424(b)(4)
Table of Contents

Filed pursuant to Rule 424(b)(4)
Registration No. 333-235398

 

11,500,000 American Depositary Shares

 

LOGO

Molecular Data Inc.

Representing 34,500,000 Class A Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, of Molecular Data Inc. Each ADS represents three of our Class A ordinary shares, par value US$0.00005 per share.

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. Our ADSs have been approved for listing on the Nasdaq Stock Market under the symbol “MKD.”

Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. MOLBASE Inc. will beneficially own all of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately 90.0% of our total issued and outstanding share capital immediately after the completion of this offering and 98.9% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option. Within six months following this offering, the existing shareholders of MOLBASE Inc. would become our shareholders through a distribution of our shares in proportion to MOLBASE Inc.’s current shareholding structure, which we refer to as Share Distribution in this prospectus. Upon the completion of such share distribution, the existing shareholders of MOLBASE Inc. will hold Class A ordinary shares of our company except for our founder, Dr. Dongliang Chang, who will beneficially own 54,819,733 Class B ordinary shares. The Class B ordinary shares then beneficially owned by Dr. Dongliang Chang will represent all of our issued and outstanding Class B ordinary shares upon the completion of the share distribution and will constitute approximately 15.9% equity interests or 65.4% voting power of our total issued and outstanding share capital immediately after the completion of the share distribution, assuming the underwriters do not exercise their over-allotment option in this offering. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

For as long as MOLBASE Inc. remains our parent company following the completion of this offering, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because MOLBASE Inc. will hold all of our then outstanding Class B ordinary shares, representing 98.9% of our total voting power, assuming that the underwriters do not exercise their over-allotment option, or 98.7% of our total voting power if the underwriters do exercise their over-allotment option in full.

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 16 for factors you should consider before buying the ADSs.

 

 

PRICE US$5.38 PER ADS

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

 

 

 

     Initial Public Offering Price      Underwriting
Discounts and
Commissions(1)
     Proceeds to us  

Per ADS

   US$ 5.38      US$ 0.3766      US$ 5.0034  

Total

   US$ 61,870,000      US$ 4,330,900      US$ 57,539,100  

 

(1)

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

The underwriters have an over-allotment option to purchase up to an additional 1,725,000 ADSs from us at the initial public offering price, less the underwriting discounts and commissions, within 30 days from the date of prospectus.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York to purchasers on or about January 2, 2020.

 

AMTD  

Fosun Hani

 

Boustead Securities, LLC

 

Tiger Brokers   R.F. Lafferty & Co., Inc.

Prospectus dated December 27, 2019.


Table of Contents

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Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

     1  

The Offering

     9  

Summary Consolidated Financial and Operating Data

     12  

Risk Factors

     16  

Special Note Regarding Forward-Looking Statements

     65  

Use of Proceeds

     67  

Dividend Policy

     68  

Capitalization

     69  

Dilution

     70  

Enforceability of Civil Liabilities

     72  

Corporate History and Structure

     74  

Selected Consolidated Financial and Operating Data

     80  

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

     84  

Industry

     107  

Business

     112  

Regulation

     140  

Management

     161  

Principal Shareholders

     169  

Related Party Transactions

     172  

Description of Share Capital

     174  

Description of American Depositary Shares

     186  

Shares Eligible for Future Sale

     202  

Taxation

     204  

Underwriting

     211  

Expenses Related to this Offering

     223  

Legal Matters

     224  

Experts

     225  

Where You Can Find Additional Information

     226  

Index to Consolidated Financial Statements

     F-1  

Index to Unaudited Interim Condensed Consolidated Financial Statements

     F-1  

 

 

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

Neither we or any of the underwriters has taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus or any filed free-writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus or any filed free-writing prospectus outside the United States.

Until January 21, 2020 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” before deciding whether to invest in the ADSs. This prospectus contains information from an industry report dated January 2019, as last updated in December 2019, commissioned by us and prepared by Frost & Sullivan, an independent market research firm, to provide information regarding our industry and our market position in China. We refer to this report as the “Frost & Sullivan Report.” This prospectus also contains information and statistics relating to China’s economy and the industries in which we operate which are derived from various publications issued by market research companies, international institutions and the PRC governmental entities, and have not been independently verified by us, the underwriters or any of their respective affiliates or advisers. The information in such sources may not be consistent with other information compiled in or outside of China.

Our Mission

Our mission is to become the integrated technology-enabled platform to provide comprehensive solutions for global participants along the chemical value chain.

Overview

We are a leading technology-driven platform in China’s chemical industry, connecting participants along the chemical value chain through our integrated solutions. According to the Frost & Sullivan Report, we are the largest chemical e-commerce platform in China in terms of GMV in 2017 and 2018. Built upon our core knowledge engine and supported by our artificial intelligence (AI) engine and software-as-a-service (SaaS) suite, we offer e-commerce solutions, financial solutions, and warehousing and logistics solutions to all participants across the chemical value chain. Our e-commerce solutions are mainly delivered through our online platform, consisting of our two websites, molbase.com and molbase.cn, Moku Data Weixin account, Chemical Community App and other ancillary platforms, or, collectively, our Online Platform.

The following chart summarizes the key participants in our ecosystem and how the interactions among them form a virtuous cycle:

 

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Our knowledge engine. Our business is built upon our proprietary chemicals knowledge engine, which serves as the fundamental infrastructure for our comprehensive services and solutions. We have accumulated a significant amount of chemicals and transaction data to build MOLBASE Encyclopedia, the most comprehensive knowledge engine for commercially available chemicals in China, according to the Frost & Sullivan Report. As the entry point of our Online Platform, users may search for chemicals based on molecular structures. We subsequently provide search results covering the synthetic routes of the searched chemicals, along with pricing and supplier information.

Our technology services. Leveraging our MOLBASE Encyclopedia knowledge engine and deep understanding on how to transform the traditional chemical value chain, we provide our suppliers and customers with information services empowered by our AI engine, which primarily consist of intelligent matching systems and MOLBASE Intelligent Chemical Industry Maps, as well as a comprehensive SaaS suite.

 

   

AI engine: our proprietary intelligent matching systems recommend relevant and useful information on chemicals to our customers, and effectively match orders among suppliers and customers by identifying chemicals on the synthetic routes and structurally similar chemicals. Built upon the significant amounts of transaction data accumulated on our platform, our MOLBASE Intelligent Chemical Industry Maps provide visualizations of the industry participants for particular chemicals and their relationships, allowing suppliers and customers to locate each other efficiently. Our intelligent matching systems and MOLBASE Intelligent Chemical Industry Maps are popular among users on our Online Platform, enabling us to facilitate a massive number of chemicals transactions and effectively cross-sell our other services and solutions.

 

   

SaaS suite: we have developed a full-fledged SaaS suite enabling suppliers and customers to optimize and digitalize their business operations. Our SaaS suite includes online store maintenance, orders and client relationship management, online payment solutions, instant messages, and promotional and marketing services. The comprehensive range of services provided by our SaaS suite offer a positive transaction experience for our customers and suppliers, enhance our brand name within the chemical industry, and empower the growth of our business. As of September 30, 2019, there are more than 98,000 users of our SaaS suite, and we expect that more customers and suppliers will adopt our SaaS suite in the foreseeable future.

Our e-commerce solutions. We offer our chemical e-commerce solutions through direct sales and marketplace models. Our direct sales model involves acquiring chemicals from suppliers at customers’ requests in most cases and selling them directly to customers, generating revenues from the sale of chemicals. We leverage our accumulated transaction data to optimize inventory management and adopt efficient pricing strategies via our AI engine. In our marketplace model, we connect suppliers and customers and currently charge commissions on only a small portion of transactions in order to attract and encourage users to transact on our platform. We continuously gain insights into the dynamic chemical market by gathering transactional information through this model.

Our financial solutions. We cooperate with banks and other non-bank financial institutions to introduce low-cost financing opportunities for chemical industry participants. We may provide guarantees for selected users requesting financial solutions, based on our review of their historical performance, credit records, and transaction history on our platform.

Our warehousing and logistics solutions. We have developed warehousing and logistics solutions to facilitate smooth and timely order fulfillment on our Online Platform. Our platform enables suppliers and customers to quickly find warehousing and logistics service providers and easily track the location and status of their goods.



 

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We have successfully implemented our business model, and our business has grown substantially since our inception. Our customer and supplier bases continue to grow meaningfully. As of September 30, 2019, we had accumulated 110,948 customers and 35,085 suppliers on our Online Platform and had built a nationwide supplier network covering more than 380 cities in China. The GMV under our direct sales model increased from RMB3.2 billion in 2016 to RMB4.2 billion in 2017, and further increased to RMB9.0 billion in 2018; while the GMV under our marketplace model increased from RMB36.4 billion in 2016 to RMB79.0 billion in 2017, and further increased to RMB160.7 billion in 2018. The GMV under our direct sales model increased from RMB6.1 billion for the nine months ended September 30, 2018 to RMB9.1 billion for the nine months ended September 30, 2019; while the GMV under our marketplace model increased from RMB120.8 billion for the nine months ended September 30, 2018 to RMB176.8 billion for the nine months ended September 30, 2019. Our total net revenues were RMB3.2 billion, RMB4.2 billion and RMB9.1 billion (US$1.3 billion) in 2016, 2017 and 2018, and RMB6.1 billion and RMB9.1 billion (US$1.3 billion) for the nine months ended September 30, 2018 and 2019, respectively. As we were in the process of enhancing our market position, we recognized a net loss of RMB113.9 million, RMB107.8 million and RMB254.6 million (US$35.6 million) in 2016, 2017 and 2018, and RMB88.0 million and RMB133.2 million (US$18.6 million) for the nine months ended September 30, 2018 and 2019, respectively.

Our Industry

Domestic and global chemical industry

As the global economy grows and the manufacturing of industrial and consumer products becomes increasingly active, the size of the global chemical industry is expected to increase at a CAGR of 3.1% in the following five years, reaching US$6,410.9 billion by 2023. China is one of the largest and fast-growing markets within the global chemical industry, with a market size of US$2,304.3 billion in 2018, accounting for 41.9% of global chemical consumption value. With a CAGR of 6.3% from 2014 to 2018, chemical industry growth rate in China has outperformed the global growth rate and China is expected to remain in a leading position with an expected CAGR of 6.0% from 2018 to 2023, driven by the booming industrial and consumer sectors. The chemical industry in China is highly fragmented. In 2018, the largest 500 chemical companies in China only accounted for 37% of the total market share.

China’s chemical e-commerce market

Since 2014, the size of China’s chemical e-commerce market, measured by the revenue generated by chemical e-commerce platforms, has increased exponentially at a CAGR of 67.1%, reaching US$18.7 billion in 2018. Driven by the stronger need of chemical industry participants to improve their operational efficiency, the steady growth of the chemical industry, and an increasing internet penetration rate, the market size of China’s chemical e-commerce market is expected to grow at a CAGR of 28.9% from 2018 to 2023, with online penetration rate reaching 2.2% by 2023, as compared to 0.8% in 2018. In addition to its core services, chemical e-commerce platforms can offer additional value-added services along the chemical value chain, including data and information services, financial services, as well as warehousing and logistics facilitation services.

Barriers of entry into China’s chemical e-commerce market

The barriers of entry into China’s chemical e-commerce market remain high. Major entry barriers include:

 

   

Data management capabilities. The establishment of a well-structured chemical database that allows customers to search for desired chemicals efficiently requires substantial expertise on both chemical compounds and information technology.

 

   

User base accumulation. Compared with new entrants, first movers into the chemical e-commerce market hold a competitive edge in growing its user base organically as time advances and form a self-reinforcing user growth cycle.



 

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Talent barriers. Strong inter-disciplinary talents with deep insights into the key trends and technologies driving the chemical industry are in short supply, which is significantly more so for new entrants.

Our Strengths

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

 

   

largest technology-enabled platform in China’s fast-growing chemical e-commerce industry;

 

   

efficient supplier and customer acquisition driven by the China’s most comprehensive chemical knowledge engine;

 

   

industry-leading AI engine and SaaS suite driving platform loyalty;

 

   

unique ecosystem with China’s largest network of chemical suppliers and customers strengthening monetization potential; and

 

   

professional and visionary management team with proven track record.

Our Strategies

We intend to achieve our goals by pursuing the following strategies:

 

   

continue to invest in our knowledge engine to support our business;

 

   

strengthen our AI engine capabilities and enrich our SaaS suite;

 

   

further develop and expand our solutions on our Online Platform; and

 

   

explore strategic business opportunities.

Our Challenges

Our ability to realize our mission and execute our strategies is subject to risks and uncertainties, including those relating to our ability to:

 

   

achieve wide acceptance of our innovative chemical e-commerce platform;

 

   

attract and retain suppliers, customers and service providers;

 

   

maintain, develop and innovate our technologies;

 

   

diversify and enrich our service offerings;

 

   

improve our operating margin and achieve profitability;

 

   

maintain and enhance our MOLBASE brand in a cost-effective manner;

 

   

effectively manage the growth of our business and execute our strategies;

 

   

compete successfully; and

 

   

adapt to industry development and regulatory changes.

In addition, we face risks and uncertainties related to our corporate structure and regulatory environment in China, including:

 

   

intensified government regulation of the internet industry in China;



 

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uncertainties in the interpretation and enforcement of PRC regulations and policies, including those relating to chemical industry and internet-based business;

 

   

risks associated with our control over our consolidated variable interest entities and their subsidiary, which is based on contractual arrangements rather than equity ownership; and

 

   

risks related to our ability to use the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries as a result of PRC regulations and governmental control of currency conversion.

Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face.

Corporate History and Structure

We commenced our operations in 2013, and have operated our business through subsidiaries and variable interest entities, or VIEs, of MOLBASE Inc. MOLBASE Inc. has completed six rounds of equity financing since its inception. In anticipation of this offering, we undertook a corporate restructuring in 2018 in order to strengthen our positioning as an independent business. We refer to this corporate restructuring in this prospectus as the Restructuring. For more details, see “Corporate History and Structure—Restructuring.”

As part of the Restructuring, we established Molecular Data Inc. in 2018, which has become our holding company in the Cayman Islands, and is 100% owned by MOLBASE Inc. We expect that, within six months following this offering, the existing shareholders of MOLBASE Inc. would become our shareholders through a distribution of our shares in proportion to MOLBASE Inc.’s current shareholding structure, and MOLBASE Inc. will remain our parent company until this Share Distribution takes place. For as long as MOLBASE Inc. remains our parent company following the completion of this offering, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because MOLBASE Inc. will hold 90.0% of our then outstanding ordinary shares, assuming that the underwriters do not exercise their over-allotment option, or 88.7% of our then outstanding ordinary shares if the underwriters do exercise their over-allotment option in full.

A wholly owned subsidiary of Molecular Data Inc., Molecular Data (HK) Limited, is our intermediary holding company in Hong Kong. Molecular Data (HK) Limited, or Molecular Data HK, has a wholly owned subsidiary in China, namely Shanghai MOHUA Information Technology Co., Ltd., which we refer to as Shanghai MOHUA or our WFOE in this prospectus. Shanghai MOHUA in turn has two wholly owned subsidiaries, namely Shanghai MOKAI Biotechnology Co., Ltd., and Shanghai MOCHUANG Biotechnology Co., Ltd., or Shanghai MOKAI and Shanghai MOCHUANG, respectively. Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other related business, we rely on contractual arrangements with Jiaxing MOLBASE Information Technology Co., Ltd. and Shanghai MOLBASE Technology Co., Ltd., or Jiaxing MOLBASE and Shanghai MOLBASE, respectively, to conduct our internet-based operations in China. We collectively refer to Jiaxing MOLBASE and Shanghai MOLBASE as our VIEs in this prospectus. As part of the Restructuring, in September 2018, Shanghai MOLBASE acquired 100% equity interest in Shaanxi MOLBASE Biotechnology Co., Ltd., or Shaanxi MOLBASE. We have obtained control over and become the primary beneficiary of our VIEs by entering into a series of contractual arrangements through Shanghai MOHUA with Jiaxing MOLBASE, Shanghai MOLBASE and their shareholders.



 

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The following diagram illustrates our corporate structure, including our significant subsidiaries and other entities that are material to our business, after giving effect to the contemplated issuance and sale of 34,500,000 Class A ordinary shares in this offering, assuming the underwriters do not exercise their over-allotment option and the completion of the Share Distribution:

 

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Notes:

(1)

Beneficial ownership percentages represent beneficial ownership of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option and the completion of the Share Distribution. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person. See also “Principal Shareholders.”

(2)

Voting power percentages represent aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option and the completion of the Share Distribution, and are calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our issued and outstanding Class A ordinary shares and Class B ordinary shares as a single class. In respect of matters requiring a shareholder vote, each Class A ordinary share is entitled to one vote and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. See also “Description of Share Capital—Ordinary Shares.”

(3)

Dr. Dongliang Chang, Mr. Zhengyu Wu and Zhejiang Xingke Technology Development Investment Co., Ltd. hold 76%, 19% and 5% equity interests in Jiaxing MOLBASE, respectively.

(4)

Dr. Dongliang Chang and Mr. Zhengyu Wu hold 80% and 20% equity interests in Shanghai MOLBASE, respectively.



 

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Corporate Information

Our principal executive offices are located at 5/F, Building 12, 1001 North Qinzhou Road, Xuhui District, Shanghai 201109, People’s Republic of China. Our telephone number at this address is +86 21-5436-5166. Our registered office in the Cayman Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

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

Conventions that Apply to this Prospectus

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

 

   

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

 

   

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

 

   

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

 

   

“Class A ordinary shares” are to our Class A ordinary shares, par value US$0.00005 per share;

 

   

“Class B ordinary shares” are to our Class B ordinary shares, par value US$0.00005 per share;

 

   

“MOLBASE group” are to MOLBASE Inc., a Cayman Islands exempted company, its subsidiaries and its VIEs, but excluding, Molecular Data Inc., its subsidiaries and its VIEs;

 

   

“we,” “us,” “our company” and “our” are to Molecular Data Inc., our Cayman Islands holding company and its subsidiaries and, its VIEs and the subsidiary of the VIEs;

 

   

“Restructuring” are to the establishment of Molecular Data Inc., its subsidiaries and its VIEs and the transfer of our business from the MOLBASE group to the subsidiaries and VIEs of Molecular Data Inc.;

 

   

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

 

   

“shares” or “ordinary shares” are to our ordinary shares, par value US$0.00005 per share, and upon and after the completion of this offering, are to our Class A and Class B ordinary shares, par value US$0.00005 per share;

 

   

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

 

   

“customers” are to the users who placed at least one order at our Online Platform;

 

   

“suppliers” are to the users who posted their chemicals for sale at our Online Platform;

 

   

“GMV” are to gross merchandise value of the transaction orders placed by customers under the direct sales model or the gross merchandise value of the transaction orders we facilitate between customers and suppliers under the marketplace model during the specified period; under the direct sales model, the GMV does not include discounts or returns by the customers and may include the shipping fees in some cases; under the marketplace model, the GMV does not include shipping fees or discounts, regardless of whether the chemicals are actually delivered or returned;

 

   

“transacting customers” for a certain period are to customers who complete at least one chemicals transaction under either direct sales model or marketplace model on our Online Platform during that



 

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period; a transacting customer who completes at least one chemicals transaction under both direct sales model and marketplace model in such period is calculated as one transacting customer;

 

   

“transacting suppliers” for a certain period are to suppliers who complete at least one chemicals transaction under either direct sales model or marketplace model on our Online Platform during that period; a transacting supplier who completes at least one chemicals transaction under both direct sales model and marketplace model in such period is calculated as one transacting supplier;

 

   

“average monthly transacting users” for a certain period are to the monthly average number of transacting customers and suppliers during that period, calculated by dividing (i) the total number of transacting customers and suppliers (eliminating duplicates) in each month of such period by (ii) the number of months in the same period;

 

   

“transaction orders” are to the total number of orders for chemicals placed under the direct sales model or we facilitate under the marketplace model on our Online Platform, regardless of whether the chemicals are actually sold, delivered or returned;

 

   

“MOLBASE Online Mall” are to the chemical e-commerce platform located at molbase.cn and molbase.com;

 

   

“user” are to any participant who uses our Online Platform; and

 

   

“Series E-1 Warrant” are to the warrant issued by MOLBASE Inc. in December 2019 to an investor for a consideration of US$2.0 million to purchase certain number of Series E-1 preferred shares of MOLBASE Inc., exercisable no later than the earlier of (i) three months after this offering, or (ii) March 31, 2020, at an exercise price of the lower of (i) a pre-determined exercise price, or (ii) our initial public offering price per share, less certain discount; based on the initial public offering price of US$5.38 per ADS, the Series E-1 Warrant holder is entitled to purchase 1,394,052 Series E-1 preferred shares of MOLBASE Inc. at an exercise price of approximately US$1.4 per share; subsequent to the exercise of Series E-1 Warrant, the Series E-1 Warrant holder will become a shareholder of MOLBASE Inc. and would become our shareholder through the Share Distribution.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option or the exercise of the Series E-1 Warrant.

Our reporting currency is the Renminbi. This prospectus also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations from Renminbi to U.S. dollars were made at RMB7.1477 to US$1.00, the noon buying rate on September 30, 2019 as set forth in the H.10 statistical release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. On December 20, 2019, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB7.0063 to US$1.00.



 

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THE OFFERING

 

Offering price

US$5.38 per ADS.

 

ADSs offered by us

11,500,000 ADSs (or 13,225,000 ADSs if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

11,500,000 ADSs (or 13,225,000 ADSs if the underwriters exercise their over-allotment option in full).

 

Ordinary shares outstanding immediately after this offering

345,127,024 ordinary shares, comprised of 34,500,000 Class A ordinary shares and 310,627,024 Class B ordinary shares (or 350,302,024 ordinary shares if the underwriter exercise their over-allotment option in full, comprised of 39,675,000 Class A ordinary shares and 310,627,024 Class B ordinary shares).

 

  Within six months following this offering, the existing shareholders of MOLBASE Inc. would become our shareholders through a distribution of our shares in proportion to MOLBASE Inc.’s current shareholding structure. Assuming the completion of such share distribution, we will have 345,127,024 ordinary shares, comprised of 290,307,291 Class A ordinary shares and 54,819,733 Class B ordinary shares (or 350,302,024 ordinary shares if the underwriter exercise their over-allotment option in full, comprised of 295,482,291 Class A ordinary shares and 54,819,733 Class B ordinary shares).

 

The ADSs

Each ADS represents three Class A ordinary shares, par value US$0.00005 per share.

 

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

 

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

 

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

 

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


 

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

 

Ordinary shares

We will issue 34,500,000 Class A ordinary shares represented by the ADSs in this offering (assuming the underwriters do not exercise their option to purchase additional ADSs). Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to ten votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

 

  Upon any sale, transfer, assignment or disposition of any Class B ordinary share by MOLBASE Inc. to any person who is not our founder, Dr. Dongliang Chang, or his affiliate, or the change of ultimate beneficial ownership of any Class B ordinary shares from MOLBASE Inc. to any person who is not our founder, Dr. Dongliang Chang, or his affiliate, each of such Class B ordinary shares shall be automatically and immediately converted into one Class A ordinary share.

 

  Upon any sale, transfer, assignment or disposition of any Class B ordinary share by our founder, Dr. Dongliang Chang, to any person who is not his affiliate, or upon a change of ultimate beneficial ownership of any Class B ordinary share from our founder, Dr. Dongliang Chang to any person who is not his affiliate, each of such Class B ordinary share shall be automatically and immediately converted into one Class A ordinary share.

 

  For a description of Class A ordinary shares and Class B ordinary shares, see “Description of Share Capital.”

 

Over-allotment option

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 1,725,000 additional ADSs at the initial public offering price, less the underwriting discounts and commissions.

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$52.2 million from this offering or approximately US$60.9 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.


 

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  We intend to use the net proceeds from this offering to invest in logistics and warehousing capabilities, enhance our technology and retain qualified personnel, make strategic acquisition and cross-border investment, and for other general corporate purposes, including general marketing and administrative purposes. See “Use of Proceeds” for more information.

 

Lock-up

We, our directors and executive officers, the existing shareholders of MOLBASE Inc. and the Series E-1 Warrant holder have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting.”

 

Listing

Our ADSs have been approved for listing on the Nasdaq Stock Market under the symbol “MKD.” The ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on January 2, 2020.

 

Depositary

JPMorgan Chase Bank, N.A.

Molecular Data Inc. is 100% owned by MOLBASE Inc. We expect that, within six months following this offering, the existing shareholders of MOLBASE Inc. would become our shareholders through a distribution of our shares in proportion to MOLBASE Inc.’s current shareholding structure, and MOLBASE Inc. will remain our parent company until this Share Distribution takes place.

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

 

   

is based on 310,627,024 ordinary shares outstanding as of the date of this prospectus, assuming the completion of Share Distribution, including (i) 255,807,291 Class A ordinary shares, and (ii) 54,819,733 Class B ordinary shares;

 

   

includes 34,500,000 Class A ordinary shares in the form of ADSs that we will issue and sell in this offering, assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs; and

 

   

excludes 48,676,179 Class A ordinary shares reserved for future issuances under our 2018 Share Plan and 3% of the total number of ordinary shares issued and outstanding immediately after this offering reserved for future issuances under our 2019 Share Incentive Plan, including 39,532,055 ordinary shares issuable upon exercise of options outstanding as of the date of this prospectus.

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

 

   

no exercise of the underwriters’ option to purchase additional ADSs; and

 

   

no exercise of the Series E-1 Warrant by its holder.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of comprehensive loss data for the years ended December 31, 2016, 2017 and 2018, summary consolidated balance sheets data as of December 31, 2017 and 2018 and summary consolidated cash flows data for the year ended December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of comprehensive loss for the nine months ended September 30, 2018 and 2019, summary consolidated balance sheet data as of September 30, 2019, and summary consolidated cash flow data for the nine months ended September 30, 2018 and 2019 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented.

Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

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

 

    For the Year Ended December 31,     For the Nine Months Ended
September 30,
 
    2016     2017     2018     2018     2019  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
          (Unaudited)     (Unaudited)  
    (in thousands, except for per share data)  

Summary Consolidated Statements of Comprehensive Loss Data:

             

Net revenues

    3,206,079       4,201,907       9,053,266       1,266,598       6,083,686       9,144,639       1,279,382  

Chemical trading—direct sales model

    3,203,742       4,199,661       9,045,458       1,265,506       6,080,902       9,126,389       1,276,829  

Chemical trading—marketplace model

    1,560       972       4,387       614       1,117       10,917       1,527  

Online membership service

    777       1,274       3,421       478       1,667       6,910       967  

Financial service

    —         —         —         —         —         423       59  

Cost of revenues

    (3,179,961     (4,151,673     (8,973,097     (1,255,382     (6,037,234     (9,078,986     (1,270,197
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    26,118       50,234       80,169       11,216       46,452       65,653       9,185  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Sales and marketing expenses(1)

    (59,160     (64,962     (103,293     (14,451     (53,013     (83,169     (11,636

General and administrative expenses(1)

    (41,801     (41,718     (173,872     (24,325     (40,793     (78,117     (10,929

Research and development expenses(1)

    (20,067     (18,608     (36,889     (5,161     (19,730     (30,503     (4,268

Allowance for doubtful accounts

    (10,863     (14,677     (1,907     (267     (4,943     (7,481     (1,047

Impairment for long-term investment

    —         (1,450     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (131,891     (141,415     (315,961     (44,204     (118,479     (199,270     (27,880


 

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    For the Year Ended December 31,     For the Nine Months Ended
September 30,
 
    2016     2017     2018     2018     2019  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
          (Unaudited)     (Unaudited)  
    (in thousands, except for per share data)  

Operating loss

    (105,773     (91,181     (235,792     (32,988     (72,027     (133,617     (18,695

Interest expenses, net

    (8,436     (16,828     (19,049     (2,665     (15,107     (2,175     (304

Foreign exchange gain (loss)

    (1,057     (552     (3,033     (424     (3,024     173       24  

Other income, net

    1,330       754       3,235       452       2,397       2,397       335  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (113,936     (107,807     (254,639     (35,625     (87,761     (133,222     (18,640

Income tax expense

    —         —         —         —         (277     —         —    

Net loss

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Molecular Data Inc.

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share

             

Basic and diluted

    (0.37     (0.35     (0.82     (0.11     (0.28     (0.43     (0.06

Weighted average shares outstanding

             

Basic and diluted

    310,627,024       310,627,024       310,627,024       310,627,024       310,627,024       310,627,024       310,627,024  

Other comprehensive income, net of tax of nil

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Molecular Data Inc.

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

Including share-based compensation expenses as follows:

 

     For the Year Ended December 31,      For the Nine Months Ended
September 30,
 
     2016      2017      2018      2018      2019  
     RMB      RMB      RMB      US$      RMB      RMB      US$  
            (Unaudited)      (Unaudited)  
     (in thousands)  

Sales and marketing expenses

                   7,942        1,111        —          11,246        1,573  

General and administrative expenses

                   109,956        15,383        —          16,715        2,339  

Research and development expenses

                   6,124        857        —          2,798        391  

Total

                   124,022        17,351        —          30,759        4,303  


 

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

 

     As of December 31,     As of September 30,  
     2017      2018     2019  
     RMB      RMB     US$     RMB     US$  
           (Unaudited)  
     (in thousands)  

Summary Consolidated Balance Sheets Data:

           

Cash and cash equivalents

     38,522        6,477       906       36,867       5,158  

Restricted cash

     67,500        —               39,001       5,456  

Accounts receivable, net

     53,928        40,730       5,698       26,839       3,755  

Prepayments and other current assets

     153,606        295,985       41,410       209,610       29,325  

Total current assets

     376,456        367,702       51,443       375,041       52,470  

Total assets

     381,148        371,598       51,989       381,027       53,307  

Total current liabilities

     299,855        255,417       35,734       374,094       52,338  

Total liabilities

     375,247        433,223       60,610       545,115       76,265  

Total shareholders’ equity (deficit)

     5,901        (61,625     (8,621     (164,088     (22,958

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

 

    For the Year Ended December 31,     For the Nine Months Ended
September 30,
 
    2016     2017     2018     2018     2019  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
          (Unaudited)     (Unaudited)  
    (in thousands)  

Summary Consolidated Cash Flows Data:

             

Net cash used in operating activities

    (145,592     (186,703     (134,636     (18,836     (53,426     (33,412     (4,675

Net cash used in investing activities

    (2,645     (3,982     (2,242     (314     (1,332     (1,666     (233

Net cash generated from financing activities

    173,302       262,849       37,333       5,223       21,178       104,469       14,616  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    25,065       72,164       (99,545     (13,927     (33,580     69,391       9,708  

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

    8,793       33,858       106,022       14,833       106,022       6,477       906  

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

    33,858       106,022       6,477       906       72,442       75,868       10,614  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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The following table presents certain of our operating data for the periods indicated or as of the dates indicated:

 

     For the Year Ended December 31,      For the Nine Months
Ended September 30,
 
     2016      2017      2018      2018      2019  
     (RMB in billions)  

GMV

              

Direct sales model

     3.2        4.2        9.0        6.1        9.1  

Marketplace model

     36.4        79.0        160.7        120.8        176.8  

Total GMV

     39.6        83.2        169.7        126.9        185.9  

 

     For the Year ended December 31,      For the Nine Months
Ended September 30,
 
     2016      2017      2018      2018      2019  

Total number of transacting customers

     20,475        27,430        35,565        27,960        24,368  

Direct sales model

     2,666        3,436        4,032        3,279        3,244  

Marketplace model

     19,018        25,308        32,534        25,927        21,726  

Total number of transacting suppliers

     11,229        15,787        17,156        15,435        17,419  

Direct sales model

     1,857        2,078        2,493        2,044        2,096  

Marketplace model

     9,949        14,208        15,408        14,013        15,721  

Total number of transaction orders

     89,712        110,499        166,136        117,777        119,651  

Direct sales model

     31,752        38,827        50,384        34,200        40,073  

Marketplace model

     57,960        71,672        115,752        83,577        79,578  

 

     As of December 31,      As of September 30,  
     2016      2017      2018      2018      2019  

Direct sales model(1)(2):

              

Total number of customers

     3,131        5,375        9,007        7,486        11,119  

Total number of suppliers

     2,346        3,725        5,163        4,783        6,168  

Marketplace model(1)(2):

              

Total number of customers

     41,045        63,409        90,129        84,221        105,581  

Total number of suppliers

     28,419        30,280        32,013        31,820        32,675  

Total number of customers(1)(3)

     42,650        65,983        94,373        87,526        110,948  

Total number of suppliers(1)(3)

     28,903        31,171        33,752        33,302        35,085  

Total number of chemical compounds(1)

     1,377,043        7,020,855        8,790,356        8,785,754        10,299,811  

 

Notes:

(1)

Calculated on a cumulative basis since our inception, which included customers or suppliers that may not be current users of our platform.

(2)

Customers and suppliers may have presence under both direct sales model and marketplace model. Dual presence under both models have not been eliminated.

(3)

Duplicates have been eliminated so that customers or suppliers who uses both our direct sales model and marketplace model would be counted as one customers or suppliers as of the specified date.



 

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RISK FACTORS

An investment in the ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in the ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. In any such case, the market price of the ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

The proper functioning of our IT systems and technology infrastructure is essential to our business. Any disruption to our IT systems and technology infrastructure could materially affect our ability to maintain the satisfactory performance of our platform and deliver consistent services to our users.

Our IT systems mainly include technology infrastructure supporting the user interface of our Online Platform, consisting of both PC end and mobile end, as well as our knowledge and AI engines, SaaS, financial solutions, and warehousing and logistics solutions. The reliability, availability and satisfactory performance of our IT systems are critical to our success, our ability to attract and retain customers and our ability to maintain a satisfactory user experience and customer service. Our servers may be vulnerable to computer viruses, traffic spike that exceeds the capacity of our servers, electricity power interruptions, physical or electronic break-ins and similar disruptions, which could lead to system interruptions, website slowdown and unavailability, delays in transaction processing, loss of data, and the inability to accept and fulfill customer orders. We have experienced four minor technical system interruptions over the past three years. Even though such technical system interruptions did not cause any material impact to our operation, we can provide no assurance that we will not experience unexpected interruptions in the future and whether such future interruptions will have material impact on our operation. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems and technology infrastructure from any third-party intrusions, electricity power interruptions, viruses and hacker attacks, information and data theft, and other similar activities. Any such future occurrences could damage our reputation, impact our operational and financial results, and result in a material decrease in our revenue.

Additionally, we are constantly upgrading our internet platform to provide increased scale, improved performance, additional built-in functionality and additional capacity. Maintaining and upgrading our technology infrastructure require significant investment of time and resources, including adding new hardware, updating software, and recruiting and training new engineering personnel. During updates, our systems may experience interruptions, and the new technologies and infrastructures may not be fully integrated with the existing systems timely, or at all. Any failure to maintain and improve our technology infrastructure could result in unanticipated system disruptions, slower response times, impaired quality of user experience and delays in reporting accurate operating and financial information, which in turn, could materially and adversely affect our business, financial condition and results of operations.

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

We have incurred significant losses in the past. We incurred net losses of RMB113.9 million in 2016, RMB107.8 million in 2017 and RMB254.6 million (US$35.6 million) in 2018, and also net losses of RMB88.0 million in the nine months ended September 30, 2018 and RMB133.2 million (US$18.6 million) in the nine months ended September 30, 2019. We cannot assure you that we will be able to generate net profits in the future. Our ability to achieve profitability will depend primarily on our ability to increase our operating margin, either by growing our revenues at a rate faster than our cost of revenues increase or by reducing our cost of revenues or operating expenses as a percentage of our net revenues. There can be no assurance that we will achieve this goal, and we may continue to experience losses in the future. We also had negative operating cash flow in the past. To the extent that we have negative operating cash flow in future periods, we may need to

 

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allocate a portion of our cash reserves to fund our operations, including repayment of the Restructuring consideration. We may also be required to raise additional funds through the issuance of equity or debt securities. There can be no assurance that we will be able to generate a positive cash flow from our operations, that additional capital or other types of financing will be available when needed or that these financings will be on terms favorable to our company.

Any harm to our brand, failure to maintain and enhance our brand recognition, or failure to do so in a cost-effective manner may materially and adversely affect our business and results of operations.

We believe that the recognition and reputation of our MOLBASE brand among our customers, suppliers and other participants in the chemical industry have contributed significantly to the growth and success of our business. Maintaining and enhancing the recognition and reputation of our brand are critical to our business and competitiveness. Many factors, some of which are beyond our control, are important to maintain and enhance our brand. These factors include our abilities to:

 

   

provide compelling transaction experience to customers;

 

   

maintain the popularity, quality and authenticity of the chemicals we offer;

 

   

maintain the efficiency, safety, reliability and quality of our warehousing and logistics solutions;

 

   

maintain or improve customers’ satisfaction with our customer services;

 

   

increase brand awareness through marketing and brand promotion activities;

 

   

preserve our reputation and goodwill in the event of any negative publicity on customer service, internet security, product quality, price or authenticity, or other issues affecting us or other e-commerce business in China; and

 

   

maintain our cooperative relationships with suppliers and third-party service providers.

If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our Online Platform, the chemicals we sell, and our services, it may be difficult to maintain and grow our customer base, and our business and growth prospects may be materially and adversely affected.

Furthermore, if we are unable to conduct our branding and marketing activities cost-effectively, our financial condition and results of operations may be materially and adversely affected. We have incurred expenses on a variety of different sales and marketing promotion efforts designed to enhance our brand recognition and increase sales of chemicals and our services. Our marketing and promotional activities may not be well received by customers and may not result in the levels of sales of chemicals and services that we anticipate. We incurred sales and marketing expenses of RMB59.2 million, RMB65.0 million and RMB103.3 million (US$14.5 million) in 2016, 2017 and 2018, and RMB53.0 million and RMB83.2 million (US$11.6 million) for the nine months ended September 30, 2018 and 2019, respectively, representing 1.8%, 1.5%, 1.1%, 0.9% and 0.9% of total net revenues in the corresponding periods. Marketing approaches and tools in the consumer products market in China are evolving. This further requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and consumer preferences, which may not be as cost-effective as our marketing activities in the past and may lead to significantly higher marketing expenses in the future. Failure to refine our existing marketing approaches or to introduce new effective marketing approaches in a cost-effective manner could impact our revenues and profitability.

We are exposed to fluctuations in the supply of, or demand for, chemicals, along with the conditions underlying such fluctuations, which could adversely affect chemicals transaction volume and price.

The volumes of supply and demand for chemicals vary from time to time resulting from changes in resource availability, government policies and regulations, costs of production, demand in end markets for chemicals. As

 

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we currently derive our revenues mainly from a limited number of chemical categories, any event that adversely affects the supply and demand for the chemicals in those chemical categories may harm our growth strategies and business prospects. As we expand our business into global markets, we are exposed to risks related to fluctuations in global production capacity and demand levels for chemicals, credit markets, chemicals transaction volume in other key export regions, such as the United States, India, Korea, Netherland, Germany, the United Kingdom, Canada, France, Russia, and Australia, as well as global and regional economic conditions.

Changes in the fluctuation conditions may also adversely impact our results of operations and financial performance. For example, a decline in economic and global financial conditions or in a specific country, region or sector may cause decline in the supply of or demand for chemicals in such country, region or sector, thus negatively affecting our business, results of operations, and earnings. Other examples of conditions which might result in fluctuations in the supply of, or demand for, chemicals include that: (i) the insolvency of key suppliers, particularly those with whom we have long-term supply agreements, could result in supply chain difficulties, unmatched chemicals price exposure and/or a reduction in chemicals available for our Online Platform; (ii) a significant reduction or increase in commodity prices could result in customers or suppliers, as the case may be, being unwilling or unable to honor their contractual commitments to purchase or sell chemicals on pre-agreed pricing terms; and (iii) a decline in the value of inventories may result in write-downs.

Due to the lack of information transparency and inefficient supply chain management in the chemical industry, there has long been an industry-wide oversupply of chemicals in China, which has caused substantial declines in prices of certain low-tech chemicals and related raw materials. If the price of certain chemicals continues to decrease, the lower selling price may cause lower benefits for us to sell chemicals under direct sales model and for us to collect commissions and service fees for suppliers conducting transactions under marketplace model on our Online Platform, as a result of which, our financial performance may be adversely affected. Under our direct sales model, we generally acquire chemicals from suppliers after the customers place an order and sell directly to customers, and we manage our inventory of chemicals so as to fulfill customer orders in a timely fashion. Therefore, in the event that the supply of chemicals decreases so that price of chemicals increases, and that we are unable to pass on the entirety or a majority of such increase in costs to our customers, our financial performance may be adversely affected.

We are reliant on chemical logistics service providers and warehouses across China to meet the growing demands of our customers.

To better serve our customers, we cooperate with third-party service providers of warehousing and logistics solutions, and rely on them to provide supporting services across our value chain. We believe we have a good business relationship with such service providers; however, there can be no assurance that we will be able to maintain a good relationship with them or renew our agreements with them on commercially reasonable terms, if at all. If we fail to continue our cooperation with such service providers, or if their business or operations are interrupted or fail, and we fail to find comparable alternatives on reasonable terms, our business may be materially and adversely affected.

We believe that providing better warehousing and logistics solutions that cover a wider range of geographical areas is essential to improve customer experience and maximize our future growth. As of September 30, 2019, we operated warehouses, all of which are leased properties, in 10 cities across China. We hired third-party delivery services providers to deliver chemicals sold on our Online Platform. As our Online Platform connects to an increasing number of suppliers and customers, and marketplace model becomes increasingly significant to our business, more types of chemicals will need to be delivered to more areas across China. Our current leased warehouses and third-party logistic service providers will not be able to meet such growing demands of our customers.

We plan to establish more warehouses in additional locations, including those smaller and less developed areas, to keep providing warehousing services to customers efficiently. We also plan to introduce more

 

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warehousing service providers to join our Chemicals Cloud Warehousing Project that matches customers’ and suppliers’ orders with available warehousing service providers. However, we cannot guarantee that we will be able to locate more warehousing resources in the abovementioned ways. If we fail to locate more warehouses either by leasing or purchasing more properties, by strategic alliance or investment in enterprises who own warehouses and required licenses, or by attracting more warehousing service providers to join Chemicals Cloud Warehousing Project, our warehousing services will not meet the demand of our customers. In addition, we need more logistics service resources to meet the growing demand for logistics solutions of our suppliers and customers. We plan to find more logistics solutions and attract more logistics service providers to register on our Chemical Community App that automatically connects logistics service providers to suppliers in need of logistics solutions. If we fail to do so either by hiring and attracting new logistics service providers, or by obtaining required licenses and operating our own vehicles, our logistics solutions will disappoint our customers, and may reduce their interest in keeping using our Online Platform. Failure to expand warehouses or logistics solutions will cause our business to be materially and adversely affected.

If we cannot manage the growth of our business or execute our strategies effectively, our business and prospects may be materially and adversely affected.

We have experienced rapid growth since our inception. Our net revenues was RMB3.2 billion, RMB4.2 billion and RMB9.1 billion (US$1.3 billion) in 2016, 2017 and 2018, and RMB6.1 billion and RMB9.1 billion (US$1.3 billion) for the nine months ended September 30, 2018 and 2019, respectively. The number of our suppliers and customers increased from 28,903 and 42,650 as of December 31, 2016, to 31,171 and 65,983 as of December 31, 2017, and further increased to 33,752 and 94,373 as of December 31, 2018, respectively. As of September 30, 2019, the number of our suppliers and customers reached 35,085 and 110,948, respectively. However, our historical growth rates may not be indicative of our future growth. We cannot assure you that we will be able to achieve similar results or grow at the same rate as we did in the past.

Our business and prospects may be materially and adversely affected if we fail to manage our growth or execute our strategies to attract and retain a critical mass of customers on our Online Platform. Our business has become increasingly complex as the scale, diversity and geographic coverage of our business and our workforce continue to grow. We are still in the process of integrating various business functions and establishing synergies. We also anticipate further expansion in the global markets. Such expansion will increase the complexity of our operations and place a significant strain on our management, operational and financial resources. We will be exposed to political, social or economic instability in foreign markets or regions in which we operate, and such tensions may impact our successful expansion into the global market.

Moreover, our current and planned staffing, systems, policies, procedures and controls may not be adequate to support our future operations. To effectively manage the expected growth of our operations and personnel, we will need to continue to improve our transaction processing, operational and financial systems, policies, procedures and internal controls, which could be particularly challenging if we start new business operations in new business sectors or geographic areas. These efforts will require significant managerial, financial and human resources. The emergence of new disruptive business models and technology could also impose risks on our future growth. We may fail to compete effectively with such new models or technology. We cannot assure you that we will be able to effectively manage our growth or to implement all these systems, procedures, control measures, business models and technological developments successfully. If we are not able to manage our growth effectively, our business and prospects may be materially and adversely affected.

We have a limited operating history in the new and dynamic chemical e-commerce industry, which makes it difficult for investors to evaluate our future prospects, and we cannot guarantee that our current or future strategies will be successfully implemented or will generate sustainable profit.

The chemical e-commerce industry is a nascent industry that emerged very recently, which may not develop into the stage and scale that we expect. We can learn from very few past experience of other industry

 

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participants’ or of ourselves’. Besides, the long term viability and prospects of the chemical e-commerce industry in China remain untested and are subject to significant uncertainty. We commenced our operations in March 2013 and have a limited operating history. We have limited experience in operating under direct sales and marketplace models, as they were first launched in 2014. In addition, we have limited experience in providing supporting solutions such as financial solutions, and warehousing and logistics solutions to our customers and suppliers. As our business grows or in response to fierce competition, we may continue to introduce new services, adjust our existing services, or adjust our business operations in general. For example, we may seek advancement in the cloud-based transport and storage management system, which may incur considerable costs. We may also seek to purchase properties and vehicles to develop our own warehousing and logistics solutions, which may result in additional costs and expenses. Furthermore, we rely on banks and other non-bank financial institutions we cooperate with, to provide financial solutions to our customers and suppliers. Our ability to continuously attract financing providers on reasonable terms is critical to our business. Any significant change to our business model that does not achieve expected results may have a material and adverse impact on our financial condition and results of operations.

You should consider our business and prospects in light of the risks and challenges that we encounter or may encounter given the rapidly-evolving market in which we operate and our limited operating history. These risks and challenges include our abilities to, among other things:

 

   

sustain and improve the quality of chemicals on our Online Platform and provide satisfactory customer experience;

 

   

maintain and enhance our relationship and business collaboration with our business partners, including suppliers, warehousing and logistics service providers, and financing providers;

 

   

develop sufficient, diversified, cost-efficient and reliable financing sources;

 

   

expand our prospective customer base, further to include customers from overseas market;

 

   

enhance our technology infrastructure to support the growth of our business and maintain the security of our system;

 

   

navigate the complex and evolving regulatory environment in China, and geopolitical tensions in global markets;

 

   

withstand fluctuations in the supply and demand of chemicals and related raw materials;

 

   

manage our strategic investments and alliances in auxiliary services and sectors;

 

   

respond to macroeconomic conditions and fluctuations; and

 

   

defend ourselves against legal and regulatory actions, such as actions involving intellectual property.

We are reliant on suppliers for our supply of chemicals under direct sales model. If we fail to maintain good relationship with them, or find alternatives on reasonable terms, our business and financial performance may be materially and adversely affected.

We source the chemicals we sell under direct sales model from suppliers. Our business, results of operations, financial condition and prospects could be materially and adversely impacted if we are unable to continue sourcing sufficient volumes of quality chemicals from current suppliers or expand our sourcing network to include new suppliers on reasonable terms and prices. We have entered into supply agreements with each of these suppliers. We cannot assure you that we will be able to maintain our existing relationships with these suppliers and continue to be able to source chemicals in stable quantities and at a reasonable price or at all. If we fail to maintain or renew these agreements on reasonable terms or enter into comparable agreements with other suppliers as substitutes, our business and operation could be materially and adversely affected.

Additionally, if our supply of chemicals is interrupted for whatever reason or there are significant increases in the prices, our business, financial condition, results of operations and prospects may be materially and

 

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adversely affected. Changes in business conditions, force majeure, governmental changes and other factors beyond our control or that we do not presently anticipate could also affect our suppliers’ ability to deliver chemicals to us on a timely basis. Any of the foregoing could materially and adversely affect our results of operations, financial condition and prospects.

We are reliant on third-party suppliers to sell their chemicals on our Online Platform under marketplace model. If we fail to keep providing satisfying services to these third-party suppliers or retain them in using our Online Platform, our business and financial performance may be materially and adversely affected.

Certain third-party suppliers sell their chemicals on our Online Platform, both through our websites, molbase.cn and molbase.com, Moku Data, one of our Weixin subscription accounts, and Chemical Business Secretary, a Weixin mini program. We rely on these third-party suppliers to provide a wide variety of chemicals that may not be available under direct sales model to customers on our Online Platform, and to enlarge our user base. We previously enabled suppliers to post information of the chemicals they sell on our Online Platform and use our intelligent matching services to connect to customers for free, and only charged service fees to certain suppliers who use value-added services on our website. As our business grows, we plan to charge suppliers higher service fees or commissions with regard to each transaction completed through our Online Platform. We believe we have good relationships with third-party suppliers both on our website and on Moku Data, but we cannot guarantee that we will be able to keep providing satisfactory services to them, especially when we start generating revenues by increasing their cost in using our services. If we fail to keep third-party suppliers using our Online Platform, we may lose certain customers, and our business and financial performance may be adversely impacted. Furthermore, in order for our marketplace model to be successful, we may need to continue to identify and attract new suppliers, and we may not be successful in this regard.

Our business is subject to intense competition, and we may fail to compete successfully against existing or new competitors, including certain matured large-scale enterprises, which may reduce demand for our services and chemicals we sell, reduce operating margins, and result in loss of market share, departures of qualified employees and increased capital expenditures.

The chemical e-commerce industry in China is intensely competitive. Our current or potential competitors include other chemical e-commerce platforms, major e-commerce companies in China that offer a wide range of general merchandise product categories, and traditional chemical manufactures in China that are moving into online retailing.

We face a variety of competitive challenges with respect to sourcing chemicals efficiently, pricing chemicals competitively, anticipating and quickly responding to changes in customer demands, maintaining favorable brand recognition and providing quality services, finding sources of warehousing and logistics solutions of good quality, and other potential challenges. If we cannot properly address these competitive challenges, our business and prospects would be materially and adversely affected.

Some of our current and potential competitors, especially major e-commerce companies in China that offer a wide range of product categories, have significantly greater financial, marketing and other resources. Certain competitors may be able to secure products from suppliers on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies, and devote substantially more resources to website and system development. Increased competition may reduce our operating margins, market share and brand recognition, or force us to incur losses. There can be no assurance that we will be able to successfully compete against current and future competitors, and competitive pressures may have a material adverse effect on our business, prospects, financial condition and results of operations.

 

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The sophisticated and innovative technologies we use for the operation of our business are new and require time to prove their reliability and effectiveness. We cannot assure you that the performance of these technologies will be stable enough to support our business.

We regard technology as critical to our ability to provide high-quality customer services. We have invested substantial resources in developing the sophisticated and innovative technology systems that we use for our daily operations. We expect these technologies to support the smooth performance of certain key functions in our Online Platform, such as searching for chemicals, making orders online, finding suitable sources of financing services, settling payments, and obtaining recommendations for warehousing and logistics solutions. We also expect our technologies to facilitate our customers’ retrieval of timely and accurate chemical industry related information, and the new cloud-based transport management system to improve customer experience. However, as we have been continuously upgrading our technology system, it will take time to gain reputation of reliability and effectiveness among our customers, suppliers, and other participants in the chemical industry. Furthermore, to adapt to evolving and increasingly demanding customers’ and suppliers’ requirements and emerging industry standards, we may need to develop other new technologies or upgrade our Online Platform, mobile applications and systems. If our efforts to invest in the development of new technologies are unsuccessful, our business, financial condition and results of operation may be materially and adversely affected.

In addition, the maintenance and processing of various operating and financial data are essential to the day-to-day operation of our business and formulation of our development strategies. Therefore, our business operations and growth prospects depend, in part, on our ability to maintain and make timely and cost-effective enhancement and upgrade to our technology and introduce innovative functions which can meet changing operational needs. Failure to do so could put us at a disadvantage to our competitors and cause economic losses. We can provide no assurance that we will be able to keep up with technological improvements or that the technology developed by others will not render our services less competitive or attractive.

As the technologies we use for the operation of our business are relatively new, we may need time to prove their stability, and we can provide no assurance that we will be able to adequately defend against or timely remedy interruptions caused by telecommunications or electricity power failures, computer viruses, hacking or other attempts to harm our systems, or other events beyond our control. The resultant unavailability or slowdown of our systems could have an immediate adverse impact on the services we provide, and our reputation and results of operations could accordingly be materially and adversely impacted.

Any quality issues of the chemicals offered by our suppliers or any negative publicity with respect to us, our suppliers and other partners, as well as the chemical industry in general, may materially and adversely affect our business and results of operations.

Our track record in providing all-rounded value propositions for chemicals transactions and a comprehensive suite of services in chemical e-commerce industry has established “MOLBASE ( LOGO )” as a leading brand in the industry. The risk management system we operate to demand authenticity and quality of the chemicals our suppliers provide has performed well and gained us trust among our customers. We believe that market recognition is key to our future success. As we continue our growth in size, broaden the scope of our services, and expand into foreign markets, however, it will be increasingly difficult to control the quality of chemicals sold on our Online Platform, and to maintain the efficiency and quality of our services, failure of which may negatively impact our market reputation. The failure to maintain and to further enhance our market recognition and corporate reputation may materially and adversely affect our business, financial condition and results of operations.

Many factors, some of which are beyond our control, may negatively impact our corporate reputation if not properly managed. These factors include our ability to provide superior services to our customers, successfully conduct marketing and promotional activities, manage relationships with and among suppliers and warehousing and logistics service providers, control quality of the chemicals sold on our Online Platform, monitor the quality

 

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of services provided by third-party warehousing and logistics service providers, deal with complaints timely, manage negative publicity of us as well as of suppliers and warehousing and logistics service providers on our Online Platform, and maintain a positive perception of our company, our peers and the chemical e-commerce industry in general. Any actual or perceived deterioration of our service quality, which is based on an array of factors including product quality, customer satisfaction, rate of complaints or rate of accidents, could subject us to damages such as loss of important customers. Any negative publicity directed against us, the chemical e-commerce industry in general or our business partners could cause damages to our corporate reputation and lead to further changes to government policies and the regulatory environment. If we are unable to promote our market recognition and protect our corporate reputation, we may not be able to maintain and grow our customer base, and our business and growth prospects may be adversely affected.

Failure to obtain, renew, or retain licenses, permits or approvals may affect our ability to conduct or expand our business.

We are required to hold a number of licenses, permits and approvals in connection with our business operation. Our business is subject to governmental supervision and regulation by relevant PRC governmental authorities, including, among others, the Ministry of Commerce of the People’s Republic of China, or MOFCOM, the Ministry of Industry and Information Technology, or MIIT, the Ministry of Emergency Management (formerly known as the State Administration of Work Safety), or MEM. Such government authorities promulgate and enforce laws and regulations that cover a variety of business activities that our operations concern, such as hazardous chemicals business, provision of internet information, provision of chemical e-commerce platform, financial solutions, and internet advertisement. These regulations in general regulate the entry process, the permitted scope, as well as approvals, of licenses and permits for the relevant business activities. We are required to hold a number of licenses and permits in connection with our business operation, including, among other, the Hazardous Chemical Operation License, Value-Added Telecommunication License, or the VATS License, for internet information service and online data processing and transaction processing businesses. We currently hold all such licenses. However, if we fail to maintain or renew the requisite licenses, our business, financial condition and results of operations may be significantly and adversely affected.

We provide printed materials containing professional articles, comments, data analysis, industry reports and other chemical industry related information for free to our users who subscribe for this value-added service. We also provide digital version of similar materials online to our users for free . Under PRC laws and regulations related to online publication, enterprises who publish periodicals are required to obtain a Periodical Publication Permit; enterprises who issue publications online are required to obtain an Online Publishing Service License. We believe that our printed or digital materials do not fall within the scope of periodicals that require such license or permit. However, we cannot assure you that the governmental authorities would agree to our conclusion. If the materials we provide are deemed as periodicals or online publication by the relevant governmental authorities, we may not be able to obtain the licenses in a timely manner, or at all, which will reduce the attractiveness of our Online Platform for our users, and thereby negatively affect our results of operations.

As of the date of this prospectus, we had not received any notice of warning or been subject to penalties or other disciplinary actions from the relevant governmental authorities regarding our business without the above mentioned approvals and permits. However, we cannot assure you that we will not be subject to any penalties in the future. As the chemical e-commerce industry is constantly evolving in China, new laws and regulations may be adopted from time to time that require additional licenses and permits other than those we currently have, and address new issues that may arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the chemical e-commerce industry.

 

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We have limited experience in providing financial solutions, which plays a substantial role in attracting customers and suppliers to use our Online Platform. Failure to accurately evaluate our customers’ or suppliers’ credit risks, to renew our agreements with banks and other financial institutions on reasonable terms or to find comparable alternatives, or regulatory changes related to the internet finance industry, may have a material adverse effect on our business and results of operations.

We started to offer financial solutions in China in 2014. We provide financial solutions to customers and suppliers of our Online Platform, and we were the pioneer and leader among chemical e-commerce platforms to offer financial solutions, which makes our Online Platform more appealing compared with our competitors. Expansion in this business area involves new risks and challenges. Our lack of familiarity with the finance business may make it difficult for us to anticipate the demand and preferences in the market and cooperate with financing providers to offer financial solutions on terms that meet our customers’ and suppliers’ requirements and preferences.

Our financial solutions may also face operational risks with respect to illegal or fraudulent activities, such as our customers or supplier providing false credit applications, credit information, or other financially related false information to us or to financing providers, or creating fictitious transactions with collaborators. Significant increases in illegal or fraudulent activities could negatively impact our relationship with financing providers we cooperate with, as well as our brand and reputation. Our failure to accurately evaluate our customers’ or suppliers’ credit risk could lead us to encounter bad debt, and negatively impact our financial solutions. Furthermore, as we put our own capital in providing guarantees for our customers and suppliers under certain circumstances, their failure to fulfill repayment obligation in time would trigger us losing a respective amount of our deposit, equivalent to the defaulted amount of the loan, immediately, therefore negatively affect our business and financial performance. Although we have devoted substantial resources in collecting necessary information to assess the creditworthiness of our customers and suppliers, we are still exposed to the potential risk of inaccurate information and failure to assess our customers or suppliers accurately.

We rely on financing providers, including banks and non-bank financial institutions, to provide financings required for financing products under commercially favorable terms and conditions. We believe we have good business relationships with such financing providers; however, there can be no assurance that we will be able to maintain good relationships with them or renew our agreements with them on commercially reasonable terms, if at all. If we fail to continue our cooperation with such financing providers, or if their business or operations are interrupted or fail, and we fail to find comparable alternatives on reasonable terms, our financial solutions may be materially and adversely affected.

In addition, PRC laws and regulations concerning the financial solutions and internet finance industry are evolving rapidly. Although we have taken measures to ensure that the financing providers we cooperate with comply with the laws and regulations applicable to the financing products, PRC governmental authorities may promulgate new laws and regulations regulating the internet finance industry in the future. We cannot assure you that any of the financial solutions we present to our customers and suppliers would not be deemed violation to any PRC laws or regulations. In addition, we cannot assure you that the financing providers we cooperate with have obtained or will continue to hold valid licenses and permits required under the applicable laws and regulations. In the event that such financing providers fail to hold, renew or obtain valid and effective licenses and permits required by the applicable laws and regulations, our financial solutions business, our results of operation and financial condition may be adversely affected and may in turn increase our credit risks. Furthermore, we provide deposit or other types of guarantee for our customers and suppliers who use our financial solutions to the financing providers. We cannot assure you that such guarantee will not be deemed as unlicensed financial guarantee business by the relevant PRC government authority, and may subject us to fines, termination of operation, or even criminal liability of our employees. Moreover, developments in the financial solutions and internet finance industry may lead to changes in PRC laws, regulations and policies or the interpretation and application of existing laws, regulations and policies that may limit or restrict financial solutions like those we offer, which could materially and adversely affect our financial solutions and operations.

 

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If we fail to manage our chemical inventory effectively under direct sales model, our operations and financial condition may be materially and adversely affected.

Although for a substantial majority of chemicals sold on our Online Platform, the whole transaction process only takes a few days at most, we still bear inventory risk, and we are required to manage our inventory effectively. We depend on our internal business analysis to make purchase decisions and to manage our inventory. Demand for chemicals, however, can change between the time inventory is ordered and the date by which we expect to sell it. Demand may be affected by seasonality, development of new types of chemicals, changes in production cycles and pricing, defects, changes in customer needs with respect to our chemicals and other factors, and our customers may not order chemicals in the quantities that we expect. We are not entitled to return unsold chemicals to suppliers. In addition, when we begin to sell a new type of chemicals, it may be difficult to establish supplier relationships, determine appropriate chemical category, and accurately forecast demand.

If we fail to manage our inventory effectively, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory value, and significant inventory write-downs or write-offs. In addition, we may be required to lower sale prices in order to reduce inventory level, which may lead to lower gross margins. High inventory level may require us to commit substantial capital resources, preventing us from using the capital for other important purposes. On the other hand, if we underestimate demand for chemicals we sell, or if our suppliers fail to supply chemicals in a timely manner, we may experience inventory shortage, which might result in missed sales, diminished brand loyalty and lost revenues, any of which could harm our business and reputation. Any of the above may materially and adversely affect our results of operations and financial condition.

We rely on several online payment platforms developed and supported by third-party financial institutions to process a portion of payments on our Online Platform. If services of these payment platforms are limited, restricted, curtailed or degraded in any way or become unavailable to us or to our customers for any reasons, our business may be adversely affected.

We cooperated with Ping’an Bank to develop third-party online payment platform to support payments on our Online Platform. Under its agreement with us, Ping’an Bank launched Mo Yi Fu as an independent payment platform to provide convenient payment processing to customers who make purchases on our Online Platform. As of September 30, 2019, 179 customers had set up Mo Yi Fu accounts. Although only a small portion of transactions on our Online Platform are processed through Mo Yi Fu, the limitation, restriction, curtailment, or reduction of services of Mo Yi Fu may negatively affect our customers’ transaction experience, and their trust in our services and our brand name.

These third-party payment platforms are subject to a number of risks that could materially and adversely affect their ability to provide payment services to us, including, among others, changes to laws and regulations with regard to online payment platforms; dissatisfaction with their services or lower use of these payment platforms by customers and suppliers; changes to rules or practices applicable to online banks and payment systems that link to these payment platforms; breach of customers’ personal information and concerns over the use and security of information collected from customers; adaption to our Online Platform and customers’ payment habits; and failure to manage funds accurately or loss of funds, whether due to employee fraud, security breaches, technical errors or otherwise.

In addition, the wide variety of payment methods that we offer subjects us to third-party payment processing-related risks. We accept payments using a variety of methods, including payment on delivery, bank transfers, payment platforms developed by banks who cooperate with us, such as Mo Yi Fu, online payments through third-party online payment platforms, such as Alipay, Weixin Pay and UnionPay. For certain payment methods, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the

 

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various payment methods we offer, including online payment and cash on logistics options. Moreover, we are subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, 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.

We are subject to risks relating to the warehousing and logistics of chemicals. If any of these risks materializes, our business, our results of operations and financial condition could be materially and adversely affected.

We hire third-party service providers, whom we have no direct control over, to provide warehousing and logistics solutions. We rely on third-party carriers to transport and deliver chemicals. Interruptions to or failures in logistics services could prevent or deter the timely or successful delivery of our chemicals. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of carriers, such as inclement weather, natural disasters or labor unrest. If chemicals sold on our Online Platform are not delivered on time or are delivered in a damaged state, customers may refuse to accept chemicals and hold less confidence in us. Furthermore, the logistics personnel of carriers act on our behalf and interact with our customers personally. Any failure to provide high-quality service to our customers may negatively impact the transaction experience of our customers, damage our reputation, and cause us to lose customers.

We rely on third-party warehousing service providers to store chemicals we sell under direct sales model on MOLBASE Online Mall. Any increase in the price charged by such warehousing service providers, any safety accidents or mishandling of chemicals, or any service disruption experienced by such warehouses could have an adverse effect on our business operations.

The storage and transportation of chemicals involve inherent safety risks. We handle a large volume of chemicals, and face challenges with respect to the protection and examination of these chemicals. Chemicals we manage may be stolen, damaged, or lost for various reasons, and we and our warehousing and logistics service providers may be perceived to be or found liable for such incidents. Although we hold licenses and permits to manage hazardous chemicals, we cannot assure you that our risk management system will eliminate all possibilities of hazardous chemical diffusions, combustions, and other types of hazardous chemical accidents. In addition, vehicles and personnel of third-party logistics service providers we hire may be involved in transportation accidents, and the chemicals carried by them may be lost, damaged, destroyed, or may cause safety accidents in the case of hazardous chemicals. In addition, friction or disputes may occasionally arise from direct interactions between logistics service providers’ pickup and logistics personnel with chemical senders and recipients. Personal injuries or property damages may arise if such incidents escalate.

Moreover, as we implement the Chemicals Transportation Community Project and the Chemicals Cloud Warehousing Project, we connect third-party warehousing and logistics service providers that do not have long-term cooperation agreements with us to our customers, and let these service providers fulfill orders on our Online Platform and directly serve our customers. Under this model, we have even less control over the quality of services offered to our customers, and we bear higher risks of being negatively impacted due to third-party warehousing and logistics solutions. We and third-party warehousing and logistics service providers may face claims and incur serious liabilities if found liable or partially liable for any injuries, damages or losses. Claims against us may exceed the amount of our insurance coverage, or may not be covered by insurance at all. Governmental authorities may also impose serious fines on us or require us to adopt costly preventive measures. Furthermore, if our services are perceived to be unsafe by our customers, our transaction volume may be seriously reduced, and our business, financial condition, and results of operations may be materially and adversely affected.

 

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We require substantial capital to expand our business and to sustain our growth, and we cannot assure you that we will be able to obtain sufficient capital on acceptable terms, or at all.

We require substantial capital to maintain and upgrade our integrated suite of solutions in response to fierce competition, technological developments, and changing laws and regulations in the industry. For example, we need substantial capital to expand our logistics and warehousing solutions, upgrade our IT system to meet the growing needs of our Online Platform users, and recruit qualified personnel to keep our innovative development. Moreover, our expansion into global markets, and the pursuit of strategic acquisitions, investments and alliances or other business opportunities may require a significant amount of capital. Our expected sources of capital include both equity and debt financing. However, financing might not be available to us in a timely manner or on terms that are acceptable, or at all.

Our ability to obtain the necessary financing to carry out our business plan is subject to a number of factors, including general market conditions and investor acceptance of our business plan. These factors may make the timing, amount, terms and conditions of such financing unattractive or unavailable to us. If we are unable to raise sufficient funds, we will have to significantly reduce our spending, delay or cancel our planned activities or substantially change our current corporate structure. We might not be able to obtain any funding, and we might not have sufficient resources to conduct our business as projected, both of which could mean that we would be forced to curtail or discontinue our operations.

Our expansion into global market may expose us to new challenges and more risks, and we may fail to expand effectively. If we fail to overcome the challenges presented by our global operations, our business, financial condition and results of operations may suffer material and adverse impact.

As we expand our global and cross-border business into an increasing number of global markets, we will face risks associated with expanding into markets in which we have limited or no experience of, and in which we may be less well-known. We may be unable to attract a sufficient number of customers and business partners, fail to anticipate competitive conditions or face difficulties in operating effectively in these new markets. The expansion of our global and cross-border business will also expose us to risks inherent in operating business globally, including but not limited to:

 

   

inability to recruit international and local talent and deal with challenges in replicating or adapting our company policies and procedures to operating environments different than those of China;

 

   

lack of acceptance of our chemicals and service offerings;

 

   

exposure to lawsuits and regulatory investigations;

 

   

trade wars;

 

   

geopolitical tensions, political instability and general economic or political conditions in particular countries or regions;

 

   

challenges and increased expenses associated with staffing and managing global and cross-border operations and managing an organization spread over multiple jurisdictions;

 

   

trade barriers, such as import and export restrictions, tariff, customs duties and other taxes, competition law regimes and other trade restrictions, as well as other protectionist policies;

 

   

differing and potentially adverse tax consequences;

 

   

increased and conflicting regulatory compliance requirements;

 

   

adaption to industry practices in different markets;

 

   

challenges caused by distance, language and cultural differences;

 

   

increased costs to protect the security and stability of our information technology systems, intellectual property and personal data, including compliance costs related to data localization laws;

 

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availability and reliability of global and cross-border payment systems and logistics infrastructure; and

 

   

exchange rate fluctuations.

As we expand further into new regions and markets, these risks could intensify, and efforts we make to expand our global and cross-border business and operations may not be successful. Failure to expand our global and cross-border business and operations could materially and adversely affect our business, financial condition and results of operation.

Our business, financial condition and results of operations may be materially and adversely affected if we are unable to maintain satisfactory customer experience or provide customer service of high quality to retain our existing customers, or fail to acquire new customers in a cost-effective manner.

The success of our business hinges on our ability to provide superior customer experience to retain existing customers, which in turn depends on a variety of factors. These factors include our abilities to continue to offer high quality chemicals and effective supporting services at competitive prices, to find sources of timely and reliable warehousing and logistics solutions, financial solutions, and to provide superior after-sales service. Our sales may decrease if our Online Platform services are severely interrupted or otherwise fail to meet customers’ expectations. For example, should we or our logistics service providers fail to provide our chemicals delivery and return services in a convenient or reliable manner, or if our customers are not satisfied with the quality of chemicals received, our reputation and customer loyalty could be adversely affected.

We also depend on our call center and online customer service representatives to provide live or timely assistance to our customers. If our call center or online customer service representatives fail to satisfy the individual needs of customers, our reputation and customer loyalty could be adversely affected and we may lose potential or existing customers and experience a decrease in sales. As a result, if we are unable to continue to maintain our customer experience and provide high quality customer service, we may not be able to retain existing customers or attract new customers, which could materially and adversely affect our business, financial condition and results of operations.

In addition, some of our suppliers may use their own logistic services and other supporting services, which we have no control over, to serve customers making purchases on our Online Platform. If such suppliers fail to provide satisfactory service to our customers, or fail to control the quality of their chemicals properly, and we fail to deal with such defects effectively, then the experience of our customers may be adversely impacted, and consequently we may face claims raised by our customers that we should be held liable for any losses and damages arising therefrom. As a result, our reputation, business, financial condition, and results of operations might suffer significantly.

Furthermore, our future growth depends on our ability to continue to attract new customers. Our efforts to enhance our brand recognition and conduct marketing activities may cause us to incur significant expenses. These efforts may not result in increased user traffic and revenues in the immediate future or at all. Even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote our services and attract customers while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our business growth. On the other hand, if we fail to devote adequate resources in maintaining our reputation, enhancing our brand recognition, or increasing positive awareness of our Online Platform and our services, it may be difficult to grow our customer base, and our business and growth prospects may be materially and adversely affected.

Failure to deal effectively with any fraud perpetrated and fictitious transactions conducted on our platform could harm our business.

We face risks with respect to fraudulent activities on our Online Platform under marketplace model. Although we take steps to verify the identity of suppliers, we cannot guarantee that all suppliers registered on our

 

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Online Platform are duly established legal entities and individuals, and all of the transactions they conduct with customers are real and commercially fair. There may be suppliers on our Online Platform who conduct fake transactions, accept customers’ payments and refuse to deliver respective chemicals, and customers who have received chemicals but refuse to pay suppliers. Although we have implemented various measures to detect and reduce the occurrence of fraudulent activities on our Online Platform, there can be no assurance that these measures will be effective in combating fraudulent transactions or improving overall satisfaction among our suppliers and consumers.

In addition, illegal, fraudulent or collusive activities by our employees could also subject us to liability and negative publicity. We have discovered four cases in which our employees conducted fraudulent activities, such as accepting payments from suppliers in order to bypass our Online Platform and to complete offline transactions, disclosing customers’ information to suppliers for personal gains, or applying for fake reimbursement. Although we have dismissed the employees responsible for these incidents, we cannot assure you that similar incidents will not occur in the future. Any illegal, fraudulent or collusive activity could severely damage our brand and reputation as an operator of a trusted online platform, which could adversely affect our business, financial condition and results of operations.

We face risks associated with the Restructuring and the subsequent operation of our business.

We undertook a Restructuring in 2018 in order to operate our Online Platform as a standalone business. For more details, see “Corporate History and StructureRestructuring.” We expect the Restructuring to enhance our brand image as an independent chemical e-commerce platform that provides a comprehensive suite of services, thereby attracting more users to our Online Platform. However, there can be no assurance that the Restructuring will deliver such benefits. For example, existing contracts signed with the MOLBASE group may need extra time or efforts to be transferred to our company. If the resources transferred from the MOLBASE group to our company were inadequate, or if we were unable to enhance the quality of our Online Platform after the Restructuring, our business, financial condition and results of operations would be materially and adversely affected.

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

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of our consolidated financial statements as of and for the fiscal years ended December 31, 2017 and 2018, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting as well as other control deficiencies. As defined in the standards established by the Public Company Accounting Oversight Board of the United States (PCAOB), a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified are the Company’s (i) lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and SEC financial reporting expertise, and (ii) lack of formalized financial reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting and compliance requirements. We are in the process of implementing a number of measures to address the material weaknesses and deficiencies that have been identified. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, we cannot assure you that these measures may fully address the material weaknesses and deficiencies in our internal control over financial reporting or that we may conclude that they have been fully remediated.

 

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Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such accountant might have identified additional material weaknesses and deficiencies. We are now a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2020. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as we are now a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. We may not be able to anticipate and identify accounting issues, or other risks critical to financial reporting that could materially impact the consolidated financial statements. Generally, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

Our success depends on the continuing efforts of our key employees, including but not limited to our senior management members, and our corporate culture. If we fail to hire, retain and motivate our key employees, or maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.

Our future success is significantly dependent upon the continued service of our key executives and other key employees, who have contributed significantly to our current achievements. If we lose the services of any member of management or other key personnel, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new staff, which could severely disrupt our business, growth, and our corporate culture. Competition for talents in the Chinese chemical e-commerce industry 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 such as stock-based incentives, 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, growth, and our corporate culture. In addition, If any dispute arises regarding the agreements between our current or former key employees and us, we may have to incur substantial costs and expenses in order to enforce the agreements in China or we may be unable to enforce them at all. We also commit significant time and other resources to training our employees, which increases their value to competitors if they subsequently leave us for our competitors.

 

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We believe that a critical component for our success is our corporate culture, that we put our users first, foster innovation, remain data-driven and encourage teamwork. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our long-term objectives.

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

Our continued growth and success are largely dependent on the experience, abilities and dedication of our personnel and workforce. As we expand into global markets with comprehensive value-added services, we would need additional qualified personnel and sufficient workforce. Therefore, we must continue to hire, train and effectively manage new employees. If our new hires perform poorly or if we are unsuccessful in hiring, training, managing and integrating new employees, our business, financial condition and results of operations may be materially harmed.

One of the directors of our consolidated controlled entities may have potential conflicts of interest with us, and if any such conflicts of interest are not resolved in our favor, our business may be materially and adversely affected.

PRC laws and regulations provide that a director owes a fiduciary duty to the company to which he or she acts as a director. Dr. Dongliang Chang, one of the directors of our VIEs, must act in good faith and in the best interests of the VIEs and must not use his respective position for personal gains. On the other hand, as the chairman of the board of the directors of our company, Dr. Dongliang Chang has a duty of care and loyalty to our company and to our shareholders as a whole under the Cayman Islands law. We control our VIEs through contractual arrangements, and the business and operations of our VIEs are closely integrated with our subsidiaries’ business and operations. Nevertheless, conflicts of interest for Dr. Dongliang Chang may arise due to his dual roles both as director of the VIEs and as chairman of the board of the directors of our company.

We cannot assure you that should any conflicts of interest arise, Dr. Dongliang Chang, or any other similarly situated shareholders, directors or executive officers will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflicts of interest or disputes between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Any failure to protect our intellectual property could harm our business and competitive position.

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. 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.

Intellectual property protection may not be sufficient in China or other countries in which we operate. Confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China or elsewhere. In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming, and costly, and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our

 

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intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

In addition, as requested by the trademark office, some PRC subsidiaries of MOLBASE Inc. are in the process of transferring their trademarks to us. The trademarks to be transferred to us are “MOLBASE Website ( LOGO )” and “MOLBASE Chemicals ( LOGO ).”

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate patents, copyrights or other intellectual property rights held by third parties. We may, and from time to time in the future be, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be other third-party intellectual property that is infringed by chemicals sold on our Online Platform, services or other aspects of our business. There could also be existing patents of which we are not aware that we may inadvertently infringe. We cannot assure you that holders of patents purportedly relating to some aspect of our technology or business, if any such holders exist, would not seek to enforce such patents against us in China or any other jurisdictions. Further, the application and interpretation of China’s patent laws and the procedures and standards for granting patents in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits.

Our operations depend on the performance of the internet infrastructure and telecommunications networks in China and in other countries.

Our business depends on the performance and reliability of the internet infrastructure in China and other countries in which we operate. Substantially all of our computer hardware and a majority of our leased cloud computing servers are currently located in China. Almost all access to the internet in China is offered through China Mobile, China Unicom and China Telecom, the state-owned telecommunication operators, operating under the administrative control and regulatory supervision of the MIIT. In addition, the national networks in China are connected to the internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the internet outside of China. We may face similar or other limitations in other countries in which we operate. We may not have access to alternative networks in the event of disruptions, failures or other problems with the internet infrastructure in China or elsewhere. In addition, the internet infrastructure in the countries in which we operate may not support the demands associated with continued growth in internet usage.

The failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our websites and mobile applications. We have no control over the costs of the services provided by the telecommunications operators. If the prices that we pay for telecommunications and internet services rise significantly, our gross margins could be adversely affected. In addition, if internet access fees or other charges to internet users increase, our user traffic may decrease, which in turn may significantly decrease our revenues.

 

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If we fail to prevent security breaches, improper access to or disclosure of our data or user data, or other hacking and attacks, we may lose users, and our business, reputation, financial condition and results of operations may be materially and adversely affected.

Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect, prevent or control all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of customer information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our supporting service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.

We are likely in the future to be subject to these types of attacks. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liabilities, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our suppliers, customers or other participants, or the internet infrastructure on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. As we do not carry cybersecurity insurance, we will not be able to mitigate such risks to any third party. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.

Our business generates and processes a large amount of data, our failure to protect the confidential information of our users or the improper use or disclose of such data may subject us to the liabilities imposed by data privacy and protection laws and regulations, negatively impact our reputation and deter our users from using our Online Platform.

We generate, collect, store and process a large amount of personal, transactional, statistical and behavioral data, including certain personal and other sensitive data from our customers. We face risks inherent in handling large volumes of data and in securing and protecting such data. In particular, we face a number of data-related challenges related to our business operations, including:

 

   

protecting the data in and hosted on our system, including against attacks on our system by external 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 or security of personal information, including any requests from regulatory and government authorities relating to such data.

Although we have taken steps to protect such data, our security measures could be breached. As techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our system could cause confidential customer information to be stolen and used for illegal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with customers or suppliers could be

 

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severely damaged, we could incur significant liability, and our business and operations could be adversely affected.

In addition, PRC government authorities have enacted a series of laws and regulations in regard of the protection of personal information, under which telecommunication business operators, internet service providers and other value chain operators are required to comply with the principles of legality, justification and necessity, to clearly indicate the purposes, methods and scope of any information collection and usage, to obtain the consent of users, and to keep collected personal information confidential, as well as to establish user information protection system with appropriate remedial measures. However, there is uncertainty as to the interpretation and application of such laws which may be interpreted and applied in a manner inconsistent with our current policies and practices or require changes to the features of our system. We cannot assure you that our existing user information protection system and technical measures will be considered sufficient under applicable laws and regulations. If we are unable to address any information protection concerns, or to comply with the then applicable laws and regulations, we may incur additional costs and liability and our reputation, business and operations might be adversely affected.

We have obtained the consents from our customers to use their information within the scope of authorization, and we have taken technical measures to ensure the security of such information and prevent the information from being divulged, damaged or lost. However, since the Cyber Security Law and relevant regulations, rules and measures are relatively new, there are uncertainties as to the interpretation and application of these laws and regulations, and it is possible that our data protection practices are or will be inconsistent with regulatory requirements. Any violation of the provisions and requirements under the Cyber Security Law and other relevant regulations, rules and measures may subject us to warnings, fines, confiscation of illegal gains, revocation of licenses, suspension of business, shutting down of websites or even criminal liabilities. Complying with such requirements could cause us to incur substantial expenses or to alter or change our practice in a manner that could harm our business. Any systems failure or security breach or lapse that results in the unauthorized release of our user data could harm our reputation and brand and, consequently, our business, in addition to exposing us to potential legal liability. See “Regulation—Regulations on Internet Information Security and Privacy Protection.”

We plan to grant options, restricted share units and other types of awards under our share option plan, which may result in increased share-based compensation expenses.

As part of the Restructuring, we adopted the 2018 Share Plan on November 27, 2018 to grant share-based compensation awards to employees, outside directors and consultants to incentivize their performance and align their interests with ours. In October 2019, we adopted the 2019 Share Incentive Plan, or the 2019 Plan, effective upon the SEC’s declaration of effectiveness of our registration statement on F-1 of which this prospectus is a part, for the same purpose. Under our 2018 Share Plan, we are authorized to grant shares, options and restricted share units. The maximum aggregate number of shares which may be issued under the 2018 Share Plan is 48,676,179. Under our 2019 Plan, the maximum aggregate number of shares shall initially be 3% of our total number of issued and outstanding shares immediately after the completion of this offering, subject to automatic annual increase. See “Management—Share Incentive Plans.” We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

Acquisitions, strategic alliances and investments could be difficult to integrate, which may disrupt our business, and lower our results of operations and the value of your investment.

We may enter into selected strategic alliances and potential strategic acquisitions that are complementary to our business and operations, including opportunities that can help us further expand our logistics service

 

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offerings and improve our technology system. These strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance or default by counterparties, and increased expenses in establishing these new alliances, any of which may materially and adversely affect our business. We may have limited ability to control or monitor the actions of our strategic partners. To the extent a strategic partner suffers any negative publicity as a result of its business operations, our reputation may be negatively affected by virtue of our association with such party.

In the past, we invested in Zhejiang Moke Biotechnology Co., Ltd., which was dissolved in December 2018. Provided suitable opportunities, we may pursue strategic alliances and investments in the future. Strategic acquisitions and subsequent integrations of newly acquired businesses would require significant managerial and financial resources and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our growth and business operations. Acquired businesses or assets may not generate expected financial results immediately, or at all, and may incur losses. The cost and duration of integrating newly acquired businesses could also materially exceed our expectations. Any such negative developments could have a material adverse effect on our business, financial condition and results of operations.

We will be a “controlled company” within the meaning of the Nasdaq Stock Market Rules if after this offering MOLBASE Inc. continues to beneficially own more than 50% of our outstanding ordinary shares.

We undertook the Restructuring in 2018, after which MOLBASE Inc. continues to hold 100% of our outstanding ordinary shares. Ultimately, we expect the existing shareholders of MOLBASE Inc. to become our shareholders. However, until this Share Distribution takes place, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because MOLBASE Inc. beneficially owns more than 50% of our outstanding ordinary shares. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

Our current risk management system may not be able to exhaustively assess or mitigate all risks to which we are exposed. If we fail to develop and maintain an effective system of internal control, our business operation might be negatively affected.

We have established risk management, quality control and internal control systems, consisting of policies and procedures, that we believe are appropriate for our business. However, the implementation of such policies and procedures may involve human error and mistakes. Moreover, we may be exposed to fraud or other misconduct committed by our employees, or other third parties, including but not limited to our customers and suppliers, or other events that are out of our control, that could adversely affect our product quality and reputation and subject us to financial losses and sanctions imposed by government authorities. As a result, despite our efforts to improve the aforementioned systems, we cannot assure you that our risk management, quality control and internal control systems are able to completely eliminate non-compliance matters or product defects.

Our insurance coverage may not be adequate, which could expose us to significant costs and business disruptions.

We have obtained insurance to cover certain potential risks and liabilities, such as domestic trade credit insurance, and casualty insurance for our employees. However, insurance companies in China and other jurisdictions in which we operate may offer only limited types of business insurance products. As a result, we may not be able to acquire any insurance for all types of risks we face in our operations in China and elsewhere, and our coverage may not be adequate to compensate for all losses that may occur, particularly with respect to loss of business or operations. For example, we do not maintain business interruption insurance, nor do we

 

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maintain key-man life insurance. In addition, we do not maintain insurance for the chemicals in our custody at the warehouse ourselves but rely on the insurance coverage maintained by our warehousing service providers that meet with our standards and the contractual arrangements with our warehousing service providers relating to reimbursement for our loss in the event that our chemicals are damaged, tainted or missing due to failure of their obligations. Even though we have required such warehousing service providers to take safety measures and maintain insurance that meet our standards during their ordinary course of operations, we cannot assure you that these warehousing service providers will provide their services properly. In the event that these warehousing service providers fail to provide their services properly or adequately and the chemicals in our custody suffer damages or losses, we cannot assure you that we may be able to obtain compensation from the warehousing service providers for all losses that may occur. Any business disruption, litigation, regulatory action, outbreak of epidemic disease or natural disaster could also expose us to substantial costs and diversion of resources. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.

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

We lease properties for our company registry, offices, and warehouses. We may not be able to successfully extend or renew such leases upon expiration of the current term on commercially reasonable terms or at all, and may therefore be forced to relocate the affected operations. This could disrupt our operations and result in significant relocation expenses, which could adversely affect our business, financial condition and results of operations. In addition, we compete with other businesses for premises at certain locations or of desirable sizes. As a result, even though we could extend or renew our leases, rental payments may significantly increase as a result of the high demand for the leased properties. In addition, we may not be able to locate desirable alternative sites for our facilities as our business continues to grow, and failure in relocating our affected operations could adversely affect our business and operations.

Our use of some leased properties could be challenged by third parties or government authorities, which may cause interruptions to our business operations.

As of the date of this prospectus, some lessors of our leased offices had not provided us with their property ownership certificates or any other documentation proving their right to lease those properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the competent government authorities, our leases could be invalidated. If this occurs, we may have to renegotiate the leases with the owners or the parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us.

In addition, none of our leasehold interests in leased properties have been registered with the competent PRC government authorities as required by PRC laws and regulations, which may expose us to administrative fines of up to RMB10,000 if we fail to remediate after receiving any notice from the competent PRC government authorities.

As of the date of this prospectus, we were not aware of any material claims or actions being contemplated or initiated by government authorities, property owners or any other third parties with respect to our leasehold interests in or use of such properties. However, we cannot assure you that our use of such leased properties will not be challenged. In the event that our use of properties is successfully challenged, we may be subject to fines and forced to relocate the affected operations. In addition, we may become involved in disputes with the property owners or third parties who otherwise have rights to or interests in our leased properties. We can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties’ challenges on our use of such

 

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properties. As a result, our business, financial condition and results of operations may be materially and adversely affected.

We may be subject to legal proceedings in the ordinary course of our business. If the outcomes of these proceedings are adverse to us, they could have a material adverse effect on our business, results of operations and financial condition. Contractual disputes could be costly and time-consuming, and may harm our reputation.

From time to time, we have become and may in the future become a party to various legal or administrative proceedings arising in the ordinary course of our business, including actions with respect to labor and employment claims, breach of contract claims, anti-competition claims and other matters. Although such proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flow. Regardless of the outcome and merit of such proceedings, however, any legal action can have an adverse impact on us because of defense costs, negative publicity, diversion of management’s attention and other factors. In addition, it is possible that an unfavorable resolution of one or more legal or administrative proceedings, whether in China or in another jurisdiction, could materially and adversely affect our financial position, results of operations, or cash flows in a particular period, or damage our reputation.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our 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, Zika or other events, such as wars, acts of terrorism, environmental accidents, power shortage or communication interruptions. The occurrence of such a disaster or prolonged outbreak of an epidemic illness or other adverse public health developments in the PRC or elsewhere could materially disrupt our business and operations. Such events could also significantly affect our industry and cause a temporary closure of the facilities we use for our operations, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. Our operations could be disrupted if any of our employees were suspected of having any of the epidemic illnesses, since this could require us to quarantine some or all of such employees or disinfect the facilities used for our operations. In addition, our revenue and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general. Our operations could also be severely disrupted if our customers, suppliers or other participants were affected by such natural disasters, health epidemics or other outbreaks.

We are reliant on the innovative development of the whole Chinese chemical industry, which is currently far behind the global leading standard in research and development, technology support, and application of information technology.

Although China has become the largest manufacturing country of chemicals and the largest chemicals consuming market in the world, the whole Chinese chemical industry is still relatively underdeveloped, especially in developing and producing high-tech chemicals. The lack of application of information technology in chemical industry, while offering us broader opportunities in obtaining market share in China, may also bring us disadvantages in competing with our competitors outside China and other world-wide chemical e-commerce industry participants.

An important part of our business model is to deliver a proprietary and comprehensive SaaS suite to participants in the chemical industry value chain. We are at the initial stage of charging fees for using our SaaS suite, and we also invest in research and development, and marketing and sales to strengthen the monetization of

 

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SaaS suite and other technology-enabled services. However, we cannot guarantee that the participants in Chinese chemical industry are willing to pay for our SaaS suite and other technology-enabled services. Failure to effectively monetize our SaaS suite and other technology-enabled services may have an adverse effect on our business, financial condition or results of operations.

The underdevelopment of Chinese chemical industry, which we have little control over, can negatively impact our results of operations in various aspects of our business, including, but not limited to, shortage of manufacture and supply of high-technology chemicals, less attraction to qualified personnel in the chemical industry, and difficulties in obtaining transportation and warehousing resources competing with other consumer goods industries. While we seek to implement our business strategy and new technology to connect all parties to all types of chemicals and information in the chemical industry, we cannot guarantee how much our efforts can actually improve the standard of the whole Chinese chemical industry, and any of the abovementioned challenges may result in potential underperformance of our business.

The chemical industry faces considerable challenges due to the higher level of scrutiny in terms of environmental protection and work safety as related laws and regulations are being established and implemented, which may increase cost and create restrictions to our business.

Our business is subject to a higher level of scrutiny from PRC laws and regulations relating to environmental protection, work safety and occupational health matters. Under these laws and regulations, we are required to limit environmental pollution to a certain standard and protect the occupational safety of our employees.

The storage and transportation process of chemicals bears an inherent risk of damaging the environment by discharging pollutants and certain chemical wastes, and the storage and transporting of chemicals. While we have taken measures to ensure us meeting the requirements of current environmental protection laws and regulations, we cannot assure you that all situations that will give rise to material environmental liabilities will be discovered and addressed immediately. If we are found liable for any environmental protection laws and regulation breaches, we will be subject to fines and other forms of punishments. Should the PRC government imposes stricter environmental protection standards and regulations in the future, the cost of participants in the chemical industry to comply with such standards will generally increase, causing a negative impact of our operations. Moreover, we cannot assure you that we will be able to comply with such new regulations at reasonable costs, or at all. Any increase in production costs resulting from the implementation of additional environmental protection measures and/or failure to comply with new environmental laws or regulations may have a material adverse effect on our business, financial condition or results of operations.

In addition, the storage and transportation of chemicals inherently require relevant personnel to be exposed to chemicals, therefore bearing risks of accidents and occupational diseases. While we have conducted periodic inspections of our operating facilities and carried out equipment maintenance on a regular basis to ensure that our operations are in compliance with applicable work safety related laws and regulations, we cannot assure you that we will not experience any material accidents, worker injuries or occupational health problems in the course of our operation in the future. Any work safety laws and regulations implemented in the future may materially increase costs of our business, and negatively affect our operation results.

Uncertainties regarding the growth and continuous profitability of e-commerce in China could adversely affect our revenues and business prospects. A severe or prolonged downturn in the Chinese or global economy, or any global systemic economic and financial crisis, could materially and adversely affect our business and financial condition, given that our business is highly dependent on Chinese and global commodity and e-commerce markets.

A substantial portion of our revenue is generated through our online direct sales and marketplace model. As the chemical e-commerce business emerged in China in recent years, only a limited number of market

 

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participants have become profitable. The long term viability and prospects of the chemical e-commerce industry in China remain untested and are subject to significant uncertainty. Our business, financial condition and results of operations will depend on numerous factors affecting the chemical e-commerce business in China, which may be beyond our control. These factors include general economic conditions inside and outside China, the growth of internet usage, confidence in e-commerce and making purchase online, the emergence of alternative trade channels or business models, the success of marketing and brand building efforts by chemical e-commerce companies, and the development of payment, warehousing and logistics, knowledge engine and business intelligence services, and other supporting services.

The global macroeconomic environment is facing challenges, including the US-China trade war, escalation of the European sovereign debt crisis since 2011, the end of quantitative easing by the U.S. Federal Reserve and the economic slowdown in the Eurozone in 2014, and slowdown in growth of the Chinese economy since 2012. The US-China trade war started in January 2018, and has kept escalating ever since. Both countries have introduced tariffs on goods traded with the other, including certain chemicals and raw materials, which may cause a significant reduction in chemical trade between the two countries, and unpredictable worldwide negative influence on the chemical industry. There have been concerns over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets, and over the expansion of terrorist activities into Europe and other regions. The vote of British citizens to withdraw United Kingdom’s membership from the European Union caused significant volatility in the global financial and securities markets, and may have a negative and prolonged impact on the global economy. There have also been concerns about the tensions in the relationship among China and other countries, including surrounding Asian countries, which may potentially have various economic effects.

Economic conditions in China are sensitive to global economic conditions. Our business and operations are primarily based in China and substantially all of our revenues are derived from our operations in China. Accordingly, our financial results have been, and are expected to continue to be, affected by the economy and e-commerce industry in China. While the economy in China has grown significantly over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing down. The e-commerce industry is particularly sensitive to economic downturns, and the macroeconomic environment in China may affect our business and prospects. A prolonged slowdown in the global or Chinese economy may lead to a reduced level of online purchasing activities, which could materially and adversely affect our business, financial condition and results of operations.

Moreover, a slowdown in the global or Chinese economy or the recurrence of any financial disruptions may materially and adversely impact financings available to us. The weakness in the economy could erode investors’ confidence, which constitutes the basis of the credit markets. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China. Any prolonged slowdown in the global or Chinese economy may negatively impact our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

Our business and results of operations are subject to seasonal fluctuations and unexpected interruptions of chemical e-commerce industry in China.

The chemical e-commerce industry in China is subject to seasonal fluctuations, which may cause our revenues to fluctuate from quarter to quarter. We generally experience less user traffic and purchase orders during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. Consequently, the first quarter of each calendar year generally contributes the smallest portion of our annual revenues. Furthermore, as we are substantially dependent on online sales of chemicals, our quarterly revenues and results of operations are likely to be affected by:

 

   

seasonality of the chemical market and customers’ purchasing patterns;

 

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our ability to retain existing customers and attract new customers for our e-commerce services;

 

   

our ability to successfully introduce new service offerings on our Online Platform;

 

   

the amount and timing of our operating expenses and capital expenditures;

 

   

the adoption of new, or changes to existing, governmental regulations;

 

   

a shortfall in our revenues relative to our forecasts and a decline in our operating results; and

 

   

economic conditions in general and specific to the chemical e-commerce industry and to China.

As our revenues have grown rapidly in recent years, these factors are difficult to discern based on our historical results, which, therefore, should not be relied on to predict our future performance. Our financial condition and results of operations for future periods may continue to fluctuate. As a result, the trading price of our ADSs may fluctuate from time to time due to seasonality.

Risks Related to Our Corporate Structure

If the PRC government deems that the contractual arrangements in relation to our VIEs and their subsidiary do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Foreign ownership of internet-based businesses, such as provision of online information and other value-added telecommunication services, are subject to restrictions under current PRC laws and regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider with the exception relating to e-commerce business, and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record.

To comply with PRC laws and regulations, our WFOE has entered into a series of contractual arrangements with our VIEs and their shareholders, which enable us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of our VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate their financial results into our consolidated financial statements under U.S. GAAP. See “Corporate History and Structure” for further details.

In the opinion of our PRC legal counsel, Global Law Office, (i) the ownership structure of our VIEs in China and our WFOE, both currently and immediately after giving effect to this offering, complies with PRC Laws in any material respect; and (ii) the contractual arrangements among our WFOE, our VIEs and their shareholders governed by PRC law constitute legal, valid and binding obligations of all the parties therein, and are enforceable against all the parties therein, and will not result in any violation of applicable PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or, if adopted, what they would provide. If we or our VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

 

   

revoking or suspending the business licenses or operating licenses of our WFOE or our VIEs;

 

   

discontinuing or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIEs;

 

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

 

   

levying fines or confiscating our income or the income of our WFOE or our VIEs, or imposing other requirements with which we or our VIEs may not be able to comply;

 

   

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

 

   

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

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

Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

On March 15, 2019, the National People’s Congress, or the NPC, approved the Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.

 

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We rely on contractual arrangements with our VIEs and their shareholders for a significant portion of our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied on and expect to continue to rely on contractual arrangements with our VIEs and their shareholders to conduct our business through Jiaxing MOLBASE, Shanghai MOLBASE and Shaanxi MOLBASE. See “Corporate History and Structure—Contractual Arrangements with VIEs.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs and their subsidiary. For example, our VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIEs and their shareholders of their obligations under the contracts to exercise control over our VIEs and their subsidiary. The shareholders of our VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our VIEs. If any disputes relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our VIEs and their shareholders may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

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

We refer to the shareholders of our VIEs as their nominee shareholders because although they remain the holders of equity interests on record in our VIEs, pursuant to the terms of the relevant shareholder voting proxy agreements, each such shareholder has irrevocably authorized any person designated by our WFOE to exercise the rights as a shareholder of the VIEs. However, if our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders of our VIEs refuse to transfer their equity interest in our VIEs to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All of the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes arising from these contracts would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us.” Meanwhile, there are little formal guidance as to how contractual arrangements in the context of VIEs should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal actions become necessary. In addition, under PRC law, rulings by arbitrators are final, which means parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and

 

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delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs and their subsidiary, and our ability to conduct our business may be negatively affected.

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

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

We may lose the ability to use and benefit from assets held by our VIEs and their subsidiary that are material to the operation of our business if our VIEs or their subsidiary declare bankruptcy or become subject to a dissolution or liquidation proceeding.

Our VIEs and their subsidiary hold a majority of our assets, some of which are material to the operation of our business. If our VIEs or their subsidiary declares bankruptcy, and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of any of their material assets outside the ordinary course of operation or equity interests in the business operation without our prior consent. If our VIEs or their subsidiary undergoes voluntary or involuntary liquidation proceedings, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

If the chops of our WFOE, our VIEs or their subsidiaries are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops that can be used for specific purposes. The chops of our WFOE, VIEs and their subsidiary are generally held securely by personnel we designated or approved in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

 

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Risks Related to Doing Business in China

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

A majority of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned or controlled by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing down since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our products and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.

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

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

The VIE structure has been adopted by many PRC-based companies, including us, to conduct business in the industries that are currently subject to foreign investment restrictions in China. Under the discussion draft of the Foreign Investment Law for public review and comment published by MOFCOM in January 2015, or the 2015 Draft Foreign Investment Law, a VIE that is controlled via contractual arrangements would also be deemed as a foreign invested enterprise, or FIE, if it is ultimately “controlled” by foreign investors. The Foreign Investment Law published by NPC, on March 15, 2019 does not touch upon the concept and regulatory regimes of “de facto control” or “variable interest entity structure.” However, there are still substantial uncertainties regarding the interpretation and application of the Foreign Investment Law and the regulatory regimes. See “—Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.” It is uncertain whether any new PRC laws or regulations relating to variable interest entity

 

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structures will be adopted or if adopted, what they would provide. If our VIEs are deemed as FIEs and the business operation of such VIE falls within the industry catalogue of special management measures, or the Negative List, amended by the MOFCOM and the NDRC in the future, the existing VIE structure may be scrutinized and subject to foreign investment restrictions and approval from the MOFCOM and other supervising authorities such as the MIIT. Our corporate governance practice may be materially impacted and our compliance costs could increase if our VIEs are deemed as FIEs by such supervising authorities. For more information on the Foreign Investment Law, please see “Regulation—Regulations on Foreign Investment—Foreign Investment Law.”

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

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

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

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including but not limited to the MOFCOM, MIIT, State Administration of Market Regulation, Ministry of Emergency Management and their counterparts. Together, these government authorities promulgate and enforce regulations that cover many aspects of the operation of transaction, storage and transportation of chemicals, and internet-related business, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in such business. The laws and regulations related to transaction, storage and transportation of chemicals, and internet-related business are evolving rapidly, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations. Under PRC laws, an entity must obtain the Hazardous Chemical Operation License from the Ministry of Emergency Management or its counterpart for conducting transaction, storage and transportation of hazardous chemicals, the value-added telecommunication service operating licenses from the MIIT or its counterpart for either online information services or e-commerce platform operation. We have made great efforts to obtain all applicable licenses and permits necessary to our business.

However, the interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the transaction, storage and transportation of chemicals, and internet-related business have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, transaction, storage and transportation of chemicals, and internet-related business in China, including our business, we cannot assure you that we have obtained all the permits or licenses required for conducting our business or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or

 

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impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

We may rely on dividends paid by our WFOE to fund any cash and financing requirements we may have. Any limitation on the ability of our WFOE to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.

We are a holding company, and we may rely on dividends to be paid by our WFOE for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to the holders of the ADSs and our ordinary shares and service any debt we may incur. If our WFOE incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

Under PRC laws and regulations, wholly foreign-owned enterprises in the PRC, such as our WFOE, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At the discretion of the board of directors of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our WFOE to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund and conduct our business.

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

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

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to filing or registration with the relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by our PRC subsidiaries is required to be registered with State Administration of Foreign Exchange, or SAFE, or its local branches, and (b) each of our PRC subsidiaries may not procure loans which exceed the statutory limit. Any medium or long-term loan that we are to provide to our VIEs must be recorded and registered by the NDRC and SAFE, or its local branches. We may not complete such recording or registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans from us to our PRC subsidiaries. If we fail to complete such recording or registration, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

In 2008, SAFE promulgated the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, which used to regulate the conversion by foreign-invested enterprises of foreign currency into Renminbi by restricting the usage of converted Renminbi. In March 2015, SAFE promulgated the Notice of the State Administration of

 

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Foreign Exchange on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises, or Circular 19. Circular 19 took effect as of June 1, 2015 and superseded Circular 142 on the same date. Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capitals for expenditures beyond their business scopes. In June 2016, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or Circular 16. Circular 16 continues to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange capitals for expenditure beyond its business scope, investment and financing (except for guarantee products issued by a bank or otherwise permitted by laws), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use (except for real estate enterprise). Circular 19 and Circular 16 may significantly limit our ability to transfer to and use in China the net proceeds from this offering, which may adversely affect our business, financial condition and results of operations.

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

The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and China’s foreign exchange policies, among other things. In 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

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

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

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on

 

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

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

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

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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

In October 2005, SAFE issued a circular on relevant issues relating to foreign exchange administration in fund financing and roundtrip investment by domestic residents via offshore special purpose vehicles, or Circular 75, requiring PRC residents, including individual and entities, to register with the relevant local branch of SAFE before establishing or controlling any company outside of China, referred to as an offshore special purpose company, for the purpose of raising funds from overseas to acquire or exchange assets of, or acquiring equity interest in, PRC companies held by such PRC residents.

In July 2014, the SAFE issued a circular on foreign exchange administration involved in overseas investment, financing and roundtrip investment conducted by PRC residents via offshore special purpose vehicles, or Circular 37, which replaced Circular 75 and further requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing by either onshore or offshore assets or equity legally held by such PRC residents. In February 2015, SAFE released the Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, or Circular 13, which further clarified that offshore individuals who have foreign identification and use their offshore assets or equity to make contributions into an offshore special purpose vehicle are not subject to the registration under Circular 37.

If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiaries, including our WFOE and its subsidiaries, may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We may not be informed of the identities of all PRC residents holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with the requirements of Circular 37. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, Circular 37 or other PRC applicable law and regulations related to outbound investment. Failure by such shareholders or beneficial owners to comply with Circular 37, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities and limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

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

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE or its local branches through a domestic qualified agent, which could be the PRC subsidiary of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted share-based

 

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awards will be subject to these regulations when our company becomes an overseas-listed company upon the completion of this offering. Failure to complete SAFE registrations may subject them to fines of up to RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctions and may also limit our ability to contribute additional capital into our WFOE and limit our WFOE’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Regulations on Labor Protection in the PRC—Employee Stock Incentive Plan.”

In addition, the State Administration of Taxation, or SAT, has issued the Notice of the State Administration of Taxation on Relevant Issues of Individual Income Tax Relating to Equity Incentive, or Notice 461 and relevant circulars concerning employee stock options and restricted shares. Under these circulars, our employees working in China who exercise stock options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options or are granted with restricted shares. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.

U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.

Any disclosure of documents or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply with China’s state secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic interests and technologies. There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect our operations will be honored by us, by entities who provide services to us or with whom we associate, without violating PRC legal requirements, especially as those entities are located in China. Furthermore, under the current PRC laws, an on-site inspection of our facilities by any of these regulators may be limited or prohibited.

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

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

 

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

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

Our VIEs have received various financial subsidies from PRC local government authorities. The financial subsidies result from discretionary incentives and policies adopted by PRC local government authorities. Local governments may decide to change or discontinue such financial subsidies at any time. The discontinuation of such financial subsidies or imposition of any additional taxes could adversely affect our financial condition and results of operations.

We may not be able to obtain certain benefits under the relevant tax treaty on dividends paid by our WFOE to us through our Hong Kong subsidiary.

Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Taxation Arrangement, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations.

In February 2009, SAT issued SAT Notice No. 81, pursuant to which an enterprise must be the “beneficial owner” of the relevant dividend income in order to enjoy the preferential withholding tax rates on dividend. If, however, such enterprise otherwise qualifies for such preferential withholding tax rates through any transaction or arrangement, whose main purpose is to qualify for such preferential withholding tax rates, the enterprise nevertheless cannot enjoy the preferential withholding tax rates and the competent tax authority has the power to adjust the applicable withholding tax rates if it so determines. The SAT Notice No. 9 issued by SAT that took effect in April 2018 indicated that “beneficial owner” refers to a person who has ownership and disposal rights to the income or any rights and assets arising from such income, and the tax authority has discretion to determine whether or not an enterprise is determined as a “beneficial owner.” However, since the SAT Notice No. 9 is newly issued, it remains unclear how the PRC tax authorities will implement SAT Notice No. 9 in practice and to what extent they will affect the dividend withholding tax rates for dividends distributed by our WFOE to our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong subsidiary is a conduit company and does not qualify as the “beneficial owner” of the dividend income it receives from our PRC subsidiaries, the higher 10% withholding tax rate will apply to such dividends.

 

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Therefore, we cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant PRC tax authority or we will be able to complete the necessary filings with the relevant PRC tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our WFOE to Molecular Data HK.

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

We face uncertainties regarding the reporting on and consequences of previous private equity financing transactions involving the transfer and exchange of shares in our company by non-PRC resident investors, and ongoing restructuring where PRC taxable assets are involved.

According to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by SAT on December 10, 2009, or SAT Circular 698, where a non-PRC resident enterprise transfers the equity interests in a PRC resident enterprise indirectly through a disposition of equity interests in an offshore holding company (other than the sale on a public stock market of shares of an offshore enterprise purchased on a public stock market), or an Indirect Transfer, the non-PRC resident enterprise, as the seller, may be subject to PRC enterprise income tax of up to 10% of the gains derived from the Indirect Transfer in certain circumstances.

On February 3, 2015, the SAT issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfers by Non-PRC Resident Enterprises, or SAT Notice No. 7, to supersede the existing tax rules in relation to the tax treatment of the Indirect Transfer, while the other provisions of SAT Circular 698 are irrelevant to the Indirect Transfer remain in force. SAT Notice No. 7 introduces a new tax regime that is significantly different from that under a notice issued by SAT Circular 698. It extends SAT’s tax jurisdiction to capture not only the Indirect Transfer as set forth under SAT Circular 698 but also transactions involving indirect transfer of (i) real properties in China and (ii) assets of an “establishment or place” situated in China, by a non-PRC resident enterprise through a disposition of equity interests in an offshore holding company. SAT Notice No. 7 also extends the interpretation with respect to the disposition of equity interests in an offshore holding company broadly. In addition, SAT Notice No. 7 further clarifies how to assess reasonable commercial purposes and introduces safe harbors applicable to internal group restructurings. However, it also brings challenges to both offshore transferor and transferee as they are required to make self-assessments on whether an Indirect Transfer or similar transaction should be subject to PRC tax and whether they should file or withhold any tax payment accordingly. On October 17, 2017, the SAT issued a Notice Concerning Withholding Income Tax of Non-Resident Enterprise, or SAT Notice No. 37, which abolishes SAT Circular 698 and certain provisions of SAT Notice 7. SAT Notice No. 37 further reduces the burden of the withholding obligator, such as revocation of contract filing requirements and tax liquidation procedures, strengthens the cooperation of tax authorities in different places, and clarifies the calculation of tax payable and mechanism of foreign exchange.

There is uncertainty as to the application of SAT Notice No. 7 and SAT Notice No. 37. In the event that non-PRC resident investors were involved in our private equity financing transactions and such transactions were determined by the competent tax authorities as lacking reasonable commercial purposes, we and our non-PRC resident investors may become at risk of being taxed under SAT Notice No. 7 and SAT Notice No. 37 and may be required to expend costly resources to comply with SAT Notice No. 7 and SAT Notice No. 37, or to establish a case to be tax exempt under SAT Notice No. 7 and SAT Notice No. 37, which may cause us to incur additional costs and may have a negative impact on the value of your investment in us.

The PRC tax authorities have discretion under SAT Notice No. 7 and SAT Notice No. 37 to adjust the taxable capital gains based on the difference between the fair value of the transferred equity interests and the investment cost. We may pursue acquisitions in the future that may involve complex corporate structures. If we are deemed as a non-PRC resident enterprise under the Enterprise Income Tax Law and if the PRC tax authorities adjust the taxable income of the transactions under SAT Notice No. 7 and SAT Notice No. 37, our income tax

 

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expenses associated with such potential acquisitions will increase, which may have an adverse effect on our financial condition and results of operations.

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

The M&A Rules adopted by the MOFCOM requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of China Securities Regulatory Commission, or CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the application of the M&A Rules remains unclear. Currently, there is no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

Our PRC legal counsel has advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval may not be required for the listing and trading of our ADSs on Nasdaq Stock Market in the context of this offering, given that: (i) our PRC subsidiary was incorporated as wholly foreign-owned enterprises by means of direct investment rather than by merger or acquisition of equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial owners; and (ii) no provision in the M&A Rules clearly classifies contractual arrangements as a type of transaction subject to the M&A Rules.

However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our WFOE, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

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

Our independent registered public accounting firm that issues the audit reports included in our prospectus filed with the U.S. Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with CSRC, and the Ministry of Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to

 

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permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the New York Stock Exchange of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected. It is unclear if this proposed legislation would be enacted. Furthermore, there has been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have material and adverse impact on the stock performance of China-based issuers listed in the U.S.

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

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

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the

 

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SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

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

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

Risks Related to This Offering and the American Depositary Shares

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

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

The trading price for the ADSs may be volatile, which could result in substantial losses to investors.

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

 

   

variations in our net revenues, earnings and cash flow;

 

   

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

 

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our or our competitors’ announcements of new products and services and expansions;

 

   

changes in financial estimates by securities analysts;

 

   

failure on our part to realize monetization opportunities as expected;

 

   

additions or departures of key personnel;

 

   

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

 

   

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

 

   

regulatory developments affecting us or our industry; and

 

   

actual or potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the trading volume and price of the ADSs.

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

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

Immediately prior to the completion of this offering, we expect to create a dual-class share structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share based on our proposed dual-class share structure. We will sell Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by MOLBASE Inc. to any person who is not our founder, Dr. Dongliang Chang, or his affiliate, or the change of ultimate beneficial ownership of any Class B ordinary shares from MOLBASE Inc. to any person who is not our founder, Dr. Dongliang Chang, or his affiliate, each of such Class B ordinary share shall be automatically and immediately converted into one Class A ordinary share. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by our founder, Dr. Dongliang Chang, to any person who is not his affiliate, or upon a change of ultimate beneficial ownership of any Class B ordinary share from our founder, Dr. Dongliang Chang to any person who is not his affiliate, each of such Class B ordinary share shall be automatically and immediately converted into one Class A ordinary share.

Subsequent to the completion of this offering and the Share Distribution described elsewhere in this prospectus, the existing shareholders of MOLBASE Inc. will hold Class A ordinary shares of our company except for our founder, Dr. Dongliang Chang, who will beneficially own 54,819,733 Class B ordinary shares. The Class B ordinary shares then beneficially owned by Dr. Dongliang Chang will represent all of our issued and outstanding Class B ordinary shares upon the completion of the share distribution and will constitute approximately 15.9% equity interests or 65.4% voting power of our total issued and outstanding share capital immediately after the completion of the share distribution, assuming the underwriters do not exercise their over-

 

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allotment option in this offering. As a result of the dual-class share structure and the concentration of ownership, holders of our Class B ordinary shares have considerable influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial. In addition, we may incur incremental compensation expenses to the holders of Class B ordinary share as a result of their becoming entitled to high votes on each Class B ordinary share.

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

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

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$5.11 per ADS, representing the difference between the initial public offering price of US$5.38 per ADS and our net tangible book value per ADS as of September 30, 2019, after giving effect to the net proceeds to us from this offering. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of any share options. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

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

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

Pursuant to our post-offering amended and restated memorandum and articles of association, our board of directors has complete discretion as to whether to distribute dividends. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that a Cayman Islands company may pay a dividend either out of profits or share premium account, and provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as it

 

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

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

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

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

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 11,500,000 ADSs (equivalent to 34,500,000 Class A ordinary shares) outstanding immediately after this offering, or 13,225,000 ADSs (equivalent to 39,675,000 Class A ordinary shares) if the underwriters exercise their over-allotment option in full. In connection with this offering, we, our directors and executive officers, the existing shareholders of MOLBASE Inc. and Series E-1 Warrant holder have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the representatives of underwriters, subject to certain exceptions. In addition, we have agreed to instruct the depositary not to accept any shares for deposit for the issuance of ADSs for 180 days after the date of this prospectus (other than in connection with this offering), without prior written consent from the representatives of the underwriters. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the underlying ordinary shares which are represented by your ADSs.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving, or deemed to be giving, voting instructions to the depositary in accordance with the provisions of the deposit agreement. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinary shares represented by your ADSs in

 

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accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares, and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the Class A ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. See also “Description of American Depositary Shares—Voting Rights.”

In addition, under our post-offering memorandum and articles of association that will become effective immediately prior to the completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying Class A ordinary shares represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the underlying Class A ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

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

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

We and the depository are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement, and we may terminate the deposit agreement, without the prior consent of the ADS holders.

We and the depository are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement, without the prior consent of the ADS holders. We and the depositary may agree to amend the deposit agreement in any way we decide is necessary or advantageous to us. Amendments may reflect, among other things, operational changes in the ADS program, legal developments affecting ADSs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment are disadvantageous to ADS holders, ADS holders will only receive 30 days’ advance notice of the amendment, and no prior consent of the ADS holders is required under the deposit agreement.

 

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Furthermore, we may decide to terminate the ADS facility at any time for any reason. For example, terminations may occur when we decide to list our shares on a non-U.S. securities exchange and determine not to continue to sponsor an ADS facility or when we become the subject of a takeover or a going-private transaction. If the ADS facility will terminate, ADS holders will receive at least 30 days’ prior notice, but no prior consent is required from them. Under the circumstances that we decide to make an amendment to the deposit agreement that is disadvantageous to ADS holders or terminate the deposit agreement, the ADS holders may choose to sell their ADSs or surrender their ADSs and become direct holders of the underlying Class A ordinary shares, but will have no right to any compensation whatsoever.

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

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, subject to the depositary’s right to require a claim to be submitted to arbitration in New York or Hong Kong, to the fullest extent permitted by applicable law, ADS holders irrevocably waive the right to a jury trial of any claim that they may have against us or the depositary arising out of or relating to our ordinary shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

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

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

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

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

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

 

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

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

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

We may need additional capital and may sell additional ADSs or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders or increase our debt service obligations.

We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or terms acceptable to us, if at all.

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

The depositary of the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act of 1933 but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.

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

We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. Our current operations are mainly conducted in China. In addition, A majority of our current directors and officers are nationals and residents of countries other than the United States. A majority of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that

 

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your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

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

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties owed to us by our directors under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties owed to us by our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

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

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

The post-offering memorandum and articles of association that we have conditionally adopted and that will become effective immediately prior to the completion of this offering will contain anti-takeover provisions that could discourage a third party from acquiring us and adversely affect the rights of holders of our ordinary shares and the ADSs.

We have conditionally adopted an amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. The post-offering memorandum and articles of association contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and holders of the ADSs of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

 

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

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

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

A non-U.S. corporation will be a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year consists of certain types of “passive” income; or (2) at least 50% of the value of its assets (generally based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. Although the law in this regard is unclear, we intend to treat our VIEs (and their subsidiaries) as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operations of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of our VIEs (and their subsidiaries) for United States federal income tax purposes, and based upon our current and expected income and assets (including goodwill and taking into account the expected proceeds from this offering) and the expected market price of the ADSs following this offering, we do not expect to be a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of the ADSs, fluctuations in the market price of the ADSs may cause us to become a PFIC for the current or subsequent taxable years. In addition, the composition of our income and assets will also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of our VIEs for United States federal income tax purposes, our risk of becoming a PFIC may substantially increase. Because PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we were to be or become a PFIC for any taxable year during which a U.S. investor holds our ADSs or ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. investor. See “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Rules.”

We will incur increased costs as a result of being a public company.

We are now a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, impose various requirements on the corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. For example, as a result of being a public company,

 

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we need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

   

our mission, goals and strategies;

 

   

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

 

   

the expected growth of chemical e-commerce industry in China;

 

   

our expectations regarding demand for and market acceptance of our platform and services;

 

   

our expectations regarding our relationships with our users/customers, suppliers, strategic partners and other stakeholders;

 

   

competition in our industry;

 

   

our proposed use of proceeds; and

 

   

relevant government policies and regulations relating to our industry.

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

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

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

 

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

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$52.2 million, or approximately US$60.9 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

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

 

   

approximately 35%, to invest in logistics and warehousing capabilities;

 

   

approximately 20%, to enhance our technology and retain qualified personnel;

 

   

approximately 30%, to make strategic acquisition and cross-border investment; and

 

   

the remaining amount for general corporate purposes, including general marketing and administrative purposes.

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

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

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiaries only through loans or capital contributions and to our VIEs only through loans, subject to satisfaction of applicable government registration and approval requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

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

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

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

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

 

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CAPITALIZATION

Molecular Data Inc. is 100% owned by MOLBASE Inc. We expect that, within six months following this offering, the existing shareholders of MOLBASE Inc. would become our shareholders through a distribution of our shares in proportion to MOLBASE Inc.’s current shareholding structure, and MOLBASE Inc. will remain our parent company until this Share Distribution takes place.

The following table sets forth our capitalization as of September 30, 2019:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (i) the redesignation of 310,627,024 ordinary shares held by MOLBASE Inc. into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, and (ii) the above mentioned Share Distribution; and

 

   

on a pro forma as adjusted basis to reflect (i) the redesignation of 310,627,024 ordinary shares held by MOLBASE Inc. into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the abovementioned Share Distribution, and (iii) the sale of 34,500,000 Class A ordinary shares in the form of ADSs by us in this offering at an initial public offering price of US$5.38 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the over-allotment option.

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

 

     As of September 30, 2019  
     Actual     Pro forma     Pro forma as adjusted  
     (in thousands)  
     RMB     US$     RMB     US$     RMB     US$  

Indebtedness:

            

Long term borrowing(1)

     170,748       23,889       170,748       23,889       170,748       23,889  

Equity:

            

Ordinary shares (US$0.00005 par value; 1,000,000,000 shares authorized, 310,627,024 shares issued and outstanding as of September 30, 2019; none outstanding on a pro forma basis and pro forma as adjusted basis)

     98       14                          

Class A ordinary shares, (US$0.00005 par value; No shares authorized, issued and outstanding; 550,000,000 shares authorized, 255,807,291 shares issued and outstanding on a pro-forma basis; and 290,307,291 shares outstanding on a pro forma as adjusted basis)

                 81       11       93       13  

Class B ordinary shares, (US$0.00005 par value; No shares authorized, issued and outstanding; 350,000,000 shares authorized, 54,819,733 shares issued and outstanding on a pro-forma basis and pro forma as adjusted basis)

                 17       3       17       3  

Additional paid-in capital

     529,385       74,064       529,385       74,064       919,428       128,633  

Accumulated deficits

     (693,571     (97,036     (693,571     (97,036     (693,571     (97,036

Total shareholders’ equity/(deficit)

     (164,088     (22,958     (164,088     (22,958     225,967       31,613  

 

Note:

(1)

“Long term borrowing” refers to the amounts due to related parties.

 

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DILUTION

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

Our net tangible book value as of September 30, 2019 was approximately negative US$23.2 million, or negative US$0.07 per ordinary share as of that date and negative US$0.21 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the initial public offering price of US$5.38 per ADS, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in net tangible book value after September 30, 2019, other than to give effect to our sale of the ADSs offered in this offering at the initial public offering price of US$5.38 per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2019 would have been US$31.3 million, or US$0.09 per ordinary share and US$0.27 per ADS. This represents an immediate increase in net tangible book value of US$0.16 per ordinary share and US$0.48 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$1.70 per ordinary share and US$5.11 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary
Share
    Per
ADS
 

Initial public offering price

   US$ 1.79     US$ 5.38  

Net tangible book value as of September 30, 2019

   US$ (0.07   US$ (0.21

Pro forma net tangible book value per ordinary share to give effect to the redesignation of our outstanding ordinary shares and Share Distribution

   US$ (0.07   US$ (0.21

Pro forma net tangible book value per ordinary share as adjusted to give effect to the redesignation of our outstanding ordinary shares, Share Distribution and this offering, as of September 30, 2019

   US$ 0.09     US$ 0.27  

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

   US$ 1.70     US$ 5.11  

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2019, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the completion of the Restructuring and completion of the share distribution). The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

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

Existing shareholders

     310,627,024        90   US$ 52,423        46   US$ 0.17      US$ 0.51  

New investors

     34,500,000        10   US$ 61,870        54   US$ 1.79      US$ 5.38  
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

     345,127,024        100   US$ 114,293        100.0     
  

 

 

    

 

 

   

 

 

    

 

 

      

 

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The discussion and tables above assume no exercise of any share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 39,532,055 ordinary shares issuable upon exercise of outstanding share options at a weighted average exercise price of US$0.4161 per share. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

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

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of foreign exchange control or currency restrictions; and

 

   

the availability of professional and support services.

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

 

   

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

 

   

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

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

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

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

We have been informed by Maples and Calder (Hong Kong) LLP that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be automatically enforceable in the Cayman Islands. We have also been advised by Maples and Calder (Hong Kong) LLP that a judgment obtained in any federal or state court in the United States will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands provided that such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

There is uncertainty as to whether the courts of the Cayman Islands would recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability

 

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provisions of the securities laws of the United States or any state in the United States. Such uncertainty relates to whether a judgment obtained from the United States courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company or its directors and officers. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands.

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

 

   

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

 

   

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

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

It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

Corporate History

We commenced our operations in 2013, when Jiaxing MOLBASE Information Technology Co., Ltd. was established in preparation for the launch of our Online Platform.

MOLBASE Inc. was established in February 2014 as the offshore holding company for our business. MOLBASE Inc. established MOLBASE (HK) Limited in February 2014 as its intermediary holding company. MOLBASE (HK) Limited subsequently established MOLBASE (Shanghai) Biotechnology Co., Ltd., or Shanghai Biotech, a wholly owned subsidiary in China, in May 2014.

We established following entities in China to operate our PRC business:

 

   

In March 2013, we established Jiaxing MOLBASE Information Technology Co., Ltd., or Jiaxing MOLBASE, to operate chemical e-commerce business, financial solutions, and logistics solutions.

 

   

In January 2014, we established Shanghai MOLBASE Technology Co., Ltd., or Shanghai MOLBASE, to manage our knowledge engine and business intelligence services, and operate our websites.

 

   

In August 2017, Shanghai Biotech established Shaanxi MOLBASE Biotechnology Co., Ltd., or Shaanxi MOLBASE, a wholly owned subsidiary of Shanghai Biotech, to operate hazardous chemicals transaction business.

MOLBASE Inc. has completed six rounds of equity financing since its inception. In May 2014, MOLBASE Inc. sold Series A preferred shares to Innovation Works Development Fund II, L.P., Innovation Works Parallel Fund II, L.P. and Trustbridge Partners IV, L.P. for an aggregate consideration of U.S. dollar equivalent to RMB10.0 million. In January 2015, MOLBASE Inc. sold Series B preferred shares to Vangoo China Growth Fund II L.P. and Trustbridge Partners IV, L.P. for an aggregate consideration of US$3.0 million. In May 2015, MOLBASE Inc. sold Series B-1 preferred shares to Greatest Investments Limited and Vangoo China Growth Fund II, L.P. for an aggregate consideration of US$3.5 million, and redesignated certain ordinary shares to Series B-1 preferred shares for Greatest Investments Limited. In January 2016, MOLBASE Inc. sold Series C-1 preferred shares to Max Smart Limited for a consideration of US$10.0 million, sold Series C-2 preferred shares to Greatest Investments Limited, Trustbridge Partners V, L.P., Vangoo Target Fund II, L.P., Innovation Works Development Fund II, L.P., and Innovation Works Parallel Fund II, L.P. for an aggregate consideration of US$20.0 million, and redesignated certain ordinary shares to Series C-3 preferred shares for Max Smart Limited, Vangoo Target Fund II, L.P., Innovation Works Development Fund II, L.P., and Innovation Works Parallel Fund II, L.P. In March 2017, MOLBASE Inc. sold Series D-1 preferred shares to TR Grand Fund Inc., Vangoo Asia Investment Fund L.P. and Max Smart Limited for an aggregate consideration of US$27.0 million, and sold Series D-2 preferred shares to Innovation Works Development Fund II, L.P., Innovation Works Parallel Fund II, L.P., Trustbridge Partners V L.P. and Greatest Investments Limited for an aggregate consideration of US$10.6 million. In December 2019, MOLBASE Inc. issued a warrant to an investor for a consideration of US$2.0 million to purchase certain number of Series E-1 preferred shares of MOLBASE Inc., exercisable no later than the earlier of (i) three months after this offering, or (ii) March 31, 2020, at an exercise price of the lower of (i) a pre-determined exercise price, or (ii) our initial public offering price per share, less certain discount. Based on the initial public offering price of US$5.38 per ADS, the Series E-1 Warrant holder is entitled to purchase 1,394,052 Series E-1 preferred shares of MOLBASE Inc. at an exercise price of approximately US$1.4 per share.

MOLBASE Inc. obtained control and became the primary beneficiary of Jiaxing MOLBASE and Shanghai MOLBASE through our WFOE’s entering into a series of contractual arrangements with Jiaxing MOLBASE, Shanghai MOLBASE and their shareholders. Due to the PRC legal restrictions on foreign ownership of internet-based businesses, MOLBASE Inc. has relied on these contractual arrangements to conduct its internet-based operations in China.

 

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We refer to MOLBASE Inc., MOLBASE (HK) Limited and its subsidiaries, and VIEs, excluding Molecular Data Inc. and its subsidiaries, in this prospectus as the MOLBASE group. We undertook a corporate restructuring in 2018, as referred to as “Restructuring” in this prospectus, in order to operate our Online Platform as a standalone business and thus enhance our brand image as an independent open platform and attract more chemical industry participants to our platform. For more details, see “—Restructuring” below.

We have been operating our business through the MOLBASE group since 2013. Through the MOLBASE group, we launched our knowledge engine in September 2013, and developed our comprehensive knowledge engine and business intelligence services therefrom. We subsequently started operating our chemical e-commerce business in March 2014, and we started offering warehousing and logistics solutions as a supplement to our chemical e-commerce business. In 2014, we started offering financial solutions.

In addition to our business, the MOLBASE group started operating commercial factoring business and investment in chemical industry, or Separate Business, through MOXIN Commercial Factoring (Shenzhen) Co., Ltd., MOLBASE (Tianjin) Biotechnology Co., Ltd. and Hele (Tianjin) Investment Management Co., Ltd.. After the Restructuring is completed, the MOLBASE group will keep operating the Separate Business as a supplement to our business.

Restructuring

On February 28, 2018, MOLBASE Inc. established a wholly owned subsidiary, Molecular Data Inc., in the Cayman Islands in anticipation of the offering. On March 14, 2018, Molecular Data Inc. established a wholly owned subsidiary, Molecular Data (HK) Limited, or Molecular Data HK, in Hong Kong. Shanghai MOHUA Information Technology Co., Ltd., or our WFOE, was established on July 27, 2018 as a wholly owned PRC subsidiary of Molecular Data HK. On October 14, 2018, Shanghai MOLBASE acquired 100% equity interest in Shaanxi MOLBASE. On December 21, 2018, we terminated the previous series of contractual arrangements between Shanghai Biotech and Jiaxing MOLBASE and its shareholders as well as the contractual arrangements between Shanghai Biotech and Shanghai MOLBASE and its shareholders. Immediately after termination of such VIE agreements, our WFOE entered into a series of contractual arrangements with Jiaxing MOLBASE, Shanghai MOLBASE and their shareholders. As a result of these contractual arrangements, we are currently the primary beneficiary of Jiaxing MOLBASE and Shanghai MOLBASE, and we accordingly treat them as our VIEs under U.S. GAAP. We consolidate the financial results of Jiaxing MOLBASE, Shanghai MOLBASE and their subsidiary in our consolidated financial statements in accordance with U.S. GAAP.

We entered into a series of business and assets transfer agreements on December 21, 2018 with the MOLBASE group, pursuant to which the MOLBASE group transferred all operating assets and liabilities relating to our business to us. We are liable to pay consideration to MOLBASE group for assets and liabilities that it incurred for the development of our business. This liability was presented as amount due to MOLBASE (Shanghai) Biotechnology Co., Ltd. in our consolidated balance sheets. Any actual funding provided by the MOLBASE group for our business before or during the Restructuring in excess of this consideration amount will be settled by the MOLBASE group and deemed as a contribution to us.

As a result of the foregoing, Molecular Data Inc. has become our holding company in the Cayman Islands, and it is wholly owned by MOLBASE Inc. For as long as MOLBASE Inc. remains our parent company following the completion of this offering, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because MOLBASE Inc. will hold 90.0% of our then outstanding ordinary shares, assuming that the underwriters do not exercise their over-allotment option, or 88.7% of our then outstanding ordinary shares if the underwriters do exercise their over-allotment option in full. We expect that, within six months following this offering, the existing shareholders of MOLBASE Inc. would become our shareholders through a distribution of our shares in proportion to MOLBASE Inc.’s current shareholding structure, and MOLBASE Inc. will remain our parent company until this Share Distribution takes place. A wholly owned subsidiary of Molecular Data Inc., Molecular Data HK, is our intermediary holding company in Hong Kong. Molecular Data HK has one wholly

 

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owned subsidiary, Shanghai MOHUA, in China. Shanghai MOHUA in turn has two wholly owned subsidiaries, Shanghai MOKAI and Shanghai MOCHUANG. After the Restructuring, we expect to rely on the operations of Shanghai MOKAI and Shanghai MOCHUANG, and our contractual arrangements with Jiaxing MOLBASE, Shanghai MOLBASE (including its wholly owned subsidiary, Shaanxi MOLBASE) and their shareholders, to conduct all of our operations in China.

 

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Corporate Structure

The following diagram illustrates our corporate structure, including our significant subsidiaries and other entities that are material to our business, after giving effect to the contemplated issuance and sale of 34,500,000 Class A ordinary shares in this offering, assuming the underwriters do not exercise their over-allotment option and the completion of the Share Distribution:

 

LOGO

 

Notes:

(1)

Beneficial ownership percentages represent beneficial ownership of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option and the completion of the Share Distribution. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person. See also “Principal Shareholders.”

(2)

Voting power percentages represent aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option and the completion of the Share Distribution, and are calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our issued and outstanding Class A ordinary shares and Class B ordinary shares as a single class. In respect of matters requiring a shareholder vote, each Class A ordinary share is entitled to one vote and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. See also “Description of Share Capital—Ordinary Shares.”

(3)

Dr. Dongliang Chang, Mr. Zhengyu Wu and Zhejiang Xingke Technology Development Investment Co., Ltd. hold 76%, 19% and 5% equity interests in Jiaxing MOLBASE, respectively.

(4)

Dr. Dongliang Chang and Mr. Zhengyu Wu hold 80% and 20% equity interests in Shanghai MOLBASE, respectively.

 

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Contractual Arrangements with VIEs

Due to the PRC legal restrictions on foreign ownership of internet-based businesses, we conduct all of our internet-based operations in China through our VIEs and their subsidiary after the Restructuring. We have entered into a series of contractual arrangements, including exclusive option agreements, equity pledge agreements, shareholders’ voting rights proxy agreements and exclusive technical support and services agreements, with our VIEs and their shareholders.

These contractual arrangements allow us to exercise effective control over our VIEs, receive substantially all of the economic benefits of VIEs, and have an exclusive option to purchase all or part of the equity interests in VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we are the primary beneficiary of our VIEs, and we accordingly treat them as our VIEs under U.S. GAAP. We consolidate the financial results of our VIEs and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

Shanghai MOLBASE, Jiaxing MOLBASE and their shareholders have all entered into a series of contractual arrangements with our WFOE, and the terms and conditions of the two sets of agreements are substantially identical. The following is a summary of the currently effective contractual arrangements by and among our WFOE, our VIEs and their shareholders.

Agreements that provide us with effective control over the VIEs

Shareholders’ Voting Rights Proxy Agreements. On December 21, 2018, our WFOE entered into shareholders’ voting rights proxy agreements with our VIEs and their shareholders. Pursuant to the shareholders’ voting rights proxy agreements, each shareholder of Shanghai MOLBASE and Jiaxing MOLBASE irrevocably authorized our WFOE to act as his or its attorney-in-fact to exercise all of his or its rights as a shareholder of the respective VIE, including, but not limited to, the right to convene and attend shareholders’ meetings, vote on any resolution that requires a shareholder vote, such as the appointment of legal representative, directors, and officers, as well as other shareholders’ voting rights permitted by the articles of association of the VIEs. The shareholders’ voting rights proxy agreement will remain effective, as long as the shareholders of the VIEs remain as registered shareholders of the VIEs, unless otherwise instructed by our WFOE in writing.

Equity Pledge Agreements. On December 21 2018, our WFOE entered into equity pledge agreements with our VIEs and their shareholders. Pursuant to the equity pledge agreements, the shareholders of the VIEs have pledged 100% equity interests in the VIEs to our WFOE to guarantee performance by the shareholders of their obligations under the respective exclusive technical support and services agreement, exclusive option agreement and shareholders’ voting rights proxy agreement, or together referred to as the “Master Agreements.” In the event of a breach by the VIEs or any of their shareholders of contractual obligations under the Master Agreements or the equity pledge agreement, our WFOE, as pledgee, will be entitled to dispose of the pledged equity. The VIEs and their shareholders also undertake that, without the prior written consent of our WFOE, the shareholders of the VIEs will not dispose of, create or allow any encumbrance on the pledged equity interests. The equity pledge agreements will remain effective until our VIEs and their shareholders discharge all their obligations under the Master Agreements. As of the date of this prospectus, we have registered such equity pledges with relevant governmental authority.

Agreement that allows us to receive economic benefits from the VIEs

Exclusive Technical Support and Services Agreements. On December 21, 2018, our WFOE and our VIEs entered into exclusive technical support and services agreements. Pursuant to the exclusive technical support and services agreements, our WFOE has the exclusive right to provide the VIEs with comprehensive technology and business support as well as the relevant consultations services required by the business of the VIEs, or to appoint a third party to provide the VIEs with such services. Without our WFOE’s prior written consent, the VIEs may

 

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not directly or indirectly accept any services that are identical or similar to the services provided by our WFOE under the respective exclusive technical support and services agreement from any third party. The VIEs agree to pay our WFOE a quarterly service fee, which is at our WFOE’s discretion. Our WFOE has the exclusive ownership of all the intellectual property rights created as a result of the performance of the exclusive technical support and services agreement to the extent permitted by applicable PRC law. During the term of the agreements, the VIEs shall not accept any consultations and/or services provided by any third party and shall not cooperate with any third party for the provision of identical or similar services without prior consent of our WFOE. The exclusive technical support and services agreements will remain effective for ten years and will be renewed thereafter upon the written confirmation of our WFOE.

Agreement that provides us with the option to purchase the equity interests in and assets of the VIEs

Exclusive Option Agreements. On December 21, 2018, our WFOE entered into exclusive option agreements with our VIEs and their shareholders. Pursuant to the exclusive option agreements, each of the shareholders of the VIEs has irrevocably granted our WFOE an exclusive option to purchase, or have its designated third party to purchase, at its discretion, to the extent permitted under PRC law, all or part of his or its equity interests in the VIEs. Our WFOE or any third party designated by our WFOE may exercise such options at the price of RMB1.0, or such other price as agreed by WFOE and the VIE shareholders based on the then appraised value, if required by PRC Laws. Any proceeds received by the nominee shareholders from the exercise of the options shall be remitted to the WFOE or its designated party, to the extent permitted by the PRC law. The VIEs undertake that, without our WFOE’s prior written consent, they will not, among other things, (i) change their registered capital or shareholding structure, (ii) amend their articles of association, (iii) create any pledge or encumbrance on any of their assets, (iv) undertake any debt or enter into any material contract with an aggregate value (except in the ordinary course of business), or (v) merge with any other entity. In addition, the shareholders of the VIEs undertake that, without our WFOE’s prior written consent, they will not create any pledge or encumbrance on their equity interests in the VIEs, or transfer or otherwise dispose of their equity interests in the VIEs. The exclusive option agreements will remain effective until all equity interests in the VIEs have been transferred to our WFOE or its designated third party.

In the opinion of Global Law Office, our PRC legal counsel:

 

   

the ownership structures of our VIEs in China and our WFOE, both currently and immediately after giving effect to this offering, are not in violation of applicable PRC laws and regulations currently in effect; and

 

   

the contractual arrangements between our Company, our WFOE, our VIEs and their shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of applicable PRC laws and regulations currently in effect.

However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or if adopted, what they would provide. If we or any of our VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to our VIEs and their subsidiary do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive loss data for the years ended December 31, 2016, 2017 and 2018, selected consolidated balance sheets data as of December 31, 2017 and 2018 and selected consolidated cash flows data for the year ended December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of comprehensive loss for the nine months ended September 30, 2018 and 2019, selected consolidated balance sheet data as of September 30, 2019, and selected consolidated cash flow data for the nine months ended September 30, 2018 and 2019 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented.

Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

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

 

    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2016     2017     2018     2018     2019  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
          (Unaudited)     (Unaudited)  
    (in thousands, except for per share data)  

Selected Consolidated Statements of Comprehensive Loss Data:

             

Net revenues

    3,206,079       4,201,907       9,053,266       1,266,598       6,083,686       9,144,639       1,279,382  

Chemical trading—direct sales model

    3,203,742       4,199,661       9,045,458       1,265,506       6,080,902       9,126,389       1,276,829  

Chemical trading—marketplace model

    1,560       972       4,387       614       1,117       10,917       1,527  

Online membership service

    777       1,274       3,421       478       1,667       6,910       967  

Financial service

    —         —         —         —         —         423       59  

Cost of revenues

    (3,179,961     (4,151,673     (8,973,097     (1,255,382     (6,037,234     (9,078,986     (1,270,197
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    26,118       50,234       80,169       11,216       46,452       65,653       9,185  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Sales and marketing expenses(1)

    (59,160     (64,962     (103,293     (14,451     (53,013     (83,169     (11,636

General and administrative expenses(1)

    (41,801     (41,718     (173,872     (24,325     (40,793     (78,117     (10,929

Research and development expenses(1)

    (20,067     (18,608     (36,889     (5,161     (19,730     (30,503     (4,268

Allowance for doubtful accounts

    (10,863     (14,677     (1,907     (267     (4,943     (7,481     (1,047

Impairment for long-term investment

    —         (1,450     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (131,891     (141,415     (315,961     (44,204     (118,479     (199,270     (27,880

Operating loss

    (105,773     (91,181     (235,792     (32,988     (72,027     (133,617     (18,695

Interest expenses, net

    (8,436     (16,828     (19,049     (2,665     (15,107     (2,175     (304

Foreign exchange gain (loss)

    (1,057     (552     (3,033     (424     (3,024     173       24  

Other income, net

    1,330       754       3,235       452       2,397       2,397       335  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (113,936     (107,807     (254,639     (35,625     (87,761     (133,222     (18,640
 

 

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    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2016     2017     2018     2018     2019  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
          (Unaudited)     (Unaudited)  
    (in thousands, except for per share data)  

Income tax expense

    —         —         —         —         (277     —         —    

Net loss

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Molecular Data Inc.

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share

             

Basic and diluted

    (0.37     (0.35     (0.82     (0.11     (0.28     (0.43     (0.06

Weighted average shares outstanding

             

Basic and diluted

    310,627,024       310,627,024       310,627,024       310,627,024       310,627,024       310,627,024       310,627,024  

Other comprehensive income, net of tax of nil

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Molecular Data Inc.

    (113,936     (107,807     (254,639     (35,625     (88,038     (133,222     (18,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

Including share-based compensation expenses as follows:

 

     For the Year Ended December 31,      For the Nine Months Ended
September 30,
 
     2016      2017      2018      2018      2019  
     RMB      RMB      RMB      US$      RMB      RMB      US$  
            (Unaudited)      (Unaudited)  
     (in thousands)  

Sales and marketing expenses

                   7,942        1,111               11,246        1,573  

General and administrative expenses

                   109,956        15,383               16,715        2,339  

Research and development expenses

                   6,124        857               2,798        391  

Total

                   124,022        17,351               30,759        4,303  

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

 

     As of December 31,     As of September 30,  
     2017      2018     2019  
     RMB      RMB     US$     RMB     US$  
           (Unaudited)  
     (in thousands)  

Selected Consolidated Balance Sheets Data:

           

Cash and cash equivalents

     38,522        6,477       906       36,867       5,158  

Restricted cash

     67,500        —         —         39,001       5,456  

Accounts receivable, net

     53,928        40,730       5,698       26,839       3,755  

Prepayments and other current assets

     153,606        295,985       41,410       209,610       29,325  

Total current assets

     376,456        367,702       51,443       375,041       52,470  

Total assets

     381,148        371,598       51,989       381,027       53,307  

Total current liabilities

     299,855        255,417       35,734       374,094       52,338  

Total liabilities

     375,247        433,223       60,610       545,115       76,265  

Total shareholders’ equity (deficit)

     5,901        (61,625     (8,621     (164,088     (22,958

 

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

 

     For the Year Ended December 31,     For the Nine Months Ended
September 30,
 
     2016     2017     2018     2018     2019  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
           (Unaudited)     (Unaudited)  
     (in thousands)  

Selected Consolidated Cash Flows Data:

              

Net cash used in operating activities

     (145,592     (186,703     (134,636     (18,836     (53,426     (33,412     (4,675

Net cash used in investing activities

     (2,645     (3,982     (2,242     (314     (1,332     (1,666     (233

Net cash generated from financing activities

     173,302       262,849       37,333       5,223       21,178       104,469       14,616  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     25,065       72,164       (99,545     (13,927     (33,580     69,391       9,708  

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

     8,793       33,858       106,022       14,833       106,022       6,477       906  

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

     33,858       106,022       6,477       906       72,442       75,868       10,614  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents certain of our operating data for the periods indicated or as of the dates indicated:

 

     For the Year Ended December 31,      For the Nine Months Ended
September 30,
 
     2016      2017      2018      2018      2019  
     (RMB in billions)  

GMV

              

Direct sales model

     3.2        4.2        9.0        6.1        9.1  

Marketplace model

     36.4        79.0        160.7        120.8        176.8  

Total GMV

     39.6        83.2        169.7        126.9        185.9  

 

     For the Year ended December 31,      For the Nine Months Ended
September 30,
 
     2016      2017      2018      2018      2019  

Total number of transacting customers

     20,475        27,430        35,565        27,960        24,368  

Direct sales model

     2,666        3,436        4,032        3,279        3,244  

Marketplace model

     19,018        25,308        32,534        25,927        21,726  

Total number of transacting suppliers

     11,229        15,787        17,156        15,435        17,419  

Direct sales model

     1,857        2,078        2,493        2,044        2,096  

Marketplace model

     9,949        14,208        15,408        14,013        15,721  

Total number of transaction orders

     89,712        110,499        166,136        117,777        119,651  

Direct sales model

     31,752        38,827        50,384        34,200        40,073  

Marketplace model

     57,960        71,672        115,752        83,577        79,578  

 

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     As of December 31,      As of September 30,  
     2016      2017      2018      2018      2019  

Direct sales model(1)(2):

              

Total number of customers

     3,131        5,375        9,007        7,486        11,119  

Total number of suppliers

     2,346        3,725        5,163        4,783        6,168  

Marketplace model(1)(2):

              

Total number of customers

     41,045        63,409        90,129        84,221        105,581  

Total number of suppliers

     28,419        30,280        32,013        31,820        32,675  

Total number of customers(1)(3)

     42,650        65,983        94,373        87,526        110,948  

Total number of suppliers(1)(3)

     28,903        31,171        33,752        33,302        35,085  

Total number of chemical compounds(1)

     1,377,043        7,020,855        8,790,356        8,785,754        10,299,811  

 

Notes:

(1)

Calculated on a cumulative basis since our inception, which included customers or suppliers that may not be current users of our platform.

(2)

Customers and suppliers may have presence under both direct sales model and marketplace model. Dual presence under both models have not been eliminated.

(3)

Duplicates have been eliminated so that customers or suppliers who uses both our direct sales model and marketplace model would be counted as one customers or suppliers as of the specified date.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our actual results and the timing of selected events may differ materially from those we currently anticipate in these forward-looking statements as a result of various factors, including those we describe under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading technology-driven platform in China’s chemical industry, connecting participants along the chemical value chain through our integrated solutions. According to the Frost & Sullivan Report, we are the largest chemical e-commerce platform in China in terms of GMV in 2017 and 2018. Built upon our core knowledge engine and supported by our artificial intelligence (AI) engine and software-as-a-service (SaaS) suite, we offer e-commerce solutions, financial solutions, and warehousing and logistics solutions to all participants across the chemical value chain. Our e-commerce solutions are mainly delivered through our online platform, consisting of our two websites, molbase.com and molbase.cn, Moku Data Weixin account, Chemical Community App and other ancillary platforms, or, collectively, our Online Platform.

Our business is built upon our proprietary chemicals knowledge engine, which serves as the fundamental infrastructure for our comprehensive services and solutions. We have accumulated a significant amount of chemicals and transaction data to build MOLBASE Encyclopedia, the most comprehensive knowledge engine for commercially available chemicals in China, according to the Frost & Sullivan Report. As the entry point of our Online Platform, users may search for chemicals based on molecular structures. We subsequently provide search results covering the synthetic routes of the searched chemicals, along with pricing and supplier information.

Leveraging our MOLBASE Encyclopedia knowledge engine and deep understanding on how to transform the traditional chemical value chain, we provide our suppliers and customers with information services empowered by our AI engine, which primarily consist of intelligent matching systems and MOLBASE Intelligent Chemical Industry Maps, as well as a comprehensive SaaS suite.

We offer our chemical e-commerce solutions through direct sales and marketplace models. Our direct sales model involves acquiring chemicals from suppliers at customers’ requests in most cases and selling them directly to customers, generating revenues from the sale of chemicals. We leverage our accumulated transaction data to optimize inventory management and adopt efficient pricing strategies via our AI engine. In our marketplace model, we connect suppliers and customers and currently charge commissions on only a small portion of transactions in order to attract and encourage users to transact on our platform. We continuously gain insights into the dynamic chemical market by gathering transactional information through this model.

We have successfully implemented our business model, and our business has grown substantially since our inception. Our customer and supplier bases continue to grow meaningfully. As of September 30, 2019, we had accumulated 110,948 customers and 35,085 suppliers on our Online Platform and had built a nationwide supplier network covering more than 380 cities in China. The GMV under our direct sales model increased from RMB3.2 billion in 2016 to RMB4.2 billion in 2017, and further increased to RMB9.0 billion in 2018; while the GMV under our marketplace model increased from RMB36.4 billion in 2016 to RMB79.0 billion in 2017, and further increased to RMB160.7 billion in 2018. The GMV under our direct sales model increased from RMB6.1 billion for the nine months ended September 30, 2018 to RMB9.1 billion for the nine months ended September 30, 2019; while the GMV under our marketplace model increased from RMB120.8 billion for the nine months ended September 30, 2018 to RMB176.8 billion for the nine months ended September 30, 2019. Our total net revenues were RMB3.2 billion, RMB4.2 billion and RMB9.1 billion (US$1.3 billion) in 2016, 2017 and 2018, and RMB6.1 billion and RMB9.1 billion (US$1.3 billion) for the nine months ended September 30, 2018 and 2019,

 

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respectively. As we were in the process of enhancing our market position, we recognized a net loss of RMB113.9 million, RMB107.8 million and RMB254.6 million (US$35.6 million) in 2016, 2017 and 2018 and RMB88.0 million and RMB133.2 million (US$18.6 million) for the nine months ended September 30, 2018 and 2019, respectively.

Key Factors Affecting Our Results of Operations

Our results of operations and financial condition are affected by the general factors driving China’s chemical e-commerce industry, including, among others, (i) China’s overall economic growth, (ii) continued demand and price trends for chemicals and related products, (iii) business prospects of our customers and suppliers, (iv) growth of e-commerce, internet usage and the chemical e-commerce market penetration rate, (v) governmental policies and initiatives affecting the chemical industry and the e-commerce industry, and (vi) regulation on data collection and internet, as well as the other general factors affecting the chemical e-commerce industry in domestic and overseas markets. Unfavorable changes in any of these general industry conditions could negatively affect demand for our products and services and materially and adversely affect our results of operations.

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

 

   

Our ability to attract, maintain and expand our user base and user activity;

 

   

Our ability to diversify and grow chemicals portfolio and services;

 

   

Our ability to establish and maintain relationships with suppliers and service providers;

 

   

Our ability to create value for participants in our ecosystem and increase monetization;

 

   

Our ability to develop and leverage our technology capacities in a cost-effective manner;

 

   

Our ability to control costs and expenses and improve efficacy; and

 

   

Our ability to manage working capital.

Our ability to attract, maintain and expand our user base and user activity

We generate our profits primarily from the price difference between the purchase price and the sales price of the chemicals from our e-commerce business under our direct sales model. Therefore, the size and characteristics of our user base on our platform and the GMV the customers and suppliers generate significantly affect our revenue and results of operations. We monitor GMV under both direct sales and marketplace models as the indicator for the scale of each model and our Online Platform as well as the engagement of our customers and suppliers. Our user base has been expanding over the past few years. Our transacting customers and suppliers increased from 20,475 and 11,229 in 2016 to 27,430 and 15,787 in 2017, and further increased to 35,565 and 17,156 in 2018, respectively. Our transacting customers and suppliers were 27,960 and 15,435 for the nine months ended September 30, 2018 and 24,368 and 17,419 for the nine months ended September 30, 2019, respectively. We acquired 18,258 new customers and 6,445 new suppliers in 2016, 23,333 new customers and 2,268 new suppliers in 2017, and 28,390 new customers and 2,581 new suppliers in 2018, respectively. We acquired 21,543 new customers and 2,131 new suppliers for the nine months ended September 30, 2018 and 16,575 new customers and 1,333 new suppliers for the nine months ended September 30, 2019, respectively. We must continue to maintain a large and active customer and supplier base that conduct chemicals transactions on our Online Platform and use our comprehensive value-added services to improve our results of operations and monetization.

We devoted considerable resources to marketing activities and user traffic acquisition as we have grown our business. To achieve profitability, we must be able to retain and expand our user base and user activity in a cost-effective manner.

 

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Our ability to diversify and grow chemicals portfolio and services

Our operation results are affected by the mix of chemicals and value-added services that we offer on our Online Platform. We currently derive our revenues primarily from the sale of chemicals on our Online Platform. We also earn commission fee from marketplace customers or suppliers who request our chemicals transaction services if the transaction we help match is completed. In addition, we have started to charge users of our SaaS suite to improve profitability and diversify our revenue stream.

Different products and services have different cost structures. The revenue contributions from our online direct sales model, our marketplace model, our online membership services and the initiatives we recently launched have a major influence on our profitability. We plan to better manage the mix of our chemicals portfolio and service offerings in order to improve our profitability.

Our ability to establish and maintain relationships with suppliers and service providers

We rely on suppliers for sourcing chemicals and third-party service providers for value-added services. Our relationship with suppliers and service providers are essential to our e-commerce solutions. Our ability to provide a broad selection of chemicals and value-added services on our Online Platform at competitive and transparent prices depends on our ability to maintain good relationships with them. As we expand our business scale, we must maintain our strong relationships with suppliers and service providers to ensure chemicals and services supply.

Our ability to create value for participants in our ecosystem and increase monetization

Our operation results depend on our ability to create value for participants in our ecosystem and offer more monetization opportunities for them. We draw customers, suppliers and other service providers to our Online Platform because our ecosystem has established a closed-loop value chain driven by our intelligent matching systems, creating value for all participants in the ecosystem. Within such closed-loop ecosystem, we are able to utilize the resources of its participants and effectively direct demands and supplies, thus performing as a supply chain management hub to create a compelling value proposition to the participants.

As transaction volume continues to increase, our warehousing and logistics service providers and financing providers can execute more transactions in a timely and cost-effective manner, whereas our customers can have access to comprehensive services with competitive costs. We must achieve and increase monetization of our value-added services, including, among others, business intelligence services, financial solutions, and warehousing and logistics solutions. As we further enhance our technologies, we aim to create more value for the ecosystem participants, increasing their engagement and connection in our ecosystem, which we anticipate will create additional monetization venues for us to drive our revenue growth.

Our ability to leverage our technology capabilities in a cost-effective manner

We have incurred significant expenses in building our platform and developing capabilities in data analytics and AI technology. Our ability to leverage our technology capabilities to develop and enhance our platform and services in a cost-effective manner affects our revenue and results of operations. We expect our research and development expenses to increase as we continue to develop and enhance our data analytics and AI technology capabilities. While we expect our research and development expenses to increase in absolute terms as our business expands, we expect that such expenses as a percentage of our total revenue will decrease as we leverage our knowledge engine and achieve more economies of scale.

Our ability to control costs and expenses and improve efficacy

Our cost of revenues represents primarily the purchase price of chemicals. As our business further grows in scale, we expect to obtain more favorable terms from suppliers, including pricing terms, credit period and

 

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volume-based rebates. In addition, we aim to create value for our suppliers, especially chemical companies, by providing an effective and transparent channel for selling of their products on our Online Platform and by offering them valuable business intelligence on market demand, customer preferences and supply chain information. We believe this value proposition will also help us deepen our relationships with suppliers, obtain favorable terms and reduce our procurement costs.

Our sales and marketing expenses are a significant contributor to our operating costs and expenses, and they primarily consist of salaries and travel expenses for sales and marketing personnel and advertising costs. We expect our sales and marketing expenses to remain substantial in absolute terms as we implement new business initiatives. As our business grows, we anticipate that our research and development expenses will increase in absolute terms in the foreseeable future in light of our anticipated expansion and investment plans.

Our ability to manage working capital

Our ability to effectively control our working capital has affected and will continue to affect our cash flow from operations. We actively manage our trade receivables and our trade payables. We leverage our scale to negotiate attractive contractual terms with our customers, merchants and suppliers.

Key Components of Results of Operations

Net revenues

Our net revenues are primarily generated from sales of chemicals under direct sales model, provision of chemical trading matching service under marketplace model and provision of online membership services. Currently, substantially all of our net revenues are derived from sales of chemicals under direct sales model. Under direct sales model, we generally acquire chemicals from suppliers after the customers place an order and sell them directly to customers primarily through our Online Platform. We also generate revenues from chemical trading under marketplace model, online membership service and recently financial solutions, which represented immaterial portion of our net revenues for the years ended December 31, 2016, 2017 and 2018 and the nine months ended September 30, 2018 and 2019. In 2016, 2017 and 2018, we generated net revenues of RMB3.2 billion, RMB4.2 billion and RMB9.1 billion (US$1.3 billion), respectively. For the nine months ended September 30, 2018 and 2019, we generated net revenues of RMB6.1 billion and RMB9.1 billion (US$1.3 billion), respectively. The following table sets forth the components of our net revenues by amounts and percentages of our total revenues for the periods presented:

 

    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2016     2017     2018     2018     2019  
    RMB     %     RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
          (Unaudited)     (Unaudited)  
    (in thousands, except for percentages)  

Net Revenues:

                       

Chemical trading—direct sales model

    3,203,742       99.9       4,199,661       99.9       9,045,458       1,265,506       99.9       6,080,902       99.9       9,126,389       1,276,829       99.8  

Chemical trading—marketplace model

    1,560       0.1       972       0.0       4,387       614       0.1       1,117       0.0       10,917       1,527       0.1  

Online membership service

    777       0.0       1,274       0.1       3,421       478       0.0       1,667       0.1       6,910       967       0.1  

Financial service

    —         —         —         —         —         —         —         —         —         423       59       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    3,206,079       100.0       4,201,907       100.0       9,053,266       1,266,598       100.0       6,083,686       100.0       9,144,639       1,279,382       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Chemical trading—direct sales model. We generate a substantial majority of our net revenues from chemical trading under our direct sales model. We generally acquire chemicals from suppliers after the customers place an order and sell them directly to customers primarily through our Online Platform as well as handle the delivery of the chemicals.

 

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Chemical trading—marketplace model. Our chemical trading under marketplace model provide an integrated supplier-customer matching system, directing demands and supplies in a cost-effective manner. We generate revenue by charging commission fees, the amount of which is at our discretion for the periods presented, upon the completion of our matching services.

Online membership service. We generate revenue from the service fees charged to our online members in relation to the membership services, including advertising services and market updates. The service provided to the online members are unique and member-specific with no other alternative use. We typically charge a fixed amount for the service subscribed over the membership term.

Financial service. We cooperate with banks and non-bank financial institutions to provide financial solutions to certain customers and suppliers who use our Online Platform. We charge a fixed fee for the facilitation service provided among the customers, suppliers and the banks and non-bank financial institutions and the guarantees provided on the loan repayments as stipulated in the purchase agreements for the underlying chemicals transactions.

We expect our net revenues will continue to increase in the foreseeable future as we strengthen our Online Platform, offer more chemicals and services, and further expand our business. While chemicals selling will continue to constitute a substantial majority of our net revenues, we expect that the revenues generated from chemicals transaction commission fees, online membership services fees, financial solutions services fee, and the initiatives we recently launched will increase in absolute amounts in the foreseeable future.

Costs of revenues

Our costs of revenues represent the cost of chemicals that we sold. We had costs of revenues of RMB3.2 billion, RMB4.2 billion and RMB9.0 billion (US$1.3 billion) in 2016, 2017 and 2018, and RMB6.0 billion and RMB9.1 billion (US$1.3 billion) for the nine months ended September 30, 2018 and 2019, respectively. We expect that our cost of revenues will increase in the foreseeable future as we increase our chemical sales volume and expand our chemicals offering portfolio.

Gross margin

Our gross margin is mainly affected by the selling price, chemical sales volume and the cost of chemicals. The following table sets forth our gross profit and gross margin for each of the periods presented:

 

    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2016     2017     2018     2018     2019  
          (Unaudited)     (Unaudited)  
    (RMB in thousands, except for percentage data)  

Gross profit

    26,118       50,234       80,169       46,452       65,653  

Gross margin

    0.8%       1.2%       0.9%       0.8%       0.7%  

We expect that our gross margin will increase in the foreseeable future as we optimize our product mix, diversify our service offerings and utilize our market position to improve monetization.

 

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Operating expenses

Our operating expenses consist of sales and marketing expenses, general and administrative expenses, research and development expenses, allowance for doubtful accounts and impairment for long-term investment. The following table sets forth the components of our operating expenses by amounts and percentages of operating expenses for the periods presented:

 

    For the Year Ended December 31,     For the Nine Months Ended
September 30,
 
    2016     2017     2018     2018     2019  
    RMB     %     RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
          (Unaudited)     (Unaudited)  
    (in thousands, except for percentages)  

Operating expenses:

                       

Sales and marketing expenses

    (59,160     44.9       (64,962     45.9       (103,293     (14,451     32.7       (53,013     44.7       (83,169     (11,636     41.7  

General and administrative expenses

    (41,801     31.7       (41,718     29.5       (173,872     (24,325     55.0       (40,793     34.4       (78,117     (10,929     39.2  

Research and development expenses

    (20,067     15.2       (18,608     13.2       (36,889     (5,161     11.7       (19,730     16.7       (30,503     (4,268     15.3  

Allowance for doubtful accounts

    (10,863     8.2       (14,677     10.4       (1,907     (267     0.6       (4,943     4.2       (7,481     (1,047     3.8  

Impairment for long-term investment

                (1,450     1.0                                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (131,891     100.0       (141,415     100.0       (315,961     (44,204     100.0       (118,479     100.0       (199,270     (27,880     100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sales and marketing expenses. Our sales and marketing expenses consist primarily of (i) salaries and travel expenses for sales and marketing personnel, (ii) shipping and other handling costs in relation to the warehousing and logistics solutions attributable to the purchase and warehousing of inventories as well as packaging and preparation for shipment, and (iii) advertising costs. We expense all sales and marketing expenses as incurred.

We expect our sales and marketing expenses to increase in absolute terms as we hire additional sales and marketing personnel, expand our business and engage in more sales and marketing activities.

General and administrative expenses. Our general and administrative expenses consist primarily of (i) salaries and benefits for general and administrative personnel, (ii) office-related expenses, and (iii) agency services fees in relation to this offering. We expense all general and administrative expenses as incurred.

Research and development expenses. Our research and development expenses consist primarily of salaries and benefits for research and development personnel. To a lesser extent, our research and development expenses also consist of rental expenses incurred for the development of, enhancement to, and maintenance of our technology infrastructure to support our business operations, which currently represented immaterial portion of our total research and development expenses. We expense all research and development expenses as incurred.

We expect that our research and development expenses will increase in absolute terms as we continue to develop new technology and services.

Allowance for doubtful accounts. Our allowance for doubtful accounts consist primarily of debts recorded in the period when loss is probable based on an assessment of specific evidence indicating troubled collection, historical experience, accounts aging and other factors.

Taxation

We are subject to various rates of income tax under different jurisdictions. The following summarizes major factors affecting our applicable tax rates in the Cayman Islands, Hong Kong and China.

 

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Cayman Islands

According to Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.

Hong Kong

Our subsidiary incorporated in Hong Kong, Molecular Data (HK) Limited, is subject to Hong Kong profit tax rate of 16.5% on its activities conducted in Hong Kong. Dividends income received from subsidiaries in China are not subject to Hong Kong profits tax.

China

Generally, Our PRC subsidiaries, the VIEs and their subsidiaries are subject to corporate income tax on their taxable income in China at a statutory income tax rate of 25%. The corporate income tax is calculated based on the corporate’s global income as determined under PRC tax laws and accounting standards. On November 24, 2016, Shanghai MOLBASE obtained its certificate of “High and New Technology Enterprises,” or HNTE, therefore it is subject to a preferential tax rate of 15% for the fiscal years ended December 31, 2016 to 2018 to the extent it has taxable income under the PRC Enterprise Income Tax Law. In addition, we are subject to value-added tax at a rate of 6%, less any deductible value-added tax we have already paid or borne. We are also subject to surcharges on value-added tax payments in accordance with PRC law.

Dividends paid by our wholly foreign-owned subsidiaries in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between China and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. Effective from November 1, 2015, the above mentioned approval requirement has been abolished, but a Hong Kong entity is still required to file an application package with the relevant tax authority, and settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority. See “Risk Factors—Risks Related to Doing Business in China—We may not be able to obtain certain benefits under the relevant tax treaty on dividends paid by our WFOE to us through our Hong Kong subsidiary.”

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

 

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Results of Operations

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

 

    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2016     2017     2018     2018     2019  
    RMB     %     RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
          (Unaudited)     (Unaudited)  
    (in thousands, except for percentages)  

Net revenues

    3,206,079       100.0       4,201,907       100.0       9,053,266       1,266,598       100.0       6,083,686       100.0       9,144,639       1,279,382       100.0  

Cost of revenues

    (3,179,961     (99.2     (4,151,673     (98.8     (8,973,097     (1,255,382     (99.1     (6,037,234     (99.2     (9,078,986     (1,270,197     (99.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    26,118       0.8       50,234       1.2       80,169       11,216       0.9       46,452       0.8       65,653       9,185       0.7  

Operating expenses:

                       

Sales and marketing

    (59,160     (1.8     (64,962     (1.5     (103,293     (14,451     (1.1     (53,013     (0.9     (83,169     (11,636     (0.9

General and administrative

    (41,801     (1.3     (41,718     (1.0     (173,872     (24,325     (1.9     (40,793     (0.7     (78,117     (10,929     (0.9

Research and development

    (20,067     (0.6     (18,608     (0.4     (36,889     (5,161     (0.4     (19,730     (0.3     (30,503     (4,268     (0.3

Allowance for doubtful accounts

    (10,863     (0.3     (14,677     (0.3     (1,907     (267     (0.0     (4,943     (0.1     (7,481     (1,047     (0.1

Impairment for long-term investment

    —         —         (1,450     (0.0     —         —         —                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (131,891     (4.1     (141,415     (3.4     (315,961     (44,204     (3.4     (118,479     (2.0     (199,270     (27,880     (2.2

Operating loss

    (105,773     (3.3     (91,181     (2.2     (235,792     (32,988     (2.6     (72,027     (1.2     (133,617     (18,695     (1.5

Interest expenses, net

    (8,436     (0.3     (16,828     (0.4     (19,049     (2,665     (0.2     (15,107     (0.2     (2,175     (304     (0.0

Foreign exchange gain (loss)

    (1,057     (0.0     (552     (0.0     (3,033     (424     (0.0     (3,024     (0.0     173       24       0.0  

Other income, net

    1,330       0.0       754       0.0       3,235       452       0.0       2,397       0.0       2,397       335       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (113,936     (3.6     (107,807     (2.6     (254,639     (35,625     (2.8     (87,761     (1.4     (133,222     (18,640     (1.5

Income tax expense

    —         —         —         —         —         —         —         (277     (0.0                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (113,936     (3.6     (107,807     (2.6     (254,639     (35,625     (2.8     (88,038     (1.4     (133,222     (18,640     (1.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

Net revenues

Our net revenues increased by 50.3% from RMB6.1 billion for the nine months ended September 30, 2018 to RMB9.1 billion (US$1.3 billion) for the nine months ended September 30, 2019. The increase was primarily due to our efforts to diversify our product offerings and an increase in average GMV and the amount of transaction orders contributed by each transacting customer and transacting supplier. The average GMV contributed by each transacting customer and transacting supplier increased from RMB4.5 million and RMB8.2 million in the nine months ended September 30, 2018 to RMB7.6 million and RMB10.7 million in the nine months ended September 30, 2019, respectively.

Net revenues for chemical trading under direct sales model increased by 50.1% from RMB6.1 billion for the nine months ended September 30, 2018 to RMB9.1 billion (US$1.3 billion) for the nine months ended September 30, 2019. The increase in net revenues from chemical trading under direct sales model was primarily due to the increase in our total number of users, customers and suppliers, the increase in the average GMV contributed by each transacting customer and transacting supplier, our expansion of chemical product categories, and the introduction of our value-added services.

 

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Net revenues for chemical trading under marketplace model increased significantly from RMB1.1 million for the nine months ended September 30, 2018 to RMB10.9 million (US$1.5 million) for the nine months ended September 30, 2019. The increase in net revenues from chemical trading under marketplace model was primarily due to our efforts to diversify the services offering, the popularity of our chemical trading services under marketplace model and increase in the proportion of transaction orders we charge commission fees.

Net revenues for online membership service increased by 314.5% from RMB1.7 million for the nine months ended September 30, 2018 to RMB6.9 million (US$1.0 million) for the nine months ended September 30, 2019. The increase in net revenues from online membership service was primarily due to the increased members using our online marketing services as we expand our online member base and diversify our services offerings.

Net revenues for financial service was RMB0.4 million (US$59 thousand) in the nine months ended September 30, 2019, compared to nil in the nine months ended September 30, 2018, as we commenced monetizing on financial service in July 2019.

Cost of revenues

Our cost of revenues increased by 50.4% from RMB6.0 billion for the nine months ended September 30, 2018 to RMB9.1 billion (US$1.3 billion) for the nine months ended September 30, 2019. The increase was primarily due to the increase in the purchase volume of chemicals, which was in line with the growth of our net revenues.

Gross profit and gross margin

As a result of the foregoing, our gross profit was RMB65.7 million (US$9.2 million) for the nine months ended September 30, 2019, as compared to RMB46.5 million for the nine months ended September 30, 2018. Our gross margin slightly decreased from 0.8% for the nine months ended September 30, 2018 to 0.7% for the nine months ended September 30, 2019 due to our strategy of diversifying our product offerings and expanding our business coverage, most of which tend to have relatively low margin, in order to gain market share and strengthen our market position.

Operating expenses

Our total operating expenses increased by 68.2% from RMB118.5 million for the nine months ended September 30, 2018 to RMB199.3 million (US$27.9 million) for the nine months ended September 30, 2019, as all of the components of operating expenses increased due to our business growth, the development and introduction of new technology and the expansion of our supplier and customer base.

Sales and marketing expenses. Our sales and marketing expenses increased by 56.9% from RMB53.0 million for the nine months ended September 30, 2018 to RMB83.2 million (US$11.6 million) for the nine months ended September 30, 2019, primarily due to (i) an increase of RMB22.6 million in payroll costs for our sales and marketing personnel (including share-based compensation) as the headcount of our sales and marketing grew, and (ii) an increase of RMB6.4 million in advertising expenses.

General and administrative expenses. Our general and administrative expenses increased by 91.5% from RMB40.8 million for the nine months ended September 30, 2018 to RMB78.1 million (US$10.9 million) for the nine months ended September 30, 2019, primarily due to (i) an increase of RMB22.6 million in payroll costs for our general and administrative personnel (including share-based compensation) related to the increase in our general and administrative personnel headcount, (ii) an increase of RMB7.1 million in office related expenses, and (iii) an increase of RMB6.1 million in agency service fees.

Research and development expenses. Our research and development expenses increased by 54.6% from RMB19.7 million for the nine months ended September 30, 2018 to RMB30.5 million (US$4.3 million) for the

 

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nine months ended September 30, 2019, primarily due to an increase of RMB9.6 million in payroll costs (including share-based compensation) related to the increase in our research and development personnel headcount.

Allowance for doubtful accounts. Our allowance of doubtful accounts increased by 51.3% from RMB4.9 million for the nine months ended September 30, 2018 to RMB7.5 million (US$1.0 million) for the nine months ended September 30, 2019, primarily due to our business expansion and temporary operational difficulties experienced by some of our customers.

Operating loss

As a result of the foregoing, we incurred operating loss of RMB133.6 million (US$18.7 million) for the nine months ended September 30, 2019, as compared to operating loss of RMB72.0 million for the nine months ended September 30, 2018.

Interest expenses, net

We had net interest expenses of RMB2.2 million (US$0.3 million) for the nine months ended September 30, 2019, as compared to RMB15.1 million for the nine months ended September 30, 2018, primarily due to the decrease in the loan amount incurred.

Foreign exchange gain (loss)

We had foreign exchange gain of RMB0.2 million (US$0.02 million) for the nine months ended September 30, 2019, as compared to foreign exchange loss of RMB3.0 million for the nine months ended September 30, 2018, primarily due to the appreciation of Renminbi against the U.S. dollar.

Other income, net

We had net other income of RMB2.4 million (US$0.3 million) and RMB2.4 million for the nine months ended September 30, 2019 and 2018, respectively.

Net loss

As a result of the foregoing, we incurred a net loss of RMB133.2 million (US$18.6 million) for the nine months ended September 30, 2019, as compared to a net loss of RMB88.0 million for the nine months ended September 30, 2018.

Year ended December 31, 2018 compared to year ended December 31, 2017

Net revenues

Our net revenues increased by 115.5% from RMB4.2 billion in 2017 to RMB9.1 billion (US$1.3 billion) in 2018. The increase was primarily due to our efforts to diversify our product offerings and an increase in transacting customers under direct sales model from 3,436 in 2017 to 4,032 in 2018, as we expanded our business. We acquired 2,244 and 3,632 new customers under the direct sales model in 2017 and 2018, and such new customers contributed 9,913 and 17,606 transaction orders over the corresponding year, respectively.

Net revenues for chemical trading under direct sales model increased by 115.4% from RMB4.2 billion in 2017 to RMB9.0 billion (US$1.3 billion) in 2018. The increase in net revenues from chemical trading under direct sales model was primarily due to the increase in our total number of users, customers and suppliers, our expansion of chemical product categories, and the introduction of our value-added services.

 

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Net revenues for chemical trading under marketplace model increased by 351.3% from RMB1.0 million in 2017 to RMB4.4 million (US$0.6 million) in 2018. The increase in net revenues from chemical trading under marketplace model was primarily due to our efforts to diversify the services offering and the popularity of our chemical trading services under marketplace model.

Net revenues for online membership service increased by 168.5% from RMB1.3 million in 2017 to RMB3.4 million (US$0.5 million) in 2018. The increase in net revenues from online membership service was primarily due to the increased members using our online marketing services as we expand our online member base and diversify our services offerings.

Cost of revenues

Our cost of revenues increased by 116.1% from RMB4.2 billion in 2017 to RMB9.0 billion (US$1.3 billion) in 2018. The increase was primarily due to the significant increase in the purchase volume of chemicals, which was in line with the growth of our net revenues.

Gross profit and gross margin

As a result of the foregoing, our gross profit was RMB80.2 million (US$11.2 million), representing a gross margin of 0.9%, in 2018, as compared to RMB50.2 million, representing a gross margin of 1.2%, in 2017. The decrease in gross margin over those periods was due to our strategy of diversifying our product offerings and expanding our business coverage, most of which tend to have relatively low margin, in order to gain market share and strengthen our market position.

Operating expenses

Our total operating expenses increased by 123.4% from RMB141.4 million in 2017 to RMB316.0 million (US$44.2 million) in 2018, as substantially all of the components of operating expenses increased due to our business growth, the development and introduction of new technology and the expansion of our supplier and customer base.

Sales and marketing expenses. Our sales and marketing expenses increased by 59.0% from RMB65.0 million in 2017 to RMB103.3 million (US$14.5 million) in 2018. The increase was primarily due to increase in (i) advertising costs, (ii) share-based compensation expenses, and (iii) salaries and travel expenses for sales and marketing personnel. Our advertising costs increased from RMB2.9 million in 2017 to RMB25.3 million (US$3.5 million) in 2018 as we devoted more resources into our marketing efforts to enhance our brand and attract customers and suppliers. We recorded share-based compensation expenses of RMB7.9 million (US$1.1 million) in 2018 due to the grants of share incentive awards in November 2018 as compared to nil in 2017. Our salaries and travel expenses for sales and marketing personnel increased from RMB42.6 million in 2017 to RMB47.5 million (US$6.6 million) in 2018 mainly due to an increase in our sales and marketing personnel headcount, and, to a lesser extent, the improvement of their sales achievement. The headcount of our sales and marketing personnel increased from 170 as of December 31, 2017 to 209 as of December 31, 2018.

General and administrative expenses. Our general and administrative expenses increased by 316.8% from RMB41.7 million in 2017 to RMB173.9 million (US$24.3 million) in 2018, primarily due to the increase in (i) share-based compensation expenses, and (ii) salaries and benefits for general and administrative personnel. We recorded share-based compensation expenses of RMB110.0 million (US$15.4 million) in 2018 due to the grants of share incentive awards in November 2018, as compared to nil in 2017. Our salaries and benefits for general and administrative personnel increased from RMB21.0 million in 2017 to RMB34.8 million (US$4.9 million) in 2018 mainly due to an increase in our general and administrative personnel headcount, including certain high-level personnel, as the scale of our business grew. The headcount of our general and administrative personnel increased from 32 as of December 31, 2017 to 48 as of December 31, 2018.

 

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Research and development expenses. Our research and development expenses increased by 98.2% from RMB18.6 million in 2017 to RMB36.9 million (US$5.2 million) in 2018, primarily due to the increase in our research and development personnel headcount, which increased from 63 as of December 31, 2017 to 81 as of December 31, 2018.

Allowance for doubtful accounts. Our allowance for doubtful accounts decreased by 87.0% from RMB14.7 million in 2017 to RMB1.9 million (US$0.3 million) in 2018, primarily due to the decrease in accounts receivable in relation to troubled accounts as we enhanced management efforts to our business.

Operating loss

As a result of the foregoing, we incurred operating loss of RMB236.0 million (US$33.0 million) in 2018, as compared to operating loss of RMB91.2 million in 2017.

Interest expenses, net

We had net interest expenses of RMB19.0 million (US$2.7 million) in 2018, as compared to RMB16.8 million in 2017, primarily due to the increase in the loan amount incurred.

Foreign exchange loss

We had foreign exchange loss of RMB3.0 million (US$0.4 million) in 2018, as compared to RMB0.6 million in 2017, primarily due to the depreciation of Renminbi against the U.S. dollar.

Other income, net

We had net other income of RMB3.2 million (US$0.5 million) in 2018, as compared to RMB0.8 million in 2017.

Net loss

As a result of the foregoing, we incurred a net loss of RMB254.6 million (US$35.6 million) in 2018, as compared to a net loss of RMB107.8 million in 2017.

Year ended December 31, 2017 compared with year ended December 31, 2016

Net revenues

Our net revenues increased by 31.1% from RMB3.2 billion in 2016 to RMB4.2 billion in 2017. The increase was primarily due to our efforts to diversify our product offerings and an increase in transacting customers under direct sales model from 2,666 in 2016 to 3,436 in 2017, as we expanded our business. We acquired 2,115 and 2,244 new customers under the direct sales model in 2016 and 2017, and such new customers contributed 14,009 and 9,913 transaction orders over the same period, respectively.

Net revenues for chemical trading under direct sales model increased by 31.1% from RMB3.2 billion in 2016 to RMB4.2 billion in 2017. The increase in net revenues from chemical trading under direct sales model was primarily due to the increase in our total number of users, customers and suppliers, our expansion of chemical product categories, and the introduction of our value-added services.

Net revenues for chemical trading under marketplace model decreased by 37.7% from RMB1.6 million in 2016 to RMB1.0 million in 2017. The decrease in net revenues from chemical trading under marketplace model was primarily due to our strategy to gain market share by charging only nominal fees rather than monetization.

 

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Net revenues for online membership service increased by 64.0% from RMB0.8 million in 2016 to RMB1.3 million in 2017. The increase in net revenues from online membership services was primarily due to the increased number of members using our online marketing services as we expanded our online member base and diversified our services offering.

Cost of revenues

Our cost of revenues increased by 30.6% from RMB3.2 billion in 2016 to RMB4.2 billion in 2017. The increase was primarily due to the significant increase in the purchase volume of chemicals, which was in line with the growth of our net revenues.

Gross profit and gross margin

As a result of the foregoing, our gross profit was RMB26.1 million, representing a gross margin of 0.8%, in 2016, as compared to RMB50.2 million, representing a gross margin of 1.2%.

Operating expenses

Our total operating expenses increased by 7.2% from RMB131.9 million in 2016 to RMB141.4 million in 2017, primarily due to the increase in our sales and marketing expenses.

Sales and marketing expenses. Our sales and marketing expenses increased by 9.8% from RMB59.2 million in 2016 to RMB65.0 million in 2017. The increase was primarily due to increase in salaries and travel expenses for sales and marketing personnel. Our salaries and travel expenses for sales and marketing personnel increased from RMB37.7 million to RMB42.6 million mainly due to adjustments to our sales and marketing personnel, including severance payments.

General and administrative expenses. Our general and administrative expenses decreased from RMB41.8 million in 2016 to RMB41.7 million in 2017.

Research and development expenses. Our research and development expenses decreased from RMB20.1 million in 2016 to RMB18.6 million in 2017, primarily due to the decrease in our research and development personnel expenses.

Allowance for doubtful accounts. Our allowance for doubtful accounts increased from RMB10.9 million in 2016 to RMB14.7 million in 2017, primarily due to our business expansion.

Operating loss

As a result of the foregoing, we incurred operating loss of RMB91.2 million in 2017, as compared to operating loss of RMB105.8 million in 2016.

Interest expenses, net

We had net interest expenses of RMB16.8 million in 2017, as compared to RMB8.4 million in 2016, primarily due to the increase in the loan amount incurred.

Foreign exchange loss

We had foreign exchange loss of RMB0.6 million in 2017, as compared to RMB1.1 million in 2016, primarily due to the appreciation of Renminbi against the U.S. dollar.

 

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Other income, net

We had net other income of RMB0.8 million in 2017, as compared to RMB1.3 million in 2016.

Net loss

As a result of the foregoing, we incurred net loss of RMB107.8 million in 2017, as compared to a net loss of RMB113.9 million in 2016.

Liquidity and Capital Resources

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

 

     For the Year Ended December 31,     For the Nine Months Ended September 30,  
     2016     2017     2018     2018     2019  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
           (Unaudited)     (Unaudited)  
     (in thousands)  

Net cash used in operating activities

     (145,592     (186,703     (134,636     (18,836     (53,426     (33,412     (4,675

Net cash used in investing activities

     (2,645     (3,982     (2,242     (314     (1,332     (1,666     (233

Net cash generated from financing activities

     173,302       262,849       37,333       5,223       21,178       104,469       14,616  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase / (decrease)in cash and cash equivalents

     25,065       72,164       (99,545     (13,927     (33,580     69,391       9,708  

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

     8,793       33,858       106,022       14,833       106,022       6,477       906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     33,858       106,022       6,477       906       72,442       75,868       10,614  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

To date, we have financed our operating and investing activities through cash generated by historical equity financing activities. As of December 31, 2017 and 2018 and September 30, 2019, our cash and cash equivalents were RMB38.5 million, RMB6.5 million (US$0.9 million) and RMB36.9 million (US$5.2 million), respectively. Our cash and cash equivalents primarily consist of cash on hand and bank deposits, which are unrestricted as to withdrawal or use.

We are at the early stage of our monetization and therefore have incurred significant losses and negative net cash flows used in operating activities in the past. We are rapidly growing and we believe our enhanced ability to expand business coverage and maintain a large user base has resulted in improved monetization in 2017, 2018 and the nine months ended September 30, 2019. As our business continues to evolve, the trend of our net revenues and cash flows used in operating activities we have experienced in the past may not apply to, or be indicative of, our future operating results. We will further implement the following initiatives to enhance revenue growth, margin improvements and financing capabilities: (i) to continue to expand the scale of our business and transaction volume completed on our Online Platform to generate more revenue and achieve increased economies of scale, (ii) to utilize our market position and the stickiness of our customers, suppliers and users to increase our gross profit, which, combined with the increased economies of scale, could result in gross margin improvement, (iii) to continue to invest in and develop new products, services and features for our Online Platform and ecosystem, and (iv) to further explore the possibilities to cooperate with financial institutions for

 

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financing options. While the uncertainties related to the successful implementation of the foregoing initiatives could impact our ability to achieve net profitability and positive cash flows in the near term, we believe they will improve our results of operations, increase cash flows and create shareholder value over the long-term.

We believe that our current cash and cash equivalents, our anticipated cash flows from operations, and potential debt and equity financing will be sufficient to meet our anticipated working capital requirements and capital expenditures for at least the next 12 months. After this offering, we may decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. However, we will be able to conduct planned operations using only currently available capital resources without regard to any potential debt and equity financing for at least 12 months from the date of this prospectus.

We had short-term borrowings of RMB13.7 million (US$1.9 million) as of September 30, 2019, which represented Renminbi-denominated borrowings obtained from financial institutions with repayment terms of less than three months. The outstanding amount as of September 30, 2019 bore weighted average interest rate of 10.00% per annum.

As of September 30, 2019, substantially all of our cash and cash equivalents were held in China, and 33.7% were held by our VIEs and denominated in Renminbi. Although we consolidate the results of our VIEs and their subsidiaries, we only have access to the assets or earnings of our VIEs and their subsidiaries through our contractual arrangements with our VIEs and their shareholders. See “Corporate History and Structure—Contractual Arrangements with Our VIEs.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.”

In utilizing the proceeds we expect to receive from this offering, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries, or acquire offshore entities with operations in China in offshore transactions. However, most of these uses are subject to PRC regulations.

See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business” and “Use of Proceeds.”

We expect that substantially all of our future revenues will be denominated in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

Operating activities

Net cash used in operating activities in the nine months ended September 30, 2019 was RMB33.4 million (US$4.7 million), as compared to net loss of RMB133.2 million (US$18.6 million) in the nine months ended

 

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September 30, 2019. The difference was primarily due to (i) a decrease in prepayments and other current assets of RMB81.4 million (US$11.4 million), (ii) an increase in accounts payable of RMB65.6 million (US$9.2 million), (iii) an increase in accrued expenses and other liabilities of RMB40.0 million (US$5.6 million), and (iv) a non-cash adjustment in share-based compensation of RMB30.8 million (US$4.3 million), and was partially offset by (i) a decrease in amounts due to related parties of RMB82.9 million (US$11.6 million), primarily attributable to repayment of Restructuring consideration, (ii) an increase in unbilled receivables of RMB45.2 million (US$6.3 million), and (iii) a decrease in deferred revenue of RMB15.8 million (US$2.2 million). The foregoing changes in working capital described were primarily attributable to growth of our business.

Net cash used in operating activities in 2018 was RMB134.6 million (US$18.8 million), as compared to net loss of RMB254.6 million (US$35.6 million) in 2018. The differences was primarily due to (i) a non-cash adjustment in share-based compensation of RMB124.0 million (US$17.4 million), (ii) an increase in deferred revenue of RMB108.6 million (US$15.2 million), (iii) a decrease in accounts receivables, unbilled receivables and inventories of RMB43.7 million (US$6.1 million), (iv) an increase in accounts payable of RMB14.0 million (US$2.0 million), and (v) an increase in accrued expenses and other liabilities of RMB12.7 million (US$1.8 million), including VAT and other tax payable, and was partially offset by (i) an increase in prepayments and other current assets of RMB144.8 million (US$20.3 million) primarily due to an increase in prepayments to suppliers, and (ii) an increase in amounts due to related parties of RMB48.9 million (US$6.8 million) primarily due to our Restructuring. The foregoing changes in working capital described were primarily attributable to growth of our business.

Net cash used in operating activities in 2017 was RMB186.7 million, as compared to net loss of RMB107.8 million in 2017. The difference was primarily due to (i) a decrease in deferred revenue of RMB103.3 million, and (ii) a decrease in accounts payab