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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended March 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report _________________

For the transition period from                       to

Commission file number 001-38852

 

RUHNN HOLDING LIMITED

(Exact name of Registrant as specified in its charter)

Cayman Islands

(Jurisdiction of incorporation or organization)

11F, Building 2, Lvgu Chuangzhi Development Center

788 Hong Pu Road

Jianggan District, Hangzhou 310016

People’s Republic of China

(Address of principal executive offices)

Jacky Jinbo Wang, Chief Financial Officer

Telephone: +86-571-2888-9393

Email: jacky@ruhnn.com
At the address of the Company set forth above

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

American Depositary Shares, each representing five Class A ordinary shares

 

RUHN

 

The Nasdaq Stock Market LLC

Class A ordinary shares, par value US$0.000000001 per share*

 

N/A

 

The Nasdaq Stock Market LLC

 

*

Not for trading, but only in connection with the listing on The Nasdaq Stock Market of American depositary shares.



Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

 

246,122,394 Class A ordinary shares were outstanding as of March 31, 2020

174,834,250 Class B ordinary shares were outstanding as of March 31, 2020

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

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

Indicate by check mark which basis of accounting the registration has used to prepare the financial statements included in this filing:

 

U.S. GAAP

International Financial Reporting Standards as issued by the International Accounting Standards Board

Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which consolidated financial statement item the registrant has elected to follow.

Item 17 Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 


Table of Contents

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

PART I.

3

 

 

 

 

Item 1.

 

Identity Of Directors, Senior Management and Advisers

3

Item 2.

 

Offer Statistics and Expected Timetable

3

Item 3.

 

Key Information

3

Item 4.

 

Information on the Company

37

Item 4A.

 

Unresolved Staff Comments

59

Item 5.

 

Operating and Financial Review and Prospects

59

Item 6.

 

Directors, Senior Management and Employees

75

Item 7.

 

Major Shareholders and Related Party Transactions

83

Item 8.

 

Financial Information

84

Item 9.

 

The Offer and Listing

85

Item 10.

 

Additional Information

86

Item 11.

 

Quantitative and Qualitative Disclosures about Market Risk

92

Item 12.

 

Description of Securities other than Equity Securities

92

 

 

 

 

PART II.

95

 

 

 

 

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

95

Item 14.

 

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

95

Item 15.

 

Controls and Procedures

95

Item 16A.

 

Audit Committee Financial Expert

96

Item 16B.

 

Code of Ethics

96

Item 16C.

 

Principal Accountant Fees and Services

96

Item 16D.

 

Exemptions from the Listing Standards for Audit Committees

96

Item 16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

97

Item 16F.

 

Change in Registrant’s Certifying Accountant

97

Item 16G.

 

Corporate Governance

97

Item 16H.

 

Mine Safety Disclosure

97

 

 

 

 

PART III.

98

 

 

 

 

Item 17.

 

Financial Statements

98

Item 18.

 

Financial Statements

98

Item 19.

 

Exhibits

98

 

 

 

 

SIGNATURES

 

 

99

 

 

 

 

 

 

 

 


Table of Contents

CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F

Except where the context otherwise requires, references in this annual report to:

“ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;

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

“AI” are to artificial intelligence;

“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, the Hong Kong Special Administrative Region or Hong Kong, and the Macao Special Administrative Region;

“AI Data” are to an AI solution developed by one of our investee companies that improves fashion design process;

“Equity Restructuring” are to a series of equity transactions that our company, our founders and the institutional shareholders of Hangzhou Ruhnn Holdings Co., Ltd., or Hangzhou Ruhnn, effected in October 2018 to re-domicile the holding entity of our business from the PRC to the Cayman Islands as described in more detail under “Item 4. Information on the Company — A. History and Development of the Company” section of this annual report;

“fans” are to followers to KOLs on social media platforms and e-commerce platforms, and references to the number of fans in this annual report are to the simple sum of the followers of the relevant KOL(s) on different social media platforms and e-commerce platforms, and therefore, a single fan may be included multiple times if the fan follows more than one KOL, follows the same KOL across multiple platforms, or both;

“fiscal year” is to the period from April 1 of the previous calendar year to March 31 of the concerned calendar year;

“GMV” is to gross merchandize value, which represents the aggregate value of merchandize ordered in our online stores and third-party online stores to which we provide KOL sales services (but not including online stores to which we only provide KOL advertising services and other services), regardless of whether the merchandise is actually sold, delivered or returned. Our calculation of GMV includes shipping charges paid by buyers. GMV of third-party online stores to which we provide KOL sales services includes the GMV of all products ordered in such stores because we generally provide KOL sales services for all products sold in such stores; Since January 2019, we have provided KOL sales services for specified products in certain third-party online stores, and in such cases, only the GMV of such products for which we provided KOL sales services are included in our GMV for the relevant period;

“Hangzhou Dayi Minority Interest Acquisition” are to the transactions completed in March 2019, whereby we acquired the remaining 49% of equity interests in Hangzhou Dayi from Hangzhou Wunai Yidui Trade Co., Ltd., a company wholly owned by Yi Zhang, and issued 44,165,899 ordinary shares, which have been re-designated as Class A ordinary shares, to China Himalaya Investment Limited, a company wholly owned by Yi Zhang;

“Hangzhou Ruhnn” are to Hangzhou Ruhnn Holdings Co., Ltd., a joint stock limited liability company established under the laws of the PRC;

“KOLs” are to key opinion leaders, also known as influencers;

“number of our KOLs’ fans” are to the simple sum of fans of all of our KOLs on all major social media platforms and e-commerce platforms, and as a result, if an individual is a fan of more than one KOL or is a fan of a KOL on multiple social media platforms and e-commerce platforms, he or she will be counted multiple times;

“ordinary shares” are to our Class A and Class B ordinary shares, par value 0.000000001 per share;

“ordinary shares issued and outstanding” are to our ordinary shares issued and outstanding;

“our company” are to Ruhnn Holding Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands;

“our KOLs” or “our signed KOLs” are to KOLs who have entered into cooperation agreements with us;

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

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

“variable interest entity,” “VIE” or “Hanyi E-Commerce” is to Hangzhou Hanyi E-Commerce Co., Ltd., a limited liability company established under the laws of the PRC and 100% owned by PRC citizens and entities; and

“we,” “us,” “our” and “ruhnn” are to (i) prior to the consummation of the Equity Restructuring on October 4, 2018, our predecessor, Hanyi E-Commerce, and its consolidated subsidiaries, and (ii) following the consummation of the Equity Restructuring, our company and its consolidated subsidiaries and affiliated entities.

1


Table of Contents

The translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB7.0808 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2020. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On August 7, 2020, the noon buying rate for Renminbi was RMB6.9670 to US$1.00.

We listed our ADSs on the Nasdaq Global Select Market under the symbol “RUHN” on April 3, 2019.

This annual report on Form 20-F contains statements of a forward-looking nature. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. These forward-looking statements relate to, among others:

our goals and growth strategies;

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

trends in the internet KOL facilitator industry in the PRC and globally;

competition in our industry;

fluctuations in general economic and business conditions in China and other regions where we operate;

the regulatory environment in which we and companies integral to our ecosystem operate;

our proposed use of proceeds from this offering; and

assumptions underlying or related to any of the foregoing.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

You should read these statements in conjunction with the risks disclosed in “Item 3. Key Information—D. Risk Factors” of this annual report and other risks outlined in our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in an emerging and evolving environment. New risks may emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we have referred to in this annual report, completely and with the understanding that our actual future results may be materially different from what we expect.

2


Table of Contents

PART I.

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable.

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

Item 3. Key Information

A. Selected Financial Data

The following selected combined and consolidated statements of operations data and selected combined and consolidated statements of cash flows data for fiscal years ended March 31, 2018, 2019 and 2020, and selected combined and consolidated balance sheets data as of March 31, 2019 and 2020 have been derived from our combined and consolidated financial statements included elsewhere in this annual report. The selected combined and consolidated statements of operations data and selected combined and consolidated statements of cash flows data for the year ended December 31, 2017, and the selected combined and consolidated balance sheet data as of March 31, 2017 and 2018 have been derived from our audited combined and consolidated financial statements that are not included in this annual report.

You should read the following summary combined and consolidated financial data in conjunction with our combined and consolidated financial statements and the related notes included elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.” Our combined and consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.

3


Table of Contents

Selected Combined and Consolidated Statements of Operations Data

 

 

 

Year Ended March 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

RMB

 

 

RMB

 

 

RMB

 

 

RMB

 

 

US$

 

 

 

(Amounts in thousands, except share data)

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

572,445

 

 

 

912,512

 

 

 

942,781

 

 

 

992,603

 

 

 

140,182

 

Services

 

 

5,458

 

 

 

35,068

 

 

 

150,657

 

 

 

303,247

 

 

 

42,827

 

Total net revenue

 

 

577,903

 

 

 

947,580

 

 

 

1,093,438

 

 

 

1,295,850

 

 

 

183,009

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

362,609

 

 

 

625,263

 

 

 

683,057

 

 

 

675,494

 

 

 

95,398

 

Cost of services

 

 

2,619

 

 

 

18,122

 

 

 

68,336

 

 

 

130,647

 

 

 

18,451

 

Total cost of revenue

 

 

365,228

 

 

 

643,385

 

 

 

751,393

 

 

 

806,141

 

 

 

113,849

 

Gross profit

 

 

212,675

 

 

 

304,195

 

 

 

342,045

 

 

 

489,709

 

 

 

69,160

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment

 

 

69,412

 

 

 

100,071

 

 

 

126,850

 

 

 

134,852

 

 

 

19,045

 

Sales and marketing

 

 

97,814

 

 

 

146,207

 

 

 

205,660

 

 

 

305,157

 

 

 

43,096

 

General and administrative

 

 

67,106

 

 

 

130,977

 

 

 

92,004

 

 

 

167,786

 

 

 

23,696

 

Other operating loss (income), net

 

 

168

 

 

 

(709

)

 

 

(927

)

 

 

(627

)

 

 

(89

)

Total operating expenses

 

 

234,500

 

 

 

376,546

 

 

 

423,587

 

 

 

607,168

 

 

 

85,748

 

Loss from operations

 

 

(21,825

)

 

 

(72,351

)

 

 

(81,542

)

 

 

(117,459

)

 

 

(16,588

)

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

42

 

 

 

88

 

 

 

595

 

 

 

21,912

 

 

 

3,095

 

Interest expense

 

 

(1,574

)

 

 

-

 

 

 

(107

)

 

 

(58

)

 

 

(8

)

Other income, net

 

 

-

 

 

 

-

 

 

 

7,600

 

 

 

3,145

 

 

 

444

 

Foreign exchange gain (loss)

 

 

56

 

 

 

(241

)

 

 

34

 

 

 

3,391

 

 

 

479

 

Loss before income taxes

 

 

(23,301

)

 

 

(72,504

)

 

 

(73,420

)

 

 

(89,069

)

 

 

(12,578

)

Income tax expense

 

 

15,243

 

 

 

15,843

 

 

 

10,413

 

 

 

8,724

 

 

 

1,232

 

Share of loss in equity method investments

 

 

(1,593

)

 

 

(1,607

)

 

 

(1,090

)

 

 

-

 

 

 

-

 

Net loss

 

 

(40,137

)

 

 

(89,954

)

 

 

(84,923

)

 

 

(97,793

)

 

 

(13,810

)

Less: Net income (loss) attributable to non-controlling

interest

 

 

15,246

 

 

 

14,051

 

 

 

(11,677

)

 

 

(5,302

)

 

 

(749

)

Net loss attributable to ruhnn

 

 

(55,383

)

 

 

(104,005

)

 

 

(73,246

)

 

 

(92,491

)

 

 

(13,061

)

Net loss per ADS, basic and diluted (each ADS represents five ordinary shares)

 

 

(0.87

)

 

 

(1.63

)

 

 

(1.14

)

 

 

(1.11

)

 

 

(0.16

)

Weighted average shares used in in calculating

net loss per ordinary share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

319,406,760

 

 

 

319,406,760

 

 

 

321,584,804

 

 

 

415,523,933

 

 

 

415,523,933

 

Weighted average shares used in in calculating

net loss per ADS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

63,881,352

 

 

 

63,881,352

 

 

 

64,316,961

 

 

 

83,104,787

 

 

 

83,104,787

 

Supplemental non-GAAP information:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net loss attributable to ruhnn

 

 

(55,383

)

 

 

(104,005

)

 

 

(73,246

)

 

 

(13,554

)

 

 

(1,914

)

Adjusted net loss per ADS, basic and diluted

 

 

(0.87

)

 

 

(1.63

)

 

 

(1.14

)

 

 

(0.16

)

 

 

(0.02

)

 

(1)

See “Non-GAAP Financial Measures” below.

4


Table of Contents

Non-GAAP Financial Measures

We use non-GAAP measures, such as adjusted net loss attributable to ruhnn and adjusted basic and diluted net loss per ADS, in evaluating our operating results and for financial and operational decision-making purposes. We believe that the non-GAAP financial measures help identify underlying trends in our business by excluding the impact of noncash charges of amortization expense of intangible assets in relation to exclusive cooperation rights and share-based compensation expense, and litigation costs incurred in relation to the class action. We believe that the non-GAAP financial measures provide useful information about our results of operations, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in our financial and operational decision-making.

The non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. The non-GAAP financial measures have limitations as analytical tools, and when assessing our performance, investors should not consider them in isolation, or as a substitute for financial information prepared in accordance with U.S. GAAP.

We mitigate these limitations by reconciling the non-GAAP financial measures to the most comparable U.S. GAAP performance measures, all of which should be considered when evaluating our performance.

A reconciliation of these non-GAAP financial measures in fiscal years 2017, 2018, 2019 and 2020 to the nearest U.S. GAAP performance measures is provided below:

 

 

 

Year Ended March 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

RMB

 

 

RMB

 

 

RMB

 

 

RMB

 

 

US$

 

 

 

(Amounts in thousands, except share data)

 

Net loss attributable to ruhnn

 

 

(55,383

)

 

 

(104,005

)

 

 

(73,246

)

 

 

(92,491

)

 

 

(13,061

)

Amortization expense of intangible assets

   in relation to exclusive cooperation rights

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,600

 

 

 

2,909

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

55,351

 

 

 

7,817

 

Litigation costs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,986

 

 

 

422

 

Adjusted net loss attributable to ruhnn

 

 

(55,383

)

 

 

(104,005

)

 

 

(73,246

)

 

 

(13,554

)

 

 

(1,913

)

Adjusted net loss per ADS (each ADS represents five ordinary shares):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

(0.87

)

 

 

(1.63

)

 

 

(1.14

)

 

 

(0.16

)

 

 

(0.02

)

Weighted average shares used in calculating

   adjusted net loss per ordinary share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

319,406,760

 

 

 

319,406,760

 

 

 

321,584,804

 

 

 

415,523,933

 

 

 

415,523,933

 

Selected Combined and Consolidated Balance Sheets Data

 

 

 

As of March 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

RMB

 

 

RMB

 

 

RMB

 

 

RMB

 

 

US$

 

 

 

(Amounts in thousands)

 

Cash and cash equivalents

 

 

21,369

 

 

 

9,713

 

 

 

89,960

 

 

 

718,478

 

 

 

101,468

 

Restricted cash

 

 

-

 

 

 

21,208

 

 

 

13,861

 

 

 

5,673

 

 

 

801

 

Short-term investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

76,450

 

 

 

10,797

 

Accounts receivable, net

 

 

219

 

 

 

6,240

 

 

 

29,372

 

 

 

60,370

 

 

 

8,526

 

Inventories

 

 

234,579

 

 

 

320,383

 

 

 

220,151

 

 

 

145,553

 

 

 

20,556

 

Advances to suppliers

 

 

40,977

 

 

 

24,695

 

 

 

42,145

 

 

 

32,628

 

 

 

4,608

 

Total current assets

 

 

333,031

 

 

 

412,829

 

 

 

428,458

 

 

 

1,076,464

 

 

 

152,025

 

Property and equipment, net

 

 

5,282

 

 

 

5,145

 

 

 

146,071

 

 

 

183,404

 

 

 

25,902

 

Intangible assets, net

 

 

-

 

 

 

3,740

 

 

 

104,457

 

 

 

82,567

 

 

 

11,661

 

Total assets

 

 

342,292

 

 

 

424,643

 

 

 

689,290

 

 

 

1,434,051

 

 

 

202,528

 

Accounts payable

 

 

68,697

 

 

 

72,890

 

 

 

78,061

 

 

 

104,822

 

 

 

14,804

 

Amounts due to related parties

 

 

285,570

 

 

 

374,558

 

 

 

574,859

 

 

 

18,097

 

 

 

2,556

 

Total liabilities

 

 

385,509

 

 

 

558,668

 

 

 

781,136

 

 

 

256,289

 

 

 

36,195

 

Total shareholders’ (deficit) equity

 

 

(43,217

)

 

 

(134,025

)

 

 

(91,846

)

 

 

1,177,762

 

 

 

166,332

 

5


Table of Contents

 

Selected Combined and Consolidated Statements of Cash Flows Data

 

 

 

Year Ended March 31,

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

RMB

 

 

RMB

 

 

RMB

 

 

RMB

 

 

US$

 

 

 

(Amounts in thousands)

 

Net cash (used in) provided by operating activities

 

 

(240,532

)

 

 

(27,575

)

 

 

(9,385

)

 

 

50,566

 

 

 

7,142

 

Net cash used in investing activities

 

 

(10,133

)

 

 

(1,949

)

 

 

(6,702

)

 

 

(320,249

)

 

 

(45,228

)

Net cash provided by financing activities

 

 

272,034

 

 

 

39,076

 

 

 

88,987

 

 

 

885,475

 

 

 

125,052

 

Effect of exchange rate changes on cash,

   cash equivalents and restricted cash

 

 

-

 

 

-

 

 

-

 

 

 

4,538

 

 

 

641

 

Net increase in cash, cash equivalents and restricted cash

 

 

21,369

 

 

 

9,552

 

 

 

72,900

 

 

 

620,330

 

 

 

87,607

 

Cash, cash equivalents and restricted cash

   at beginning of the year

 

 

-

 

 

 

21,369

 

 

 

30,921

 

 

 

103,821

 

 

 

14,662

 

Cash, cash equivalents and restricted cash

   at end of the year

 

 

21,369

 

 

 

30,921

 

 

 

103,821

 

 

 

724,151

 

 

 

102,269

 

Exchange Rate Information

Substantially all of our operations are conducted in China and all of our revenue is denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB7.0808 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2020. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On August 7, 2020, the noon buying rate for Renminbi was RMB6.9670 to US$1.00.

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

Risks Relating to Our Business and Industry

We may not be able to maintain and optimize our KOL ecosystem.

Our ability to maintain our KOL ecosystem which creates strong network effects among our ecosystem participants is critical to our success. The extent to which we are able to maintain and strengthen the attractiveness of our ecosystem depends on our ability to offer a mutually beneficial platform for all participants, including our KOLs, their fans who are potential buyers in our online stores, designers, brands and online retailers, manufacturers and suppliers. To this end, we need to maintain the quality of our products and services, develop attractive opportunities and create profits for our ecosystem participants, expand the scope and scale of our ecosystem, and retain our participants. We must also continue utilizing data to enhance our KOL selection and cultivation, increase fan engagement, develop our product design and merchandising, improve operational efficiency and upgrade our technology infrastructure.

Changes made to enhance our ecosystem or balance the interests of participants may be viewed positively by one participant but may have negative effects upon another. If we fail to balance the interests of all participants in our ecosystem, we may fail to attract and retain additional ecosystem participants, which could adversely impact our business, financial condition and results of operations.

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Our limited operating history makes it difficult to evaluate our business and prospects. We cannot guarantee that we will be able to maintain the growth rate that we have experienced to date.

We have a limited operating history. Our founders started to explore the commercialization of KOLs through e-commerce in 2014, and the first company in our current corporate structure commenced operations in 2016. Revenue from our product sales through full-service model increased by 59% from RMB572.4 million for fiscal year 2017 to RMB912.5 million for fiscal year 2018, increased by 3% to RMB942.8 million for fiscal year 2019 and increased by 5% to RMB992.6 million (US$140.2 million) for fiscal year 2020. Revenue from our services through platform model increased by approximately 5.4 times from RMB5.5 million for fiscal year 2017 to RMB35.1 million for fiscal year 2018, increased by approximately 3.3 times to RMB150.7 million for fiscal year 2019 and increased by 101% to RMB303.2 million (US$42.8 million) for fiscal year 2020. However, our historical performance may not be indicative of our future growth or financial results. We cannot assure you that we will grow at the same rate as we did in the past or avoid any decline in the future. Our growth may slow down or become negative, and revenue 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, unexpected pandemic, 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 our ADSs could decline. You should consider our prospects in light of the risks and uncertainties that companies with a limited operating history may encounter.

A substantial portion of our revenue is generated from online stores opened in the names of a limited number of KOLs under the full-service model. We may experience a decrease in purchases on our online stores.

Product sales revenue through full-service model accounted for 96%, 86% and 77% of total net revenue, while the number of KOLs serving the full-service model through online stores opened in their names was 33, 14 and 3, for fiscal years 2018, 2019 and 2020, respectively, following the transition of certain online stores from full-service model to platform model. Online stores opened in the names of our top-tier KOLs classified based on GMV facilitated accounted for 69%, 68% and 73% of our total net revenue for fiscal years 2018, 2019 and 2020, respectively. In particular, online stores opened in the name of Dayi Zhang, accounted for 52%, 55% and 58% of our total net revenue for fiscal years 2018, 2019 and 2020, respectively. The success of our online stores is largely determined by the popularity of the KOLs in whose names such stores are opened. KOLs with more fans are able to reach a wider audience when they promote our products on their social media pages and to direct more potential customers to our online stores to purchase such products. As of March 31, 2020, our top-tier KOLs classified based on GMV faciliatated had approximately 37.9 million fans and Dayi Zhang had approximately 26.5 million fans on various social media platforms, representing 18% and 13%, respectively, of the total number of fans of our KOLs.

Our concentration on online stores opened in the names of a few KOLs exposes us to the risk of substantial decreases in, or impediments to the growth of, our revenue if the number of fans or the popularity of any of such KOLs is reduced or fails to grow. We anticipate that a limited number of KOLs under the full-service model will continue to contribute to the majority of our total net revenue in the near future, as it will take time for other KOLs to develop their fan bases and thus our customer base. We cannot assure you that our top-tier KOLs will be able to retain their popularity, or our other KOLs will be able to increase their number of fans. See also “- Negative publicity about our KOLs or our products may materially and adversely affect our reputation, our business and the trading price of our ADSs.” Any failure to do so will materially and adversely affect our business, prospects, financial performance and results of operations.

We have incurred net losses in the past, and we may continue to incur losses in the future.

We have incurred net losses in our history. For fiscal years 2018, 2019 and 2020, we incurred net losses of RMB90.0 million, RMB84.9 million and RMB97.8 million (US$13.8 million), respectively. We also had negative cash flows from operations of RMB27.6 million and RMB9.4 million for fiscal years 2018 and 2019, respectively. While we had positive cash flows from operations of RMB50.6 million for fiscal year 2020, we cannot assure you that we will be able to maintain a positive operating cash flow for any future period. We expect our operating expenses to increase in absolute amounts in the future due to (i) the continued expansion of our business, and (ii) the continued identification and cultivation of KOLs, which will affect our ability to achieve profitability.

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Our ability to achieve profitability depends on our ability to, among other things, increase the number of fans and consumers, grow and diversify our product and service offerings and optimize our cost structure. However, we may not be able to achieve any of the above. In particular, our sales and marketing expenses increased by 41% to RMB205.7 million for fiscal year 2019, primarily due to the increased expenses of KOL incubation, cultivation and training in order to support increased activities in the Company’s KOL sales and advertising businesses. Our sales and marketing expense further increased by 48% to RMB305.2 million (US$43.1 million) for fiscal year 2020, primarily due to (i) the expansion of our KOL pool, which caused related expenses for KOL incubation, cultivation and personnel of related support teams to increase, and (ii) non-cash amortization expense of intangible assets in relation to exclusive cooperation rights of RMB20.6 million (US$2.9 million) and the noncash amortization of share-based compensation expense of RMB10.2 million (US$1.4 million). If we continue to incur substantial sales and marketing expenses without being able to achieve the anticipated consumer and revenue growth, our operating results may be materially and adversely affected. As a result, we may fail to improve our operating margin and may continue to incur net losses in the future.

The Covid-19 pandemic has adversely affected, and may continue to adversely affect, our results of operations.

The Covid-19 pandemic has adversely impacted our business since the fourth quarter of fiscal year 2020. Among other things, the product manufacturing, logistics and fulfillment of us and certain third-party merchants and brands that cooperated with us were adversely affected due to various travel restrictions and quarantine measures imposed in China. We have implemented preventative measures to protect the health and safety of our employees and made appropriate adjustments to our business operations in response to the pandemic’s impact.

While we have seen gradual recovery of our overall business resulting from improving health statistics in China since March 2020, the pandemic continued to have an adverse effect on our business and results of operations for the past few months and we anticipate the negative impact of the pandemic may continue. As a result, our results of operations for fiscal year 2021 and any period thereof could be worse than our results of operations for fiscal year 2020 and corresponding periods thereof.

The duration and magnitude of the impact from the pandemic on our business will depend on numerous evolving factors that cannot be accurately predicted or assessed, including the duration and scope of the pandemic, the negative impact it has on the Chinese and global economy, its impact on unemployment and consumer confidence, our ability to successfully navigate the impact of the pandemic, as well as actions governments, businesses and individuals take in response to the pandemic.

We and our KOLs may fail to anticipate or influence changes in fans’ buying preferences and develop our product offering and merchandising.

The success of our business depends on our and our KOLs’ ability to anticipate and influence the purchase decisions of our KOLs’ fans. The market for products sold in our online stores, in particular women’s apparel, changes rapidly in ways that are often difficult to predict. Consequently, we must stay abreast of emerging consumer preferences, anticipate product trends that will appeal to our KOLs’ existing and potential fans and take them into account during our product design and manufacturing process. This requires a combination of various elements, including but not limited to accurate analysis and prediction of market trends, timely collection of fans’ feedback, strong research and development capability, and access to flexible product production. If we are unable to accurately predict or timely react to evolving preferences or trends, or if we misjudge the market for our products, the continued success and future growth of our business could be materially and adversely affected, potentially resulting in significant decreases in revenue.

We may not be able to attract new KOLs or retain our existing KOLs.

We rely on our KOLs to promote our products and to drive traffic to our online stores. See “Item 4. Information on the Company — B. Business Overview — Our KOLs — Key Information of Our Selected KOLs.” We enter into cooperation agreements with our KOLs. The term of the cooperation agreements typically ranges from three to five years. If any of our KOLs cease to cooperate with us during the term of the cooperation agreement or employment agreement, sales and marketing efforts of that KOL will reduce. If we are unable to enforce our rights against him or her, there may be less or no traffic to our online stores opened in his or her name and we may generate less revenue from such online stores. Even if we are able to enforce our rights against the relevant KOL, the gross compensation that we receive through enforcement may be substantially less than the revenue we would have earned were the cooperation agreement performed in full by the relevant KOL.

Starting from 2017, the cooperation agreements we entered into with our KOLs normally provide that, if the KOL’s revenue or number of new fans reaches a certain threshold during the initial contract term, it will automatically renew for a period of three years upon expiration of the original term. However, the cooperation agreements entered into before 2017 do not have such provision. If, after the term, any of our KOLs is able to sustain his or her popularity and decides to open his or her own online store or to cooperate with other KOL sales and marketing platforms, he or she may compete with our KOLs and our online stores and our ability to generate revenue could be reduced.

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We may not be successful in cultivating KOLs and may be unable to recoup the costs incurred in cultivating our KOLs.

We incurred a significant amount of operating expenses in training and providing professional support to our KOLs for fiscal years 2018, 2019 and 2020. A significant portion of such expenses in respect of each KOL are incurred before the KOL has developed a sufficiently large fan base to generate any revenue for us.

The cultivation of successful KOLs is subject to many uncertainties, including their personal style, charisma, attitude and professionalism, the receptiveness of social media users to our KOLs and other circumstances beyond our control. If any of our KOLs fails to develop a fan base to our expectations, we may not open any online store in his or her name or such online store may not be successful, and in such case, we may fail to receive the expected revenue from online stores or fail to recoup the costs incurred in training and supporting such KOL, which may adversely impact our business, financial condition and results of operations.

Negative publicity about our KOLs or our products may materially and adversely affect our reputation, our business and the trading price of our ADSs.

Negative publicity about our KOLs or our products may arise and appear on the internet and other media from time to time. There has been negative publicity about our KOLs in the past including recent negative publicity about one of our top KOLs, and negative publicity of a similar or more serious nature may arise in the future. For example, we do not interfere with our KOLs’ personal lives and we respect our KOLs’ privacy and other personal rights. Partly due to the popularity of our KOLs, however, one or more aspects of their personal lives may be exposed to the public and related information and rumors may widely spread on the internet and other media, which may in certain cases signficantly harm our KOLs’ reputation, reduce their fans’ loyalty and adversely affect their ability to advertise, promote and sell products of us and our business partners. Our KOLs may also post unlawful, false, offensive or controversial content on their social media pages, notwithstanding any terms of use of the social media platforms and our guidelines, which may result in negative comments and complaints or even cause their accounts to be closed by social media platforms. In addition, they may also receive negative publicity if they are involved in any illegal activities, scandals or rumors. Such negative publicity may lead to an impairment of the intangible assets on our combined and consolidated balance sheets.

Our products may also be subject to negative publicity for various reasons, such as complaints about the quality of our and their products and related services or other public relation incidents of us, which may adversely affect our reputation and the sales of our products of those of third-party online retailers in our online stores. Any such negative publicity, regardless of 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.

We have experienced rapid growth since our inception, but we may fail to adequately manage our expansion.

Our rapid growth has placed, and continues to place, significant strain on our management and our technology infrastructure, as well as our operational, financial and administrative systems. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded systems, procedures and controls. We will also need to continue expanding, training, managing and motivating our KOLs and employees and manage our relationships with our customers, suppliers and other service providers. All of these endeavors involve risks and will require substantial management effort and additional expenditures. We cannot assure you that we will be able to manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our business, financial condition and results of operations.

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

We have in the past generated most of our revenue from our full-service model. In the future, revenue from our platform model is expected to grow more rapidly, and under our platform model, we plan to diversify our service offerings to include more KOL services such as additional forms of advertising and casting. Such plans may require us to devote significant financial and managerial resources and may not perform as expected. In addition, we may not be able to successfully anticipate and address customer demands and preferences in connection with new product offerings and our existing network may not be adaptable to the new product offerings.

We also expect to explore new monetization opportunities and expand our revenue sources, and to adjust the proportion of our revenue from different revenue sources in response to changes in market conditions. This may make predicting our future results of operations more difficult than it otherwise would be. Therefore, our past results of operations should not be taken as indicative of our future performance. We may also be inexperienced with the operations associated with new monetization opportunities.

If we cannot successfully address challenges, 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.

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We may fail to manage our inventories effectively.

To operate our business successfully and meet our consumers’ demands and expectations, we must maintain a certain level of finished goods inventory to ensure immediate delivery when required. However, forecasts are inherently uncertain. For example, as we allow consumers to cancel their pre-orders, we may not be able to make accurate forecasts and actual orders may be lower than our forecasted orders, and therefore, we may not be able to maintain an appropriate level of inventory of fabrics and raw materials for production. In addition, if our forecasted demands are lower than actual demand, we may not be able to maintain an adequate inventory level of our finished goods or produce our products in a timely manner and may lose sales and market share to our competitors. On the other hand, if our forecasted demand is higher than actual demand, we may be exposed to increased inventory risks due to accumulated excess inventory of our finished products, fabrics or raw materials. Excess inventory levels may lead to increases in inventory holding costs, risk of inventory obsolescence, increases in markdown allowances and write-offs.

Our return and exchange policies may adversely affect our results of operations.

We have adopted consumer-friendly return and exchange policies that make it convenient for consumers to change their minds after completing purchases. We may also be required by law to adopt new or amend existing return and exchange policies from time to time. For example, pursuant to the amended Consumer Protection Law, which became effective in March 2014, consumers are generally entitled to return the products purchased within seven days upon receipt without giving any reasons when they purchase the products from business operators on the internet. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Relating to Tort Liability, Product Quality and Consumer Protection.” These policies subject us to additional costs and expenses, which we may not recoup through increased revenue. Our ability to handle a large volume of returns is unproven. If our return and exchange policy is misused by a significant number of consumers, our costs may increase significantly, and our results of operations may be materially and adversely affected.

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

We have experienced, and we expect to continue to experience, seasonal fluctuations in our revenue, which have caused, and will continue to cause, fluctuations in our results of operations. We generally experience a lower level of sales in the fourth quarter of each fiscal year due to the Chinese New Year holiday, during which consumers generally spend less time on our KOLs’ social media spaces and on online shopping, while we usually have higher sales in the third quarter of each fiscal year due to sales on Singles Day in November, Double Twelve in December and sales of fall and winter apparel, which typically have a higher average selling price than spring and summer apparel. In addition, our logistics and fulfillment service hours will be impacted by holidays.

We make planning, inventory and personnel decisions based on our estimates of demand. If we fail to adequately increase inventory levels for popular products or do not have sufficient staff to handle purchase orders in a timely manner, we may fail to meet consumer demand, which may reduce the volume of transactions in our online stores as well as the attractiveness or such online stores. On the other hand, if we overstock products or if we hire more staff than required, we may be required to take inventory markdowns or write-offs or we may incur unnecessary costs, which could reduce our profits.

We may be subject to product liability claims that could be costly and time-consuming.

We sell our products and promote third-party merchants’ products on our KOL sales and marketing platform; some of the products may be defective. 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 that consumers were harmed due to their reliance on our KOLs’ promotion of third-party brands’ products. If a successful claim were brought against us, it could adversely affect our business. We may have the right under applicable laws, rules and regulations to recover from the relevant manufacturers or third-party merchants compensation that we are required to make to consumers in connection with a product liability, personal injury or a similar claim, if such relevant party is found responsible. However, there can be no assurance that we will be able to recover all or any amounts from these parties. Any product liability claim, regardless of its merit or success, could result in the expenditure of funds and management time and adverse publicity and could have a negative impact on our reputation, business, financial condition and results of operations.

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We may incur liability for counterfeit, unauthorized, illegal, or infringing products sold or misleading information available on our KOL sales and marketing platform.

Under our platform model, our KOLs represent reputable brands and online retailers on our KOL sales and marketing platform. However, brands’ and online retailers’ measures of safeguarding against counterfeit, unauthorized, illegal, or infringing products sold through e-commerce platforms may not be adequate. Although we have indemnity clauses in most of our contracts with our brands and online retailers, sales could decline and our reputation may be adversely affected. We may be subject to sanctions under applicable laws and regulations if we are deemed to have participated or assisted in infringement activities associated with counterfeit goods, which may include injunctions to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability, depending on the gravity of such misconduct. Furthermore, counterfeit products may be defective or inferior in quality as compared to authentic products and may pose safety risks to consumers. If consumers are injured by counterfeit, unauthorized, illegal, or infringing products sold on our KOL sales and marketing platform, we may be subject to lawsuits, severe administrative penalties and criminal liability. See “— We may be subject to product liability claims that could be costly and time-consuming.” We believe our reputation is extremely important to our success and our competitive position. The discovery of counterfeit, unauthorized, illegal, or infringing products promoted by our KOLs or sold on our KOL sales and marketing platform may severally damage our reputation among brand partners, and they may refrain from using our services in the future, which would materially and adversely affect our operations and financial results.

We rely on a limited number of online social media platforms and e-commerce platforms to conduct our business. However, operators of the platforms may curtail or inhibit our ability to use the platforms, or there may be material disruption of the platforms.

Our KOLs use social media platforms such as Weibo, Weitao, Douyin, Kuaishou, Bilibili and Xiaohongshu to promote our and third-parties’ products and to drive traffic to online stores on platforms like Alibaba and Kuaishou.

While they are generally open to all users, these social media and e-commerce platforms have no obligation to allow us or our KOLs to use their platforms in the long term. If we or our KOLs breach the terms of use of such platforms, or for any other reason, the platform operators may decide at any time to curtail or inhibit our ability to use such platforms, for example, by banning or closing our or our KOLs’ user accounts. Additionally, these platforms may increase their fees or make changes to their respective business models, terms of use, policies or systems, and those changes could impair or restrict our or our KOLs’ ability to post content and sell products. Further, social media platforms and e-commerce platforms could cease operations unexpectedly due to a number of events, including interruptions in telecommunication services, computer viruses and security breaches.

Any of the above could reduce our KOLs’ ability to post promotional content, fans’ and consumers’ engagement time, our ability to serve third-party online retailers, and traffic and sales on our online stores, any of which could affect our ability to achieve profitability or have a material adverse effect on our business, financial condition and results of operations.

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

As of March 31, 2020, we had over 700 fabric suppliers, wholesale clothing providers and manufacturers on our supplier list who had worked with us and with which we expect to continue our business relationships in the near future. Maintaining strong relationships with these suppliers is important to the growth of our business. In particular, we depend significantly on our suppliers to provide fabrics and sample clothes or to produce apparel for us on favorable pricing terms. We typically enter into framework agreements with suppliers on an annual basis, and these framework agreements do not ensure the availability of products or the continuation of particular pricing practices or payment terms beyond the end of the relevant contractual terms. We cannot assure you that our current suppliers will continue to sell products or provide services to us on commercially acceptable terms, or at all, after the term of the current agreement expires. If our suppliers cease to provide us with favorable payment terms, our requirements for working capital may increase and our operations may be materially and adversely affected.

Moreover, we may also become involved in disputes with our suppliers on the required prepayments and relevant settlement afterwards. If we fail to maintain business relationships with our suppliers due to such disputes, and we will need to establish new supplier relationships promptly to ensure that we have access to a steady supply of products or services on favorable commercial terms. However, we cannot assure you that we will be able to find new suppliers who can satisfy our requirements.

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The success of our platform model is linked to the success of third-party merchants whose products and services our KOLs promote or who publish advertisements on the social media space of our KOLs.

For our platform model, our success and our growth are partly dependent upon the success of third-party merchants who hire our KOLs to promote their products and services or who place advertisements on our KOL sales and marketing platform. As we continue growing our business under our platform model, our future success will be dependent more on the success of such third-party merchants, including brands and online retailers. As we negotiate with third-party merchants on a case-by-case basis, the rates we charge for our KOL service fees may vary from merchant to merchant. We cannot assure you that our efforts to optimize our customer base under our platform model will be successful or will not have any material adverse impact on our business performance or results of operations. If our customers under our platform model were to have financial difficulties, suffer impairment of their brands or if the profitability of, or demand for, their products or services decreases, it could adversely affect our results of operations and our ability to maintain and grow our business. Our business could also be adversely affected if our customers’ marketing, brands or retail stores are not successful or if they reduce their marketing efforts.

We depend on logistics service providers to deliver products to customers, and they may fail to provide reliable logistics services.

We rely on logistics service providers to deliver products to our customers. See “Item 4. Information on the Company — B. Business Overview — Our Suppliers —Logistics Service Providers.” Any major interruptions to or failures in these logistics service providers could prevent the timely or successful delivery of products. These interruptions may be due to unforeseen events that are beyond our control or the control of these third-party logistics providers, such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. If products are not delivered on time or are delivered in a damaged state, customers may return the products and may claim refund from us, third-party brands or other online retailers who cooperate with us, and these third-party brands or other online retailers may have less confidence in our services. As a result, we may lose brand and online retailer partners, and our business, financial condition and results of operations could suffer.

We are subject to payment processing related risks.

Our online stores accept payments through third party online payment platforms such as Alipay. For certain payment methods, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profitability. We may be subject to fraud and other illegal activities in connection with online payment. We are also subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to process electronic funds transfers or facilitate other types of online payments, and our business, financial condition and results of operations could be materially and adversely affected.

In addition, as restricted by Alipay, one corporate entity can only be associated with a maximum of five online store accounts and receive revenue generated from these stores via Alipay. As we can associate our online store accounts to a limited number of our VIE’s subsidiaries, we directly receive payments from a minority of our online store accounts via Alipay, while the majority of our online stores transfer their sale proceeds to us through bank accounts opened in the names of the respective KOLs. We have taken measures to maintain control over such KOLs’ bank accounts and avoid KOLs’ misappropriation or any other misconduct in connection with our revenue generated from online stores. For example, we create and keep the passcodes required to access the online payment system. However, we cannot assure you that these measures will be effective and keep us from being harmed by KOLs’ misappropriation or misconduct. In addition, according to the Administrative Measures for RMB Bank Settlement Account, a corporation is not allowed to misuse personal accounts to receive payments from customers. Therefore, if our control over the KOL bank accounts is deemed as misuse by relevant government authorities, we may be subject to fines.

We may not be able to provide high-quality customer service.

We depend on our customer service representatives and online store managers to provide assistance to customers on our online stores. See “Item 4. Information on the Company — B. Business Overview — Our Customers — Consumers.” If they fail to satisfy the individual needs of customers, our sales could be negatively affected and we may lose potential or existing third-party online retailers, which could have a material and adverse effect on our business, financial condition and results of operations.

We may not be able to compete successfully against current and future competitors.

We face competition in the internet KOL facilitator market and e-commerce market in China, and we expect greater competition in the future from new market entrants. Intensified competition may result in a decrease in our market share or reduction in revenue or difficulty in recruiting new KOLs, any of which could negatively affect our business, financial condition, results of operations and our ability to grow our business.

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In addition, competition may intensify as our competitors raise additional capital and as established companies in other market segments expand into our market segments. If we cannot compete successfully against our current and future competitors, our business, financial condition and results of operations could be adversely affected.

We depend on our senior management as well as experienced and capable personnel generally, but we may fail to attract, motivate and retain them.

Our future success is significantly dependent upon the continued service of our senior management and other key employees, including Min Feng, Lei Sun, Chao Shen and Jacky Jinbo Wang. If members of our senior management team or other key personnel resign, join a competitor or form a competing company, we may not be able to locate suitable or qualified replacements and may face uncertainty and incur additional expenses as we seek to recruit and train new staff, which could severely disrupt our business and growth.

We have entered into employment, non-compete, non-solicitation and confidentiality agreements with our senior management and other key personnel. However, these employment, non-compete, non-solicitation and confidentiality agreements do not ensure the continued service of these senior management and key personnel, and we may not be able to enforce these agreements. In addition, we do not maintain key person life insurance for any of the senior members of our management team or other key personnel.

Competition for discovering and signing talents in the internet KOL facilitator industry and e-commerce industry in China is intense, and the availability of suitable and qualified candidates in China is limited. Competition for these individuals could cause us to offer higher compensation and other benefits to attract and retain them. Even if we were to offer higher compensation and other benefits, there is no assurance that these individuals will choose to join or continue to work for us. Any failure to attract or retain key management and personnel could severely disrupt our business and growth.

We may fail to obtain requisite approvals, licenses or permits applicable to our business or fail to comply with PRC laws and regulations.

Our business is subject to supervision and regulation by relevant PRC government authorities, including the State Administration for Market Supervision, the Ministry of Industry and Information Technology of the PRC, the National Development and Reform Commission, the Ministry of Culture and Tourism of the PRC, China Food and Drug Administration and/or their relevant local counterparts. These government authorities promulgate and/or enforce regulations that cover many aspects of operation of online retailing such as Interim Measures for the Administration of Online Commodities Trading and Relevant Services, Product Quality Law of the PRC, Pricing Law of the PRC, Administrative Measures for Food Business Licensing, Regulations for the Administration of Commercial Performances and E-commerce Law of the PRC. We are required to hold a number of licenses and permits in connection with our operations, such as business license, commercial performance permit and food business license. 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, change in our operations or change in laws and regulations applicable to us.

As the e-commerce industry is still evolving in China, new laws and regulations may be adopted from time to time, and substantial uncertainties exist regarding the interpretation and implementation of current and future PRC laws and regulations applicable to our operations. Our current business activities could be found in violation of any future laws and regulations or any of the laws and regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations. In addition, although relevant PRC government authorities currently do not have any laws or regulations governing KOLs’ qualifications, activities, behaviors and other elements that may have an impact to our business, they could tighten the restrictions on KOL-related business and promulgate new laws and regulations in the future.

If we fail to adapt to any new regulatory requirement or any competent government authority considers that we operate our business without any requisite license, permit or approval, or otherwise fails to comply with applicable regulatory requirements, we may be subject to administrative actions and penalties against us, including fines, confiscation of our incomes, revocation of our licenses or permits, or, in severe cases, cessation of certain business. Any of these actions may have a material and adverse effect on our business, financial condition and results of operations.

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We may fail to renew our leases upon expiration or comply with relevant PRC laws that require registration of lease agreements as well as other title certificates, in which case we may have to relocate our offices or warehouses.

As of March 31, 2020, we leased 9,245 square meters of office space in Hangzhou, Zhejiang Province, and leased an aggregate of over 48,926 square meters of warehouses in Haining and Hangzhou, Zhejiang Province, and we may have to relocate for a number of reasons. For example, we may not be able to successfully renew leases upon expiration of the current term and may decide to move to more premium locations or have to relocate our operations as required by relevant PRC laws and regulations. In particular, our warehouses which are not located at our registered corporate addresses in China have not registered as our branches with the competent government authority and we may be subject to fines of up to RMB100,000 for each of such warehouses or may need to relocate our warehouses. In those cases, we may not be able to locate desirable alternative sites for our offices or warehouses under favorable terms. Nevertheless, we are in the process of establishing an operating entity to modify the registration of our corporate addresses to cover the said warehouses.

In June 2020, we terminated certain warehouse lease contracts covering 32,426 squar meters in Haining as a result of the government expropriation plan. Meanwhile, we entered into new warehouse lease contracts with third-party landlords in Haining and Hangzhou for an aggregate of 35,952 square meters.

We have not been able to receive from our lessors of some of our leased properties copies of title certificates or proof of authorization to lease the properties to us. In addition, we have not registered our lease agreements with relevant government authorities as required by PRC law. As of the date of this annual report, we are not aware of any actions, claims or investigations threatened against us or our lessors with respect to the defects in our leasehold interests. However, if any of our leases is terminated as a result of challenges by third parties or governmental authorities for lack of title certificates or proof of authorization to lease, we do not expect to be subject to any fines or penalties but we may be forced to relocate the affected offices or warehouses and incur additional expenses relating to such relocation. In addition, failure to complete the lease registration will not affect the legal effectiveness of the lease agreements according to PRC law, but the real estate administrative authorities may require the parties to the lease agreements to complete lease registration within a prescribed period of time and the failure to do so may subject the parties to fines from RMB1,000 to RMB10,000 for each of such lease agreements.

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

We rely on a combination of trademark, patent, copyright 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. Our cooperation agreements with KOLs typically provide that we own their portrait rights or right of publicity on social media platforms, social media accounts and online store accounts. Our cooperation agreements with KOLs also include provisions on confidentiality and intellectual property rights protections. We also enter into confidentiality agreements with our employees and any third parties who may access our proprietary information, and we rigorously control access to our proprietary technology and information. Our success also depends in part upon the technology and AI solutions that we utilize in designing and manufacturing products as well as certain systems we use in managing the entire fulfillment and transaction process.

Nevertheless, it may be possible for third parties to obtain and use our intellectual property and exclusive rights without authorization. Intellectual property protection may not be sufficient or consistent in China. Moreover, cooperation agreements and confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights 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 and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property and exclusive rights. 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 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 or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

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

Third parties may claim that the technology or content used in our KOLs’ social media pages or our operation of online stores infringe upon their intellectual property rights. For example, while offering our advertising services, we may be subject to liabilities such as infringement of copyrights or trademarks and to other claims based on the materials and content posted on our KOL sales and marketing platform. We have been in the past subject to claims relating to infringement of the intellectual property rights of others. The possibility of intellectual property claims against us increases as we continue to grow. Such claims, whether or not having merit, may result in our expenditure of significant financial and management resources, injunctions against us or payment of damages. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in the number of third parties whose sole or primary business is to assert such claims.

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

The outcome of any claims, investigations and proceedings is inherently uncertain, and in any event, defending against these claims could be both costly and time-consuming and could significantly divert the efforts and resources of our management and other personnel. An adverse determination in any such litigation or proceedings could cause us to pay damages, legal fees and other costs, as well as limit our ability to conduct business or require us to change the manner in which we operate. 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.

The proper functioning of our information technology systems is essential to our business. We may fail to maintain the satisfactory performance of our systems.

Our business relies on the proper functioning of our information technology systems. We use information technology systems to enable us to conduct our operations, including product design and procurement, inventory control, supplier management, market data analysis, sales, logistics, KOL identification, cultivation and support, customer service, budgeting and financial reporting. Although we did not experience any material failure or breakdown of our information technology systems during fiscal years 2018, 2019 and 2020, we cannot assure you that our information technology systems will always operate without interruptions. Any malfunction of our information technology systems, whether caused by computer viruses, hacking or other security breaches, errors encountered during system upgrades or other issues, that result in the unavailability or slowdown of our information technology systems may, individually or collectively, materially and adversely affect our business, financial condition and results of operations.

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. We cannot assure you that our security mechanisms will be sufficient to protect our information technology systems from any such occurrences, which could materially and adversely affect our business, reputation and prospects.

Further, we must continue to upgrade and improve our information technology systems and software to support our business growth, and failure to do so could impede our growth. However, we cannot assure you that we will be successful in implementing these system and software upgrades and improvement plans. In particular, our systems may experience interruptions during upgrades, and any new technologies may not be fully integrated with our existing systems on a timely basis, or at all. If our existing or future technology systems or software do not function properly, we could experience disruptions and failures, which in turn could materially and adversely affect our business, financial condition and results of operations.

Our business generates, collects and processes a large quantity of data, and any improper use or disclosure of or unauthorized access to such data may harm our reputation.

Our business generates, collects and processes a large quantity of personal, transaction, demographic and behavioral data. We face risks inherent in handling large volumes of data and in protecting the security of such data. In particular, we face challenges related to protecting the data in our system, including against attacks on our system by outside parties or fraudulent behavior by our employees, addressing concerns related to privacy and sharing, safety, security and other factors, and complying with applicable laws, rules and regulations relating to the collection, use, disclosure and security of personal information, including requests from regulatory and government authorities relating to such data.

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The PRC regulatory and enforcement regime with regard to data security and data protection has continued to evolve. There are uncertainties on how certain laws and regulations will be implemented in practice. PRC regulators have been increasingly focused on regulating data security and data protection. We expect that these areas will receive greater attention from regulators, as well as attract public scrutiny and attention going forward. This greater attention, scrutiny and enforcement, including more frequent inspections, could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, our reputation and results of operations could be materially and adversely affected.

Failure to protect confidential information of KOLs, fans and consumers, brands and other merchants on our KOL sales and marketing platform against security breaches could damage our reputation and substantially harm our business and results of operations.

A significant challenge to the e-commerce business is the secure storage of confidential information and its secure transmission over public networks. A majority of the product orders and purchase payments are made through online transactions. Maintaining complete security on our KOL sales and marketing platform for the storage and transmission of confidential or private information, such as consumers’ personal information, payment-related information and transaction information, is essential to maintain consumer confidence in our platform.

We have adopted strict security policies and measures, including encryption technology, to protect our proprietary data and buyer information. However, advances in technology, skills of hackers, new discovery in the field of cryptography or other events or development could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties from illegally obtaining such confidential or private information we hold with respect to KOLs, fans and consumers, brands and other merchants on our platform. Such individuals obtaining confidential or private information may further engage in various illegal activities using such information. In addition, we have limited control or influence over the security policies or measures adopted by third-party online payment service providers through which most of our consumers may choose to make payment for purchases. Any negative publicity about our online stores’ safety or privacy protection mechanisms and policies, and any claims asserted against us or fines imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and results of operations. Any compromise of our information security or the information security measures of third-party online payment service providers could have a material and adverse effect on our reputation, business, prospects, financial condition and results of operations.

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

Our business operations and expansion require a substantial amount of capital. We had negative cash flows from operations of RMB27.6 million and RMB9.4 million for fiscal years 2018 and 2019, respectively. We expect that our business operations will continue to require a substantial amount of working capital. Although we had positive cash flows from operations of RMB50.6 million (US$7.1 million) for fiscal year 2020, we cannot assure you that we will be able to maintain positive cash flows from operations in the near future. To expand our business, we have also incurred, and expect to continue to incur, substantial costs to expand our KOL pool and develop our diversified monetization channels and we may only be able to recover such costs over the long term.

We have historically funded our operations with contributions, advances from our shareholders and IPO proceeds. 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.

We may engage in acquisitions, investments or strategic alliances in the future, which could require significant management attention and materially and adversely affect our business and results of operations.

We may identify strategic partners to form strategic alliances and invest in or acquire additional assets, technologies or businesses that are complementary to our existing business. These investments may involve minority stakes in other companies, acquisitions of entire companies or acquisitions of selected assets.

Any future strategic alliances, investments or acquisitions and the subsequent integration of the new assets and businesses obtained or developed from such transactions into our own may divert management from their primary responsibilities and subject us to additional liabilities. In addition, the costs of identifying and consummating investments and acquisitions may be significant. We may also incur costs and experience uncertainties in completing necessary registrations and obtaining necessary approvals from relevant government authorities in China and elsewhere in the world. The costs and duration of integrating newly acquired assets and businesses could also materially exceed our expectations. Any such negative developments could have a material adverse effect on our business, financial condition, results of operations and cash flow.

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We may not have sufficient insurance coverage.

We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased property insurance covering our inventory. However, we do not maintain business interruption insurance, general third-party liability insurance or key-man insurance. This could leave us exposed to potential claims and losses. Any business disruption, litigation, regulatory action, outbreak of epidemic disease or natural disaster could also expose us to substantial costs and diversion of resources. We cannot assure you that our insurance coverage is sufficient to prevent us from any losses or that we will be able to successfully claim for losses under our current insurance policies on a timely basis, or at all. If we incur losses that are not covered by our insurance policies, or if the amount reimbursed is significantly less than our actual losses, our business, financial condition and results of operations could be materially and adversely affected.

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

As a U.S. public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the Nasdaq Global Select Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. We must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act starting from this annual report. Our management has concluded that, as of March 31, 2020, our existing disclosure controls and procedures and internal control over financial reporting were ineffective, due to the material weakness described below. See “Item 15. Controls and Procedures — Management’s Annual Report on Internal Control over Financial Reporting.”

In accordance with reporting requirements set forth by the SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The two material weakness, which was first identified in the course of preparing our combined and consolidated financial statements for the fiscal year ended March 31, 2018, relates to (i) a lack of formal documentation of accounting policies and procedures relating to financial reporting in accordance with U.S. GAAP, and (ii) a lack of formal risk assessment process over financial reporting and internal control framework. To remedy our identified material weakness, we have undertaken and will continue to undertake steps to strengthen our internal control over financial reporting, including establishing a group-wide risk assessment process which identifies risks arising from both internal and external events and developing an overall internal control framework and maintain related documents for group level as well as each major business line. However, such measures have not been fully implemented and we concluded that the material weakness in our internal control over financial reporting have not been fully remediated as of March 31, 2020.

Once we cease to be an “emerging growth company” as the 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. In the future, our management may conclude that our internal control over financial reporting is still 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 not reach the same conclusion. In addition, 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.

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

If we are unable to implement and maintain proper and effective internal control, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of the ADSs could decline and we could be subject to sanctions or investigations by the Nasdaq, SEC or other regulatory authorities.

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We may experience a severe or prolonged downturn in the Chinese or global economy.

Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect advertising customers’ willingness to advertise or consumers’ willingness to spend on entertainment. Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of the Chinese economy since 2012. 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 in North Korea, Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns over the withdrawal of the United Kingdom from the European Union. In addition, there have been concerns over the downturn in economic output caused by the Covid-19 outbreak. It is unclear whether these challenges will be contained and what effects they each may have. Economic conditions in China are sensitive to global economic conditions. Recently there have been signs that the rate of China’s economic growth is declining, and China’s economy contracted in the first quarter of 2020 as a result of the Covid-19 outbreak. Any prolonged slowdown in China’s economic development might lead to tighter credit markets, increased market volatility, sudden drops in business and consumer confidence and dramatic changes in business and consumer behaviors.

Moreover, there have been concerns about the economic effect of the tensions in the relationship between the United States, China and neighboring Asian countries. In March 2018, U.S. President Donald J. Trump announced the imposition of tariffs on steel and aluminum entering the United States and in June 2018 announced further tariffs targeting goods imported from China. Subsequently both China and the U.S. have each imposed tariffs that have adversely affected trade between the two countries. In October 2019, U.S. President Donald J. Trump announced that China and the United States had reached a tentative agreement for the first phase of a trade deal, under which China has agreed to buy up to US$50.0 billion of American products and services, while the United States has agreed to suspend new tariffs. Such agreement was signed in January 2020. Although we do not currently export any of our products to the United States, we may do so in the near future. It is not yet clear what impact these tariffs may have or what actions other governments, including the Chinese government, may take in response. In addition, these developments could have a material adverse effect on global economic conditions, the stability of global financial markets and the Chinese economy. Political tensions between the United States and China have escalated since the Covid-19 outbreak and the passage of The Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region. 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 a material and adverse impact on the stock performance of China-based issuers listed in the United States. It is unclear if this proposed legislation would be enacted.

If present Chinese and global economic uncertainties persist, we may have difficulty in attracting advertising customers or spending by consumers on entertainment. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

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

Our business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of a widespread health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola, Covid-19 or other events, such as wars, acts of terrorism, environmental accidents, power shortage 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 also significantly impact our industry and cause a temporary closure of the facilities we use for our operations, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. Our operations could be disrupted if any of our employees or employees of our business partners were suspected of having the swine flu, avian influenza, SARS, Ebola or Covid-19, 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. In addition, our revenue and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general. 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.

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The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of operations.

The Standing Committee of the National People’s Congress enacted the Labor Contract Law in 2008, and amended it on December 28, 2012. The Labor Contract Law introduced specific provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous PRC labor laws. Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited term, subject to certain exceptions. With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated or expires. In addition, the PRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract Law.

Under the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees or separately, to pay the social insurance premiums and housing funds for their employees. To comply with such laws and regulations, we provide social security insurance including pension insurance, unemployment insurance, and work-related injury insurance to our employees. Additionally, we provide supplementary medical insurance for all management and research and development personnel. We currently make social insurance and housing fund contributions according to the minimum standards announced by local governments, but we may be deemed as violating relevant PRC laws and regulations that require companies to make social insurance and housing fund contributions based on actual wages. We may be deemed as violating the PRC Social Insurance Law and the Administrative Measures on Housing Fund, and we may be subject to fines and legal sanctions, including a late charge and a fine ranging from one to three times the amount due, and our business, financial condition and results of operations may be adversely affected.

These laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.

Risks Relating to Our Corporate Structure

The PRC government may find that the contractual arrangements that establish our corporate structure for operating our business do not comply with applicable PRC laws and regulations.

Pursuant to the Circular on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce), or the New E-commerce Circular, while foreign investors are allowed to hold up to 100% equity interest of an entity operating online data processing and transaction processing business (operational e-commerce) in China, such foreign investors still need to satisfy certain stringent qualification requirements, for instance, the major foreign investors must have good track records and operating experience in the value-added telecommunications service industry. Further, there remain significant uncertainties with respect to the interpretation and implementation of the New E-commerce Circular as well as the applications for the license regarding online data processing and transaction processing business by a wholly foreign funded enterprise in practice.

To maintain our flexibility to engage in operational e-commerce business in the future and to ensure compliance with PRC laws and regulations, we conduct our businesses in China mainly through our PRC affiliates, Hangzhou Hanyi E-Commerce Co., Ltd., or Hanyi E-Commerce or VIE, and its subsidiaries. Hanyi E-Commerce is 1% owned by Min Feng and 99% owned by Hangzhou Xinghui, which is a company incorporated in the PRC and wholly owned by Min Feng. Min Feng is a PRC citizen. We entered into a series of contractual arrangements with Hanyi E-Commerce, which enable us to:

exercise effective control over Hanyi E-Commerce and its subsidiaries;

receive substantially all of the economic benefits from Hanyi E-Commerce and its subsidiaries; and

have a call option to purchase all or part of the equity interests in Hanyi E-Commerce when and to the extent permitted by the relevant laws.

Because of these contractual arrangements, we are the primary beneficiary of Hanyi E-Commerce and its subsidiaries and treat them as our PRC affiliates under U.S. GAAP. We consolidate the financial results of Hanyi E-Commerce and its subsidiaries in our financial statements in accordance with U.S. GAAP. For a detailed discussion of these contractual arrangements, see “Item 4. Information on the Company — C. Organizational Structure — Contractual Arrangements with Our VIE and Its Shareholders.”

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There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations concerning foreign investment in the PRC, and their application to and effect on the legality, binding effect and enforceability of the contractual arrangements. In particular, we cannot rule out the possibility that PRC regulatory authorities, courts or arbitral tribunals may in the future adopt a different or contrary interpretation or take a view that is inconsistent with the opinion of our PRC legal counsel.

It is uncertain whether any new PRC laws, rules or regulations relating to VIE structures will be adopted or if adopted, what affect they may have on our corporate structure. On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which has become effective on January 1, 2020 and replace the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Foreign Owned Enterprise Law to become the legal foundation for foreign investment in the PRC. The Foreign Investment Law stipulates three forms of foreign investment, but does not explicitly stipulate the contractual arrangements as a form of foreign investment. Notwithstanding the above, the Foreign Investment Law stipulates that the concept of a foreign investment includes foreign investors investing in China through “any other methods” under laws, administrative regulations, or provisions prescribed by the State Council. Therefore, contractual arrangements could be deemed as a form of foreign investment under future laws, administrative regulations or provisions of the State Council of the PRC. If the other laws, administrative regulations and provisions of the State Council do not incorporate contractual arrangements as a form of foreign investment, the contractual arrangements as a whole and each of the agreements comprising the contractual arrangements will not be materially affected and will continue to be legal, valid and binding on the parties. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Relating to Foreign Investment” and “—We face uncertainties with respect to the implementation of the Foreign Investment Law.” If, as a result of such contractual arrangement, we or Hanyi E-Commerce and its subsidiaries are found to be in violation of any existing or future PRC laws or regulations, or such contractual arrangement is determined as illegal and invalid by the PRC court, arbitral tribunal or regulatory authorities, or we fail to obtain, maintain or renew any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

being unable to exert control over affiliated entities;

revoking the business licenses and/or operating licenses of Hangzhou Yihan Technology Co., Ltd., or Yihan Technology or WFOE, and/or Hanyi E-Commerce and its subsidiaries;

discontinuing or restricting the conduct of any transactions between Yihan Technology and Hanyi E-Commerce and its subsidiaries, which includes receiving the economic benefits of our affiliated entities under such contractual arrangements;

limiting our business expansion in China by way of entering into contractual arrangements;

imposing fines and penalties, confiscating the income from Hanyi E-Commerce and its subsidiaries, or imposing other requirements with which we or Hanyi E-Commerce and its subsidiaries may not be able to comply with;

shutting down our servers or blocking our websites;

requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with Hanyi E-Commerce and its subsidiaries and deregistering the equity pledges of Hanyi E-Commerce;

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

restricting the use of financing sources by us or Hanyi E-Commerce and its subsidiaries or otherwise restricting our or their ability to conduct business;

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

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

The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business and on our results of operations. If any of these penalties results in our inability to direct the activities of Hanyi E-Commerce and its subsidiaries that most significantly impact their economic performance, and/or our failure to receive the economic benefits from Hanyi E-Commerce and its subsidiaries, we may not be able to consolidate them in our financial statements in accordance with U.S. GAAP.

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We face uncertainties with respect to the implementation of the Foreign Investment Law.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which has become effective on January 1, 2020 and replaced the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Foreign Owned Enterprise Law to become the legal foundation for foreign investment in the PRC. The Foreign Investment Law stipulates three forms of foreign investment, but does not explicitly stipulate the contractual arrangements as a form of foreign investment. Notwithstanding the above, the Foreign Investment Law stipulates that the concept of a foreign investment includes foreign investors investing in China through “any other methods” under laws, administrative regulations, or provisions prescribed by the State Council. Therefore, there are possibilities that future laws, administrative regulations or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign investment, at which time it will be uncertain whether the contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how the above-mentioned contractual arrangements will be handled. There is no guarantee that the contractual arrangements and our business will not be materially and adversely affected in the future due to changes in PRC laws and regulations. If future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be completed by companies with existing contractual arrangements, we may face substantial uncertainties as to the timely completion of such actions. In the extreme case scenario, we may be required to unwind the contractual arrangements and/or dispose our VIEs, which could have a material and adverse effect on our business, financial condition and result of operations.

We rely on contractual arrangements with Hanyi E-Commerce and its shareholders for our operations in China, which may not be as effective in providing control as direct ownership.

We have relied and expect to continue to rely on the contractual arrangements with Hanyi E-Commerce and its shareholders to operate our KOL sales and marketing business. For a description of these contractual arrangements, see “Item 4. Information on the Company — C. Organizational Structure — Contractual Arrangements with Our VIE and Its Shareholders.” The revenue contribution of Hanyi E-Commerce and its subsidiaries accounted for all of our total revenue for fiscal years 2018, 2019 and 2020. However, these contractual arrangements may not be as effective as direct equity ownership in providing us with control over Hanyi E-Commerce and its subsidiaries. Any failure by Hanyi E-Commerce and its subsidiaries or the shareholders of Hanyi E-Commerce to perform their obligations under the contractual arrangements would have a material adverse effect on the financial position and performance of our company. For example, the contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in