplace services.

On January 1, 2018, we elected to early adopt ASC 606, Revenue from contracts with Customers (“ASC 606”) using the full retrospective method. We apply the five-step model outlined in ASC 606. We account for a contract when it has approval and commitment from the customer, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We evaluate if we are a principal or an agent in a transaction to determine whether revenues should be recorded on a gross or net basis. We act as the principal and record revenue on a gross basis if we obtain control over the specified goods and services before they are transferred to the customers and would also generally be subject to inventory risk and have latitude in establishing prices. When we act as an agent, we record revenue on a net basis and we also generally do not bear any inventory risk nor have the ability to establish price.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Product sales

We primarily recognize revenue from the sale of beauty products, maternal and baby products, food and beverages, fast fashion goods, wellness and other consumer products through our social e-commerce platforms.

 

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Customers are required to pay for the products in advance and amounts received are recorded as “Customer advances and deferred revenue” on the consolidated balance sheets. In arrangements with multiple performance obligations, the transaction price is allocated to each performance obligation using the relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost plus a margin. Product revenues are recognized at a point in time when the products are accepted by the customers, which occurs when customers confirm acceptance of the products or when it is deemed to occur 21 days after delivery of the products, as stipulated in our sales policies published on our social e-commerce platforms.

We offer an unconditional right of return for a period of seven days upon the customer’s receipt of the products. Estimated merchandise returns are estimated using the expected value method based on historical return patterns. We recognize revenues net of estimated merchandise returns and record a refund liability included in “Accrued expenses and other liabilities” in the consolidated balance sheets. As of December 31, 2018, 2019 and 2020, estimated merchandise returns were not significant.

In 2019, we launched a customer loyalty program which grant loyalty points to customers when they purchase products from our social e-commerce platforms. Loyalty points are redeemable for cash discounts that can be offset against the selling price of future purchases made by customers or redeemed for a 12-month trial of a KOC subscription. We consider loyalty points as a separate performance obligation and allocates the total transaction price proportionally between the products sold and the loyalty points granted based on their relative standalone selling prices. We also provide discounts and coupons to our customers without concurrent purchases and recognizes them as a reduction of product revenues when they are utilized by customers in a sales transaction.

Revenue is recorded net of value-added taxes (“VAT”), custom duties and consumption taxes collected on behalf of the government. Revenues also include delivery fees charged to customers who do not meet the minimum order requirements for free shipping. We utilize external logistic service providers to deliver products to our customers and record the shipping and handling costs as “Fulfillment expenses” in the consolidated statements of comprehensive (loss)/income.

Services rendered

We earn subscription service revenue from providing our KOCs with a lifetime subscription service in exchange for a non-refundable upfront fee. KOC subscribers are entitled to earn referral incentives from us. The amount of referral incentives are determined by an agreed formula based on the successful completion of product orders placed by customers referred by them, which are recorded as “Costs of revenues” in the consolidated statements of comprehensive (loss)/income. KOC subscribers are not required to purchase any products from our social e-commerce platforms in order to become a subscriber. We are the principal in the subscription service revenue transaction and recognize revenue based on the amount we are entitled to in exchange for transferring promised services to KOCs. The receipt of subscription fees is initially recorded as deferred revenue and recognized as revenue on a straight-line basis over the estimated active KOC subscription period as that is when our customers simultaneously receive and consume benefits from our performance and our efforts or inputs are expended evenly throughout the performance period. Judgment is required to estimate the active KOC subscription period and changes to such estimates could impact the amount of subscription service revenue recognized. The active KOC subscription period is estimated based on historical KOC usage patterns of KOC accounts which are determined on a daily basis by comparing the proportion of KOC with generated orders to the total KOC accounts, considering KOC accounts registered on or after January 1, 2016. We then use a regression model to simulate a KOC retention rate curve based on the daily historical KOC usage patterns. Based on this KOC retention rate curve, we estimate the average number of days during which a KOC account remains active after its initial registration. The active KOC subscription period is estimated to be no more than two years for the periods presented. Revision to our estimates of active KOC subscription period are accounted for as a change in accounting estimate on a prospective basis in accordance with ASC 250, Accounting Changes and Error

 

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Corrections (“ASC 250”). We review and revise such estimates, if necessary, on a periodic basis and at a minimum, on an annual basis. As a result of the change in estimate in 2018, total revenues decreased by RMB19.6 million, net loss increased by RMB19.6 million and basic and diluted loss per share increased by RMB3.41. As a result of the change in estimate in 2019, total revenues and net income decreased by RMB34.2 million and basic and diluted earnings per share decreased by RMB4.28. As a result of the change in estimate in 2020, total revenues and net income increased by RMB31.2 million (US$4.8 million) and basic and diluted earnings per share increased by RMB3.91 (US$0.60).

We also provided marketplace services as an agent to various merchants to facilitate the display and sales of their products on our social e-commerce platforms. We consider the merchants as our customers and receive service fees based on an agreed-upon formula with our customers. We recognize the service fees at a point in time, which is generally upon acceptance of the merchant’s products purchased by the buyers. Marketplace services were discontinued from July 2019.

Consolidation of affiliated entities

To comply with PRC laws and regulations which prohibit foreign control of companies that engage in value-added telecommunication services, we primarily conduct our business in the PRC through our PRC subsidiaries and the VIE. The equity interests of our VIE is legally held by PRC shareholders. Despite the lack of technical majority ownership, we have effective control of our VIE through a series of contractual agreements and a parent-subsidiary relationship exists between us and our VIE. Through the contractual agreements, the shareholders of our VIE effectively assigned all of their voting rights underlying their equity interests in our VIE to us and therefore, we have the power to direct the activities of our VIE that most significantly impact its economic performance. We also have the ability and obligations to absorb substantially all the profits or losses of our VIE that potentially could be significant to our VIE. Based on the above, we consolidate the VIE in accordance with SEC Regulation SX-3A-02 and ASC 810, Consolidation. We will reconsider the initial determination of whether a legal entity is a consolidated affiliated entity upon certain events listed in ASC 810-10-35-4 occurring. We will also continuously reconsider whether we are the primary beneficiary of our affiliated entities as facts and circumstances change. See “Risk Factors—Risks Relating to Our Corporate Structure.”

Share-based compensation

We apply ASC 718, Compensation—Stock Compensation (“ASC 718”) to account for our employee share-based awards and early adopted ASU No. 2018-7, Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting (“ASU 2018-7”) on January 1, 2018. Therefore, for non-employee share-based payments, we also apply ASC 718 to account for share-based awards for acquiring goods and services from non-employees at grant date fair value.

In accordance with ASC 718, we determine whether an award should be accounted for as a liability award or equity award. All our share-based awards to employees and non-employees were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values. We also elected to account for forfeitures as they occur.

A change in any of the terms or conditions of the awards is accounted for as a modification of the award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the fair value of the awards and other pertinent factors at the modification date. For vested awards, we recognize incremental compensation cost in the period the modification occurs. For unvested awards, the unrecognized compensation cost remaining from the original grant-date valuation is recognized over the remainder of the employee’s original requisite service period, while the incremental compensation cost is recognized over the remaining service period of the modified award.

 

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If the fair value of the modified award is lower than the fair value of the original award immediately before modification, the minimum compensation cost we recognize is the cost of the original award. If an award has a vesting condition that was improbable of being achieved both before and after the modification, the original grant-date fair value is not considered relevant and the fair value of the modified award is used to recognize compensation cost if it ultimately vests.

A cancellation of outstanding awards with no replacement awards is accounted for as a repurchase for no consideration. Therefore, any previously unrecognized compensation cost shall be recognized at the cancellation date.

With the assistance of an independent third-party valuation firm, we used the discounted cash flow method to determine the underlying equity value of us and used an equity allocation model to estimate the fair value of our restricted share units.

Equity method investments

Investments in entities in which we can exercise significant influence and hold an investment in voting common stock or in-substance common stock (or both) of the investee but does not own a majority equity interest or control are accounted for using the equity method. Under the equity method, we initially record our investments at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. We subsequently adjust the carrying amount of the investments to recognize our proportionate share of each equity investee’s net income or loss into earnings after the date of investment. When we have other investments in our equity-method investee (including, but not limited to, preferred stock, debt securities and loans to the investee) and were not required to advance additional funds to that investee, we would continue to report our share of equity method losses in our consolidated statement of comprehensive (loss)/income after our equity method investment in ordinary shares has been reduced to zero, to the extent of and as an adjustment to the adjusted basis of our other investments in the investee. Such losses are first applied to those investments of a lower liquidation preference before being further applied to the investments of a higher liquidation preference. Unrealized inter-company profits and losses related to equity investees are eliminated. We evaluate the equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. We consider the financial condition and near-term prospects of the investee including the investee’s ability to sustain earnings and generate operating cash flows and any specific events that may influence the operations of the investee in determining whether equity method investments are recoverable. An impairment loss is recognized in “Other (expenses)/income, net” in the consolidated statements of comprehensive (loss)/income when a decline in value of an equity method investment is determined to be other-than-temporary.

Business combinations

We account for our business combinations using the purchase method of accounting in accordance with ASC 805, Business Combinations. The purchase method accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, equity instruments issued as well as contingent considerations, if any, as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.

 

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In a business combination achieved in stages, we remeasure our previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in “Other (expenses)/income, net” in the consolidated statements of comprehensive (loss)/income.

Business combination that have a pre-existing relationship is evaluated to determine if the settlement of a pre-existing relationship exists. A settlement gain or loss is recognized by us and recognized in “Other (expenses)/income, net” in the consolidated statements of comprehensive (loss)/income in conjunction with the effective settlement of a pre-existing relationship.

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management.

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting and financial reporting personnel and other resources to address our internal controls and procedures. In connection with the audits of our consolidated financial statements included in this prospectus, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, 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 company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified are our (i) lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and SEC rules and (ii) lack of financial reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting requirements.

We have since hired certain mid-level financial staff with U.S. GAAP and/or SEC reporting experience. We are in the process of implementing a number of measures to address these material weaknesses identified, including: (i) continuing to hire additional accounting and financial reporting personnel with U.S. GAAP and SEC reporting experience, (ii) expanding the capabilities of existing accounting and financial reporting personnel through continuous training and education in the accounting and reporting requirements under U.S. GAAP, and SEC rules and regulations, (iii) developing, communicating and implementing an accounting policy manual for our accounting and financial reporting personnel for recurring transactions and period-end closing processes, and (iv) hiring an external consulting firm to assist in the design and implementation of effective monitoring and oversight controls to identify non-recurring and complex transactions to ensure the accuracy and completeness of our company’s consolidated financial statements and related disclosures.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligation. See “Risk Factors—Risks Relating to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls to remediate our material weaknesses over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These

 

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provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of such exemptions, with the exception of ASC 606, Revenue from Contracts with Customers, ASC 321, Investments—Equity Securities, ASU No. 2018-7, Compensation—Stock Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting and ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.

Holding company status

As a holding company with no material operations of our own, we conduct substantially all of our operations through our PRC subsidiaries, VIE and subsidiaries of VIE in China. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries in China through capital contributions or loans, subject to the approval of government authorities and limits on the amount of capital contributions and loans. In addition, our subsidiaries in China may provide Renminbi funding to our VIE only through loans. See “Regulation—Regulations on Foreign Exchange,” “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries and to make loans to our VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business” and “Use of Proceeds.” The ability of our subsidiaries in China to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations. See “Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business” and “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.”

Quantitative and Qualitative Disclosures about Market Risk

Foreign currency exchange rate risk

A majority of our revenue is denominated in Renminbi. The vast majority of our costs are denominated in Renminbi and a portion of them are denominated in U.S. dollars, Hong Kong dollars, Japanese Yen, Korean (South) Won as we import certain products from overseas. Our management considers that the business is not exposed to any significant foreign exchange risk and we have not used any derivative financial instruments to hedge exposure to such risk.

In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The depreciation of the Renminbi against the U.S. dollar was approximately 5.7% in 2018. The appreciation of the Renminbi against the U.S. dollar was approximately 1.2% in 2019. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of RMB against the U.S. dollar would reduce the RMB amount we receive from the conversion. Conversely, if we decide

 

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to convert RMB into U.S. dollars for the purpose of making payments for dividends on our Class A ordinary shares or ADSs, servicing our outstanding debt, or for other business purposes, appreciation of the U.S. dollar against the RMB would reduce the U.S. dollar amounts available to us.

As of December 31, 2020, we had RMB-denominated cash, cash equivalents, restricted cash and short-term investments of RMB 247.3 million (US$37.9 million). A 10% depreciation of RMB against U.S. dollar based on the foreign exchange rate on December 31, 2020 would result in a decrease of US$3.8 million in cash, cash equivalents, restricted cash and short-term investments. A 10% appreciation of RMB against U.S. dollar based on the foreign exchange rate on December 31, 2020 would result in an increase of US$3.8 million in cash, cash equivalents and short-term investments.

Concentration of risks

Concentration of credit risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, loans receivable, amounts due from related parties and other receivables from third-party payment platforms. As of December 31, 2018, 2019 and 2020, the aggregate amount of cash and cash equivalents, restricted cash, and short-term investments of RMB63.4 million, RMB193.2 million and RMB243.3 million (US$37.3 million), respectively, were held at major financial institutions located in the PRC, and RMB36.4 million, RMB105.0 million and RMB109.6 million (US$16.8 million), respectively, were deposited with major financial institutions located outside the PRC. We believe that these financial institutions are of high credit quality and continually monitor the credit worthiness of these financial institutions. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. In the event of bankruptcy of one of these financial institutions, we may not be able to claim its cash and demand deposits back in full. We continue to monitor the financial strength of the financial institutions. There has been no recent history of default in relation to these financial institutions. 100%, 100% and 95% of our loans receivable is derived from loan to a third-party company in the PRC as of December 31, 2018, 2019 and 2020, respectively. The risk with respect to loans receivable is mitigated by credit evaluations we perform on the third-party company and our ongoing monitoring process of outstanding balances. Other receivables from third-party payment platforms derived from merchandise sales on our social e-commerce platforms are exposed to credit risk. The risk is mitigated by credit evaluations we perform on the selected third-party payment platforms that are reputable and market leaders. There has been no default of payments from these third-party payment platforms. Accounts receivable and amounts due from related parties are typically unsecured and are derived from sales of products to product resellers and distributors. As of December 31, 2019 and 2020, we had one and two customers with a receivable balance exceeding 10% of the total accounts receivable balance, respectively. No such concentration of credit risk in accounts receivable existed at December 31, 2018. The risk with respect to accounts receivable is mitigated by credit evaluations we perform on our customers and our ongoing monitoring process of outstanding balances.

Concentration of suppliers

There were purchases from one supplier for logistic services which individually represented 26% and 27% of the total purchase amount of logistic services made by us for the year ended December 31, 2018 and 2019, respectively. There were purchases from two suppliers for logistic services which individually represented 15% and 12%, respectively, of the total amount of logistic service purchases made by the Company for the