As filed with the Securities and Exchange Commission on February 2, 2023

Registration No. 333-269357

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

New Ruipeng Pet Group Inc.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands		0700		Not Applicable
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

11F, Building B, Kingkey Timemark

No.9289 Binhe Boulevard, Futian District

Shenzhen, Guangdong Province 518042

People’s Republic of China

+86 755-8398-6686

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

 

 

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

(800) 221-0102

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

 

 

Copies to:

 

Haiping Li, Esq. Yuting Wu, Esq. Skadden, Arps, Slate, Meagher & Flom LLP JingAn Kerry Centre, Tower II, 46/F 1539 Nanjing West Road Shanghai, the People’s Republic of China +86 21-6193-8200		Brian V. Breheny, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, D.C. United States 1 202-371-7000		Li He, Esq. James C. Lin, Esq. Davis Polk & Wardwell LLP 18/F, The Hong Kong Club Building 3A Chater Road, Central Hong Kong +852 2533-3300

 

 

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

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

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

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

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

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

Emerging growth company.  ☒

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

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

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

 

 

 

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

 

Subject to Completion. Dated                     , 2023.

American Depositary Shares

New Ruipeng Pet Group Inc.

Representing              Ordinary Shares

 

 

This is an initial public offering of                  American depositary shares (the “ADSs”), by New Ruipeng Pet Group Inc. Each ADS represents                  of our ordinary shares, par value US$0.000001 per share.

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. We anticipate that the initial public offering price will be between US$             and US$             per ADS. We intend to apply to list the ADSs on the Nasdaq Global Select Market under the symbol “RPET.”

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

New Ruipeng Pet Group Inc. is not a Chinese operating company, but a Cayman Islands holding company with operations primarily conducted by its subsidiaries in China. We face various legal and operational risks and uncertainties associated with being based in or having our operations primarily in China and the complex and evolving PRC laws and regulations. For example, we face risks associated with the fact that the PRC government has significant authority in regulating our operations and may influence or intervene in our operations at any time, regulatory approvals on offerings conducted overseas by and foreign investment in China-based issuers, anti-monopoly regulatory actions, and oversight on cybersecurity and data security, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. On December 16, 2021, the PCAOB issued its report notifying the SEC of its determination that it was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China or Hong Kong, including our auditor. Under the Holding Foreign Companies Accountable Act, or the HFCAA, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for two consecutive years, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. Furthermore, on December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements under the HFCAA, pursuant to which the SEC will identify a “Commission-Identified Issuer” if an issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for two consecutive years. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we continue to use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. There can be no assurance that we would not be identified as a Commission-Identified Issuer for any future fiscal year, and if we were so identified for two consecutive years, we would become subject to the prohibition on trading under the HFCAA. For more details, see “Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs,” “Risk Factors—Risks Related to Doing Business in China—The PCAOB had historically been unable to inspect our auditor in relation to their audit work,” and “Risk Factors—Risks Related to Doing Business in China—Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely auditors located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”

Unless otherwise indicated or the context otherwise requires, references in this prospectus to “New Ruipeng,” “we,” “us,” “our company” and “our” are to New Ruipeng Pet Group Inc., our Cayman Islands holding company, and its subsidiaries. New Ruipeng Pet Group Inc., our holding company, or the Parent, may transfer cash to our offshore intermediary holding entities in the Cayman Islands and Hong Kong, including Skyfield Holdings (Cayman) Inc. and HHRP Holdings (Cayman) Inc. and their respective subsidiaries, through capital injections and intra-group loans. Our offshore intermediary holding entities, in turn, may transfer cash to our PRC subsidiaries New Ruipeng Pet Healthcare Group Co., Ltd. and Skyfield (Shanghai) Investment Co., Ltd. through capital injections and intra-group loans. Similarly, New Ruipeng Pet Healthcare Group Co., Ltd. and Skyfield (Shanghai) Investment Co., Ltd. may transfer cash to their respective subsidiaries in the PRC through capital injections and intra-group loans. Cash may also be transferred through our organization by way of intra-group transactions. If our wholly owned subsidiaries

in the PRC realize accumulated after-tax profits, they may, upon satisfaction of relevant statutory conditions and procedures, pay dividends or distribute earnings to our offshore intermediary holding entities, which, in turn, may transfer cash to the Parent through dividends or other distributions. With necessary funds, the Parent may pay dividends or make other distributions to U.S. investors and service any debt it may have incurred outside of the PRC. In 2020, 2021 and the nine months ended September 30, 2022, the Parent transferred cash in the amount of US$56 million, US$210 million and US$100 million, respectively, to our PRC subsidiaries through our offshore intermediary holding entities by way of capital contribution to the PRC subsidiaries. In 2020, 2021 and the nine months ended September 30, 2022, no assets other than cash were transferred between the Parent and a subsidiary, no subsidiaries paid dividends or made other distributions to the Parent, and no dividends or distributions were paid or made to U.S. investors.

We have established stringent controls and procedures for cash flows within our organization. Each transfer of cash among our Cayman Islands holding company and our subsidiaries is subject to internal approval. To effect a cash transfer, a number of steps are needed, including but not limited to the issuance of payment receipt, logging into the online banking system and completing its verification process, inspection of the invoice, and payment execution. A single employee is not permitted to complete each and every stage of a cash transfer, but rather only portions of the whole procedure. Only the finance department is authorized to make cash transfers. Within the finance department, the roles of payment approval, payment execution, record keeping, and auditing are segregated to minimize risk. For a detailed description of how cash is transferred through our organization, see “Summary—Cash Flows through Our Organization.”

Pursuant to a convertible note purchase agreement entered into with a subsidiary of Nestlé S.A., a global food and beverage company, we issued to the purchaser a convertible note dated January 17, 2023 for an aggregate purchase price and with a principal amount of US$50,000,000. Subject to the terms and conditions of and exceptions provided in this note: (i) concurrently with, and subject to, the completion of this offering, half of the principal amount of the note (i.e., US$25,000,000) will be automatically converted into a number of our ordinary shares at a conversion price equal to the initial public offering price (adjusted for the ADS-to-ordinary share ratio), and (ii) the remaining half of the principal amount will be automatically converted after the [180-day] lock-up period applicable to this offering, provided that certain conditions are satisfied. For more details, please refer to “The Offering—Nestlé Convertible Note” and “Description of Share Capital—History of Securities Issuances.”

Carmignac Gestion, an asset manager established in France and licensed as a UCITS management company and alternative investment fund manager (AIFM), has indicated, on behalf of certain mutual funds it manages, an interest in subscribing for an aggregate of up to US$30 million worth of ADSs being offered in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. In addition, Snow Lake Management LP, an affiliate of certain of our existing shareholders, has indicated, on behalf of Snow Lake China Master Fund, Ltd. and Snow Lake China Master Long Fund, Ltd., an interest in subscribing for an aggregate of up to US$20 million worth of ADSs being offered in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. Assuming an initial public offering price of US$             per ADS, the midpoint of the estimated initial public offering price range, the number of ADSs to be purchased by these investors would be up to              ADSs, which represents approximately             % of the ADSs being offered in this offering, assuming the underwriters do not exercise their over-allotment option. Because the indications of interest are not binding agreements or commitments to purchase, such investors may determine to purchase more, fewer or no ADSs in this offering, and we and the underwriters are under no obligation to sell ADSs to them. The underwriters will receive the same underwriting discounts and commissions on any ADSs purchased by such investors as they will on any other ADSs sold to the public in this offering.

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 26 for factors you should consider before buying the ADSs.

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

 

 

PRICE US$                 PER ADS

 

 

 

		Per ADS				Total
Initial public offering price			US$				US$
Underwriting discounts and commissions			US$				US$
Proceeds, before expenses, to us			US$				US$

 

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

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

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about                     , 2023.

 

 

 

MORGAN STANLEY		Credit Suisse		CICC		UBS Investment Bank

Prospectus dated                     , 2023

TABLE OF CONTENTS

 

		Page
PROSPECTUS SUMMARY			1
RISK FACTORS			26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			89
USE OF PROCEEDS			91
DIVIDEND POLICY			92
CAPITALIZATION			93
DILUTION			95
ENFORCEABILITY OF CIVIL LIABILITIES			97
CORPORATE HISTORY AND STRUCTURE			99
SELECTED CONSOLIDATED FINANCIAL DATA			102
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			107
INDUSTRY			146
BUSINESS			151
REGULATION			181
MANAGEMENT			207
PRINCIPAL SHAREHOLDERS			215
RELATED PARTY TRANSACTIONS			219
DESCRIPTION OF SHARE CAPITAL			221
DESCRIPTION OF AMERICAN DEPOSITARY SHARES			236
SHARES ELIGIBLE FOR FUTURE SALES			253
TAXATION			255
UNDERWRITING			261
EXPENSES RELATED TO THIS OFFERING			273
LEGAL MATTERS			274
EXPERTS			275
WHERE YOU CAN FIND ADDITIONAL INFORMATION			276
INDEX TO THE 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 any sale of the ADSs.

Neither we have nor 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                     , 2023 (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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RISK FACTORS

An investment in our 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 our 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 our ADSs could decline, and you may lose all or part of your investment. In particular, as we are a China-based company incorporated in the Cayman Islands, you should pay special attention to the subsection headed “Risks Related to Doing Business in China” below.

Risks Related to Our Business and Industry

The pet care industry is highly fragmented and competitive. If we fail to compete effectively, we may lose our market share or fail to gain additional market share, and our growth and profitability may be materially and adversely affected.

The pet care industry is highly fragmented and competitive and we expect that competition may become even more intense in the future. We compete with a number of pet care services providers, specialty pet store chains and independent pet stores. We also compete with online retailers, supermarkets, warehouse clubs and mass merchants. The pet care industry has become increasingly competitive as existing market players expand their pet-related service and product offerings and new players enter into the market. Some of our international competitors are larger and have access to greater capital and the ability to invest in more resources than we do.

We may face greater competition from national, international, regional, local and online pet care services providers in the future. In particular, if any of our major competitors seeks to gain or retain market share by reducing prices or by introducing additional products or services, we may be required to reduce prices on our key products or services or introduce new offerings in order to remain competitive, which may negatively affect our profitability and require a change in our operating strategies.

In addition, new competitors have been entering our market and may continue to do so and existing competitors may introduce new and competitive products and services. Some of our competitors or potential competitors may seek to differentiate themselves by offering similar products or services at lower prices or bundled product and service offerings through co-marketing arrangements.

We believe that our ability to compete effectively depends on many factors, including the breadth and depth of our products and service offerings, our pricing competitiveness, customer experience, our ability to form and retain a closed-loop business model, our supply chain capabilities, our technological capabilities, quality control of our product and service offerings, our long-term investments in equity method investees in the pet care industry, our marketing efforts, and the strength and reputation of our brand.

In addition, as our business continues to grow rapidly, we face significant competition for highly skilled personnel, including management, veterinarians and other pet care professionals, and back-office personnel such as IT professionals. The success of our growth strategy depends in part on our ability to retain existing personnel and attract additional highly skilled employees.

Furthermore, if consumer preferences change and thereby decrease the attractiveness of what we believe to be our competitive advantages, including high-quality service offerings, our extensive product assortment, premium product offerings, competitive pricing, and a unique customer experience, or if we fail to otherwise positively differentiate our customer experience from that of our competitors, we may lose our market share or fail to gain additional market share, and as a result, our growth and profitability could be adversely affected.

 

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Negative publicity arising from claims that we do not properly care for pets we treat or negative media coverage in general could adversely affect how we are perceived by the public and reduce our revenues and profitability.

From time to time we receive claims or complaints alleging that we do not properly care for some of the pets we handle, which may include dogs, cats, birds, fish, reptiles, and other animals. Deaths, injuries or losses sometimes occur while animals are under our care, including during transportation. Although the claims or complaints we receive are often due to inadequate communication with our customers, we may be subject to claims that our animal care practices, including veterinary, grooming and other services, or the related training of our associates, do not provide the proper level of care. Our efforts to establish our reputation as a “health and wellness” company increase the risk of claims or complaints regarding our practices. Any such claims or complaints, as well as any related news reports or reports on social media, even if inaccurate or untrue, could cause negative publicity, which in turn could harm our business and have a material adverse effect on our results of operations.

In addition, negative publicity about us or our business, shareholders, affiliates, directors, officers or other employees, brand partners, manufacturers, third-party platforms, service providers and other third parties as well as the industry in which we operate, can harm our operations and reputation. Such negative publicity could be related to a variety of matters, including, but not limited to:

 

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alleged misconduct or other improper activities committed by our shareholders, affiliates, directors, officers and other employees, as well as our brand partners, manufacturers, third-party platforms, service providers and other third parties;

 

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allegations or rumors about us or our shareholders, affiliates, directors, officers and other employees, as well as our brand partners, manufacturers, third-party platforms, service providers and other third parties, including but not limited to allegations or rumors about excessive overtime or other mistreatment of employees or violations of labor laws;

 

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customer complaints about the quality, pricing, delivery, returns, refunds and other aspects of products and services provided by us or third parties we cooperate with;

 

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complaints or disputes arising from the interpretation of terms and conditions of the pet medical cards we provide;

 

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infringement activities associated with counterfeit goods on our platform;

 

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security breaches or customer data leakage;

 

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challenges or scrutiny from animal welfare advocates;

 

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governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations;

 

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instances of product or service safety issues including injuries and deaths of pets caused by products and services on our platform, even those not involving us or our business partners; and

 

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other lawsuits and legal proceedings, with or without merits.

In addition to traditional media, there has been an increasing use of social media platforms and similar devices in China, including instant messaging applications, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of users and other interested persons. The availability of information on instant messaging applications and social media platforms is virtually immediate and may not afford us an opportunity for redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company, shareholders, directors, officers and employees as well as our brand partners, manufacturers, third-party platforms, service providers and other third parties may be posted on such platforms at any time. Such negative publicity, whether valid or not, may result in a decrease in customer confidence in us and materially and adversely affect our reputation, business, financial condition and results of operations.

 

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A decline in consumer spending or a change in consumer preferences or demographics may materially and adversely affect our business and results of operations.

Our sales and profitability depends in part on the frequency of visits to our pet hospitals, which is impacted by consumer spending habits. Consumer spending habits are affected by a number of factors, including among other things, the continued impact of the COVID-19 outbreak, disruption or volatility in global financial markets, changes in interest rates, the availability of discretionary income and credit, weather, consumer confidence, unemployment levels and government orders restricting freedom of movement. The Chinese economy has undergone and may in the future undergo, significant volatility. Business and financial disruptions in China could have a material adverse effect on the demand for our services. We may experience declines in sales or changes in the types of products and services sold during economic downturns. Our business could be harmed by any material decline in the amount of consumer spending, which could reduce our sales, or result in a decrease in the sales of higher-margin products, which could reduce our profitability and adversely affect our business. In addition, economic concerns may cause some pet parents to elect to skip or defer visits to pet hospitals, forgo expensive treatment options or defer treatment for their pets altogether, or affect their willingness to approve certain diagnosis tests, comply with a treatment plan, or even own a pet. Additionally, the frequency of visits to our pet hospitals and the number of diagnosis tests performed by our laboratories may be negatively impacted as a result of preventative care and better pet nutrition. The demand for our products and services may decline as a result of the eradication or substantial declines in the prevalence of certain diseases. Also, many pet-related products traditionally sold at pet hospitals have become more widely available in retail stores and other channels of distribution, including the internet, resulting in a decline in demand for these products at our pet hospitals. All of the foregoing may result in a decrease in sales of our products and services, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

In addition, we have benefited from increasing pet ownership, discretionary spending on pets and current trends in humanization and premiumization in the pet care industry, as well as favorable pet ownership demographics. To the extent these trends slow or reverse, our sales and profitability would be adversely affected. The success of our business depends in part on our ability to identify and respond to evolving trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences, spending patterns and pet care needs could adversely affect our relationship with our customers, the demand for our products and services, our market share and our profitability.

If we fail to acquire and retain new customers, or fail to do so in a cost-effective manner, our business, financial condition and results of operations may be materially and adversely affected.

Our success depends on our ability to acquire and retain new customers and to do so in a cost-effective manner. In order to expand our customer base, we must appeal to, and acquire new pet parents and customers who have historically sought pet care services from other providers or purchased their pet products from other online or offline suppliers or retailers. We have incurred significant marketing and advertising expenses to promote our services and products to potential new customers. We cannot assure you that the net sales from the new customers we acquire will ultimately exceed the cost of acquiring those customers. If we fail to deliver a quality hospital visit or shopping experience, or if customers do not perceive the products or services we offer to be of high value and quality, we may be unable to acquire or retain customers. If we are unable to acquire or retain customers who purchase products or services in volumes sufficient to grow our business, we may be unable to generate the scale necessary to achieve operational efficiency and drive beneficial network effects with our suppliers. Consequently, our prices may increase, or may not decrease to levels sufficient to generate customer interest, our net sales may decrease and our margins and profitability may decline or not improve. As a result, our business, financial condition, and results of operations may be materially and adversely affected.

We believe that many of our new customers originate from word-of-mouth and other non-paid referrals from our customers. Therefore, we must ensure that our customers remain loyal to us in order to continue receiving those referrals. If our efforts to satisfy our customers are not successful, we may be unable to acquire

 

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new customers in sufficient numbers to continue to grow our business, and we may be required to incur significantly higher marketing expenses in order to acquire new customers.

We drive a significant amount of traffic to our website via social networking or other e-commerce channels used by our current and prospective customers. As social networking and e-commerce channels continue to rapidly evolve, we may be unable to develop or maintain a presence within these channels. If we are unable to cost-effectively drive traffic to our website, our ability to acquire new customers and our financial condition would be materially and adversely affected. Additionally, if we fail to increase our net sales per active customer, generate repeat purchases or maintain high levels of customer engagement, our business, financial condition, and results of operations could be materially and adversely affected.

Additionally, we host and participate in offline events to promote our brand name, such as the Pet Carnival in Beijing and various industry conferences, forums and seminars. As a result of COVID-19 and the travel and social gathering restrictions it brought, our ability to continue to host or participate in such events, and in turn our ability to promote our brand name through such events, was adversely affected and may continue to be adversely affected. We also cannot assure you that the benefit from hosting or participating in such events will ultimately exceed the significant costs it brings.

Expanding into new businesses and services may expose us to new challenges and more risks.

We strive to offer a wide variety of pet products and services that are responsive to customers’ evolving needs. Offering new products or services or expanding into new businesses, including launching new products and services and expansion into new product or service categories, involves new risks and challenges. For example, we currently provide to our customers a new service through a Weixin mini program, where we display various pet-related insurance products provided by qualified third-party insurance institutions. Such new service may be deemed as selling Internet insurance products or providing insurance services as an insurance agent, in which case we may be required to obtain the insurance agency business license. We do not believe we are required to obtain such license. However, we cannot assure you that the regulatory authorities will be of the same view. Further, we may offer certain financing services to our supply chain customers in the future, which may subject us to credit risks as well as regulatory risks related to the operation of a financing business. In addition, our lack of familiarity with those new products and services and lack of relevant customer data relating to them may make it more difficult for us to anticipate customer demand and preferences. We may misjudge consumer demand, resulting in inventory and personnel buildup and possible inventory write-down. It may also make it more difficult for us to inspect and control quality and ensure proper service provision or handling, storage and delivery of products. We may experience higher return rates on new products, receive more customer complaints about new products or services and face costly product liability claims related to our new products, which would harm our brand and reputation as well as our financial performance. Furthermore, we may not have much purchasing power in new categories of products and services, and we may not be able to negotiate favorable terms with suppliers. We may need to price aggressively to gain market share or remain competitive in new product or service categories. It may be difficult for us to achieve profitability in the new product or service categories and our profit margin, if any, may be lower than we anticipate, which would adversely affect our overall profitability and results of operations. We cannot assure you that we will be able to recoup our investments in introducing these new product or service categories.

The growth of our business depends on our ability to effectively capture the evolving consumer trends, improve existing products and services and expand into new offerings.

Our growth depends, in part, on our ability to successfully introduce, improve, and reposition our products and services to meet the requirements of pet parents. This, in turn, depends on our ability to predict and respond to evolving consumer trends, demands and preferences. Our ability to innovate is affected by the technical capability of our product development staff and third-party consultants, our attractiveness as a partner for outside research and development scientists and entrepreneurs, the success of our management and sales team in introducing and marketing new products and service offerings, our ability to leverage our digital and data

 

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capabilities to gather and respond to consumer feedback, and developing and testing new products, including complying with governmental regulations.

By leveraging our proprietary big data and AI technologies, we have introduced an intelligent pet care system to cover the full spectrum of smart treatment from an identification protocol applicable to dog noses and cat faces at the pre-examination stage to a smart follow-up tool at the post-examination stage. We have also introduced other advanced technologies for our pet care services. We continue to invest in the research and development of such intelligent pet care and high-end diagnosis and treatment technologies, but such effort may fail to produce results that meet our expectations.

We may be unable to determine with accuracy when or whether any of our products or services now under development will be launched, and we may be unable to develop or otherwise acquire product candidates or products. Additionally, we cannot predict whether any such products or services, once launched, will be commercially successful. If we are unable to successfully develop or otherwise acquire new products or services, our business, financial condition and results of operations may be materially adversely affected.

If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

Our ability to maintain or enhance our growth rates and profitability depends in part on our ability to increase our revenue and operating income through a balanced program of organic growth initiatives. Our growth strategies include to strengthen leadership in the pet care industry in China and further upgrade the scope and quality of our pet care services, to enhance supply chain services and local services capabilities and integrate the pet service value chain to empower industry growth and build up a vibrant ecosystem, to continue our investment in industry talents to build a pool of top-notch veterinary talents, to further improve operational quality and capabilities through digitalized technology, and to empower the global pet industry, develop localized pet business capabilities in overseas regions, and construct a pet metaverse through the existing digitalization functionalities. However, we may not be able to execute on these strategies as effectively as anticipated. Our ability to execute on these strategies depends on a number of factors, including:

 

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whether we have adequate capital resources to expand and optimize our ecosystem, expand our offerings, build our digital and data capabilities and increase our spending on talent development;

 

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our ability to continue to build new pet hospitals, acquire existing hospitals and further consolidate the industry;

 

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our ability to hire, train and retain skilled managers and personnel, including veterinarians, information technology professionals, owned brand merchants, instructors, and groomers and trainers;

 

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our ability to establish our brand in international markets and compete with local players by leveraging our digital capabilities; and

 

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our ability to continue to upgrade our information and other operating systems and to make use of the data that we collect through these systems to offer better products and services to our customers.

Our current pet hospitals and other businesses may not maintain their levels of sales and profitability, and our growth strategies may not generate sales necessary to achieve a comparable level of profitability. To the extent that we are unable to execute on our growth strategies in accordance with our expectations and fail to maintain the current levels of sales and profitability, our business and results of operations may suffer. In addition, our internal growth may continue to fluctuate and may be below our historical rates. Any reduction in the rate of our internal growth may cause our revenue and operating income to decrease. Investors should not assume that our historical growth rates are reliable indicators of results in future periods.

 

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If we fail to generate or obtain sufficient capital to finance our business operations and growth, we may be unable to sustain our growth and our business may be materially and adversely affected.

Our growth rate depends, to a large degree, on the availability of adequate capital to fund the expansion of our offerings, including veterinary and other services and digital capabilities, which in turn will depend in large part on cash flow generated by our business and the availability of equity and debt capital. We cannot assure you that we will be able to maintain sufficient cash flow or obtain sufficient equity or debt capital on acceptable terms, or at all, to support our expansion plans.

Even if we are able to obtain additional financings, such financings may be on terms that are dilutive or potentially dilutive to our shareholders, and the prices at which new investors would be willing to purchase our securities may be lower than the public offering price of this offering or the current market price per share of our ordinary shares. The holders of new securities may also have rights, preferences, or privileges that are senior to those of existing stockholders. If new financing sources are required, but are insufficient or unavailable, we may need to modify our growth and operating plans and business strategies based on available funding, if any, which would harm our ability to grow our business.

Our continued success is substantially dependent on positive perceptions of our brands. Any harm to our brands or failure to maintain and enhance our brand recognition may materially and adversely affect our business and results of operations.

We believe that one of the reasons our customers prefer to purchase products and services from us, and that our partners choose us to collaborate with, is the reputation we have built over the years of serving our primary constituencies: customers, partners, and the communities in which we operate. To be successful in the future, we must continue to preserve, grow, and leverage the value of our reputation and our brands, including our pet hospitals, local services channels, supply chain, diagnosis laboratories, and continued veterinary education institutions. Reputational value is based in large part on perceptions of subjective qualities, and even isolated incidents that erode trust and confidence, particularly if they result in adverse publicity or widespread reaction on social media, governmental investigations, or litigation, can have an adverse impact on these perceptions and lead to adverse effects on our business, including decreased comparable sales, consumer boycotts and loss of new pet hospital development opportunities.

In addition, while we plan to continue to invest in the development of our business, including in the expansion of our offering of private brand products, we may be unable to maintain or expand sales of our private brand products for a number of reasons, including the loss of key suppliers and product recalls. See “—Our private label products may not always appeal to our customers, and may compete with our brand partners.” Our inability to sustain the growth and sales of our private brand offerings may materially and adversely affect our projected growth rates, business, financial condition, and results of operations.

Our large number of trademarks are valuable assets that support our brands and consumers’ perception of our products and services. We rely on trademark laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our trademarks and brands. We may fail to protect our trademarks for a variety of reasons, such as malicious preemptive registration of trademarks by third parties. See “—Failure to establish, maintain, protect, and enforce our intellectual property and proprietary rights or prevent third parties from making unauthorized use of our technology or our brands could harm our competitive position or require us to incur significant expenses to enforce our rights.” If we are unable to maintain our reputation, protect our trademarks and brands, and further enhance our brand recognition, our results of operations and business may suffer.

 

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If we fail to take adequate safety precautions, there will be an increased risk of injuries or other health problems suffered by our employees, customers or trainees at our facilities and we may be subject to additional costs and regulatory, litigation and reputational risks.

We have seen and may in the future see work-related injuries suffered by employees at our pet hospitals, stores, front distribution centers (“FDC”), warehouses and company-provided dormitories and during work-related travel. In particular, our hospital personnel face the risk of being injured by the pets they serve on a daily basis. Our employees are also subject to the risk of contracting various occupational diseases, animal diseases transmissible to humans and depression and other mental problems. The highly infectious nature of certain diseases such as rabies makes such diseases highly dangerous to our employees, our customers and other people who come into contact with them. Furthermore, our customers may also suffer injuries at our hospitals or other facilities, such as injuries caused by pets. Our trainees who receive training at our teaching facilities and training bases may also get injured due to inadequate safety measures taken by us. We have taken precautionary measures to protect our employees, customers and trainees and create a safe environment and continue to invest in such measures to improve the safety of our facilities. However, we cannot assure you that our safety measures will be adequate or effective. If our employees, customers or trainees are injured due to inadequate safety measures or accidents, we may be liable for medical costs and other forms of compensation and subject to government-imposed penalties and litigation and reputational risks.

Animal health products and medications used on animals are subject to safety, quality or efficacy concerns, which may have a material and adverse effect on our reputation, financial condition and results of operations.

Safety, quality or efficacy concerns can arise with respect to our products, including veterinary drugs and other medications used on animals, whether or not scientifically or clinically supported, leading to product recalls, withdrawals or suspended or declining sales, as well as product liability and other claims.

Violations of relevant regulations and regulatory actions based on these types of safety, quality or efficacy concerns could impact all or a significant portion of a product’s sales, affect the licenses of the veterinarians involved, and could, depending on the circumstances, materially and adversely affect our operating results. The cost of compliance with such laws and regulations may further impose financial burden on us. For example, for certain pet diseases that do not have an effective veterinary treatment option, some of our pet hospitals use on pets human medications or veterinary drugs pending regulatory approval or without import veterinary drug registration certificates. In addition, for certain pet diseases that do not have an effective treatment option, off-label use of certain veterinary drugs is provided in some of our hospitals. Also, some of our hospitals had inaccurate or incomplete records on veterinary drug use. These practices could violate the relevant PRC regulations. We cannot assure you that our hospitals will not use human medications or other problematic veterinary drugs on pets or the drug use records will remain authentic and complete in the future as required by the relevant PRC laws and regulations, which may subject us to order to rectify, administrative penalty of fines or revocation of the certificate or the licenses of the veterinarians involved or other civil or criminal liabilities for any loss caused. Further, as to the purchase, use and storage of narcotic and psychotropic drugs for animals, certain of our hospitals have not followed all the national or local required procedures, and there is no assurance we will be able to rectify the current practice of such hospitals and satisfy all the procedures and requirements under the relevant PRC laws and regulations and we may be subject to a warning, order to rectify, fines or other administrative penalties from the relevant regulators. Moreover, we did not have the relevant supporting documents of product quality qualifications or quarantine certificates for certain of the veterinary drugs we sold through our local services segment, and we cannot assure you that we will be able to obtain such qualifications or certificates in a timely manner or at all and we may be subject to order to rectify, administrative penalty of fines, confiscation of the drugs marketed and the income therefrom, revocation of the certificate on veterinary drugs operation, or other civil or criminal liabilities for any loss caused.

We have put in place a comprehensive set of internal policies to prevent and rectify the issues described above, including policies that (i) prohibit the inappropriate or unapproved use of human medications on pets or

 

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unapproved veterinary drugs, (ii) prohibit purchase, use and storage of narcotic and psychotropic drugs for animals and sales of veterinary drugs without relevant product quality qualifications or quarantine certificates and (iii) require each pet hospital and related veterinarian to maintain accurate and complete medical records. However, we cannot assure you that we will be able to remediate or rectify these issues and be in full compliance with the relevant PRC laws and regulations in a timely manner. In the event of an accident related to any of such animal health concerns, we may be held liable for any consequential damage and any resulting claims for damages, which may exceed our financial resources and may materially adversely affect our business, financial condition, results of operations and future growth prospects.

In addition, since we depend on positive perceptions of the safety, quality and efficacy of our products, and animal health products generally, by our customers, veterinarians and end-users, any concerns as to the safety, quality or efficacy of our products, whether actual or perceived, may harm our reputation. These concerns and the related harm to our reputation could materially adversely affect our operating results and financial condition, regardless of whether such reports are accurate.

Any lack of requisite approvals, licenses or permits applicable to our business operation may have a material and adverse impact on our business and results of operations. Certain aspects of our business were or currently are not in full compliance with the regulatory requirements, including certain of our hospitals’ failure to obtain or renew the License for Animal Diagnosis and Treatment under their own names and many of our PRC entities’ failure to obtain the Radiation Safety License before using or selling radioisotopes and radiation-emitting devices, among other things.

Our business is subject to intense regulation, and we are required to hold a number of licenses and permits in connection with our business operations, including, but not limited to, the License for Animal Diagnosis and Treatment, the Veterinary Drug Operation License and the Radiation Safety License. Approvals and licenses related to fire safety and environmental protection, among other things, are required for conducting business in our hospitals, FDCs and warehouses. Certain aspects of our business were not or have not been in full compliance with one or more of these requirements. If the applicable local government authorities consider that we were or have been operating without the proper approvals, licenses or permits, they have the power to, among other things, levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by government authorities may have a material and adverse effect on our results of operations.

Specifically, certain of our hospitals had in the past failed to obtain or renew, or have not obtained or renewed as of the date of this prospectus, the License for Animal Diagnosis and Treatment under their own names. Certain hospitals had in the past failed to submit, or have not submitted as of the date of this prospectus, annual reports regarding animal diagnosis and treatment activities to the relevant government authorities in a timely manner. The registered business scope, business addresses, hospital names or legal representatives stated on the licenses of some hospitals had in the past failed to reflect the latest status, or have not reflected the latest status as of the date of this prospectus. We may be given a warning, or be ordered to rectify the non-compliance or suspend the operation, or be subject to penalties of fines or confiscation of related gains, or even the relevant license may be revoked or cancelled, as the case maybe, by the relevant government authorities. We are in the process of making the applicable applications, filings and/or renewals with the applicable local authorities. However, we cannot assure you that we can obtain or renew such permits and licenses in a timely manner, or at all, due to complex procedural requirements and policies. Some of our hospitals may fail to meet certain establishment requirements at national or local regulatory levels, such as the selected location or the size of the usable area, though such hospitals have obtained the License for Animal Diagnosis and Treatment. To date, the regulatory governmental authorities have not raised any objection to our location or area size, nor have they imposed any penalties on us or revoked the License for Animal Diagnosis and Treatment held by us. If the relevant local government authorities require us to rectify such defects, we cannot assure you that we will be able to find an alternative suitable location satisfying the regulatory requirements and to obtain the approvals, permits or renewals from the proper level of government authorities, in a timely manner or at all.

 

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Further, some of our PRC entities have changed their business names and/or business addresses, but have not been able to renew their Veterinary Drug Operation Licenses or other relevant permits to reflect the latest status. For those entities, we have paused their business operations, and plan to resume once they receive the updated licenses and permits. We cannot assure you that we will be able to renew such licenses and permits in a timely manner, or at all, in the future. Failing to do so may subject us to business suspension for rectification, fines or confiscation of the related income and the veterinary drugs for distributions.

In addition, we use radioisotopes and radiation-emitting devices in many of our hospitals, and are required to apply for Radiation Safety Licenses. However, many of our hospitals failed to obtain the Radiation Safety License before using radioisotopes and radiation-emitting devices. Historically, one of our PRC entities sold radioisotopes and radiation-emitting devices to pet hospitals without a Radian Safety License as required under applicable laws and regulations. Such PRC entity has rectified its operations and obtained the required license as of the date of this prospectus. We might be ordered to rectify in a prescribed period, failing which we may be subject to cease of operation or revocation of the license, penalty of fines and confiscation of related gains. Many of our hospitals did not apply for the approval of the change registration as to the Radiation Safety License in a timely manner, which may also lead to administrative penalties if we fail to rectify as requested by the relevant government authority. We are in the process of making the applicable applications, filings and/or renewals with the applicable local authorities. However, we cannot assure you that we can obtain or renew such permits and licenses in a timely manner, or at all, due to complex procedural requirements and policies.

Furthermore, some of our premises used as pet hospitals and third-party diagnosis laboratories have not completed the fire control acceptance filing in a timely manner or at all. We might be ordered to stop the use of or to suspend our business operations in these premises, and imposed fines by the competent housing and urban and rural development authorities. We are in the process of making the applicable applications and filings with the applicable local authorities. However, we cannot assure you that we can obtain such permits and licenses in a timely manner, or at all, due to complex procedural requirements and policies.

Besides, many of our pet hospitals and our third-party diagnosis laboratory in Beijing and Chengdu historically did not complete the environmental impact assessment and acceptance filings, or have not completed the environmental impact assessment and acceptance filings as of the date of this prospectus, or failed to obtain the wastewater discharge permit or the pollutant discharge permit or go through the registration of pollutant discharge, as the case may be. We might be ordered to rectify within a prescribed period, failure to do which might result in fines imposed by the competent governmental authorities on us. If serious environmental pollution and ecological destruction were caused, we might be ordered to suspend, cease or close the relevant operations. We are in the process of making the applicable applications and filings with the applicable local authorities. However, we cannot assure you that we can obtain such permits and licenses in a timely manner, or at all, due to complex procedural requirements and policies.

We may also be required to obtain other approvals, permits or registration during our business operations. For example, we had in the past failed to obtain, or have not obtained as of the date of this prospectus, the certificate for animal epidemic prevention conditions to operate animal farms and raising areas, the relevant quarantine certificates to transport or sell live animals and the relevant filing record to set up a pathogenic microbiology laboratory. Failing to do so may subject us to a warning, order to rectify in a prescribed time or suspend business for rectification or penalties of fines or confiscation of the related income and the veterinary drugs for distributions without the required license. We are in the process of making the applicable applications and filings with the applicable local authorities. However, we cannot assure you that we can obtain such permits and licenses in a timely manner, or at all, due to complex procedural requirements and policies. We had historically received penalties or disciplinary actions by relevant governmental authorities in the ordinary course of business due to the lack of the foregoing approvals, licenses, permits and filings.

As of the date of this prospectus, we have not been subject to material penalties or other material disciplinary action from the relevant governmental authorities regarding the conducting of our business without

 

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such approvals, licenses, permits and filing. However, we cannot assure you that the relevant governmental authorities would not require us to obtain the approvals, certificates or permits, complete filings or take any other actions retrospectively in the future. If the relevant governmental authorities require us to obtain the approvals, licenses or permits, or to complete filings, we cannot assure you that we will be able to do so in a timely manner or at all.

In addition, new laws and regulations may be enforced from time to time to require additional licenses and permits other than those we currently have. We may provide new products or services or expand our current business, which may also requires additional licenses and permits. We cannot assure you that we will be able to obtain such licenses and permits in a timely and cost-effective manner, and our financial condition and results of operations could be adversely affected if we fail to do so.

We have sought and will continue to seek to grow our business through acquisitions of or investments in pet hospitals, new or complementary businesses, products or services, or through strategic ventures, and the failure to successfully identify these opportunities, manage and integrate these acquisitions, investments, or alliances, or to achieve an adequate return on these investments, could have an adverse effect on us.

The pet care industry is highly fragmented. We have completed acquisitions in the past and may pursue expansion and acquisition opportunities in the future. If we are unable to manage acquisitions, investments, or strategic ventures, or integrate any acquired businesses, services, or technologies effectively, we may not realize the expected benefits from the transaction relative to the consideration paid, and our business, financial condition, and results of operations may be adversely affected. To be successful, the integration process requires us to achieve the benefits of combining the companies, including generating operating efficiencies and synergies and eliminating or reducing redundant costs. This integration process involves inherent uncertainties, and we cannot assure you that the anticipated benefits of these acquisitions will be fully realized without incurring unanticipated costs or diverting management’s attention from our core operations.

From time to time we also make strategic investments. These investments typically involve many of the same risks posed by acquisitions, particularly those risks associated with the diversion of our resources, the inability of the new venture to generate sufficient revenues, the management of relationships with third parties, and potential expenses. Strategic ventures have the added risk that the other strategic venture partners may have economic, business, or legal interests or objectives that are inconsistent with our interests and objectives.

We may not be able to make acquisitions or investments on favorable terms or within a desired time frame. For certain of our PRC subsidiaries we acquired historically, certain provisions of the shareholder agreements or investment agreements restrict us to transfer or dispose our equity interest in such PRC subsidiaries, which may affect our equity interests in the relevant PRC subsidiaries.

In addition, we may be unsuccessful in identifying and evaluating business, legal, or financial risks as part of the due diligence process associated with a particular transaction. We also cannot guarantee that we are able to resolve all the issues we have identified effectively, or at all, such as historical non-compliance incidents (including but not limited to underpayment of taxes) associated with acquired businesses. In addition, some investments may result in the incurrence of debt or may have contingent consideration components that may require us to pay additional amounts in the future in relation to future performance results of the subject business. If we do enter into agreements with respect to these transactions, we may fail to complete them due to factors such as failure to obtain regulatory or other approvals. We may be unable to realize the full benefits from these transactions, such as increased net sales or enhanced efficiencies, within the timeframes that we expect or at all. These events could divert attention from our other businesses and adversely affect our business, financial condition, and results of operations. Any future acquisitions also could result in potentially dilutive issuances of equity securities, the incurrence of additional debt, or the assumption of contingent liabilities.

Furthermore, we may be unsuccessful in the integration of the acquired businesses. Any difficulties in the integration process could result in increased expense, loss of customers and a decline in operating margins and

 

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profitability. We may experience delays and increased costs in integrating acquired businesses, particularly where we acquire a large number of animal hospitals in a single region at or about the same time. We also could experience delays in converting the systems of acquired businesses into our systems, which could result in increased staff and payroll expense to collect our results as well as delays in reporting our results, both for a particular region and on a consolidated basis. Further, the legal and business environment prevalent in new territories and with respect to new businesses may pose risks that we do not anticipate and materially adversely impact our ability to integrate newly acquired operations. In addition, our management may spend a greater amount of time integrating these new businesses and less time managing our existing businesses. During these periods, there may be less attention directed to marketing efforts or staffing issues, which could affect our revenue and expense. For all of these reasons, our historical success in integrating acquired businesses is not a reliable indicator of our ability to do so in the future.

Relatedly, from time to time, for our acquisitions, we use direct or indirect beneficial ownership in our equity interest as consideration to the selling shareholders. The interests of those external parties who become our direct or indirect beneficial owners this way may not align with ours. Even though they have limited influence on our operations and our relationship with them is governed by relevant contracts, disputes with them may arise and they may act against our interest, including harming our reputation. Additionally, some of the above acquisitions in China with direct or indirect beneficial ownership in our equity interest as consideration may be subject to the approval of the MOFCOM under Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, but we have not obtained such approval, which is rarely granted in practice. As of the date of this prospectus, we have not received any notice of warning or been subject to penalties or other disciplinary action in this regard. However, there is uncertainty as to how the M&A Rules will be interpreted or implemented or whether the relevant government authorities would promulgate any detailed requirements. Moreover, we may be required to receive approval under anti-monopoly and competition laws for our past and future acquisitions. We cannot guarantee that we will be able to obtain such regulatory approval when needed in a timely manner, or at all, failure of which will subject us to anti-monopoly regulatory actions.

If we fail to comply with environmental, fire protection, drainage or health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material and adverse effect on the success of our business.

We are subject to numerous environmental, fire protection, drainage or health and safety laws and regulations, including but not limited to those governing the construction procedures of pet hospitals, the use of radioisotopes and radiation-emitting devices, the handling, use, storage, treatment and disposal of hazardous materials, drainage and wastes discharge of stationary pollution sources. The cost of compliance with such laws and regulations is substantial. We failed to fulfill the relevant environmental or fire protection procedures, such as failure to prepare or complete environmental impact assessment document, obtain environmental assessment approval/filing receipt, complete environmental protection acceptance formalities, or complete filing of fire control acceptance for many of our hospitals and our third-party diagnosis laboratories, which have caused penalties on us and may subject us to potential penalties. See “—Any lack of requisite approvals, licenses or permits applicable to our business operation may have a material and adverse impact on our business and results of operations. Certain aspects of our business were or currently are not in full compliance with the regulatory requirements, including certain of our hospitals’ failure to obtain or renew the License for Animal Diagnosis and Treatment under their own names and many of our PRC entities’ failure to obtain the Radiation Safety License before using or selling radioisotopes and radiation-emitting devices, among other things.” Further, many of our hospitals conduct the disposal of medical waste without a qualified disposal institution or a valid disposal agreement, and as a result, such hospitals may be warned or fined by the relevant competent authorities; where the spread of epidemic disease or environmental pollution accident is caused, such hospitals may be subject to the suspension or revocation of their business or operating licenses, or even criminal liabilities. Our third-party diagnosis laboratory in Beijing historically did not file the disposal plan of hazardous materials to the relevant environmental authority, nor has it renewed its agreement regarding the disposal of hazardous materials with a

 

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qualified disposal institution as of the date of this prospectus, and we have not signed a valid agreement regarding the disposal of hazardous materials with a qualified disposal institution for our third-party diagnosis laboratory in Chengdu. These incidents may cause the relevant laboratories to be ordered to rectify, subject to penalty of fines or confiscation of illegal gains, or such business may even be suspended or closed in serious situations. Additionally, we may be required to obtain the water drainage permit, the pollutant discharge permit or go through the registration of pollutant discharge but we have not done so because of the uncertainties of the interpretation and implementation of the relevant PRC laws and regulations. There is no assurance that we will be able to rectify these non-compliances in a short time or at all. We could be subject to cease of operation, fines, confiscation of illegal gains or other penalties. We cannot eliminate the risk of contamination or injury from these materials, which could cause an interruption of our business operations. We cannot guarantee that the safety procedures utilized by our partners and by third-party manufacturers and suppliers with whom we may contract will comply with the standards prescribed by laws and regulations or will eliminate the risk of accidental contamination or injury from these materials. In such an event, we could be held liable for any resulting damages, and such liability could exceed our resources. In addition, we may be required to incur substantial costs to comply with current or future environmental, health and safety laws and regulations which are complex, change frequently and have tended to become more stringent. We do not currently carry biological or hazardous waste insurance coverage. In the event of an accident or environmental discharge, we may be held liable for any consequential damage and any resulting claims for damages, which may exceed our financial resources and may materially adversely affect our business, financial condition, results of operations and future growth prospect. We are taking measures to remediate the non-compliance described above and are actively monitoring related legal and regulatory risk exposures.

Although we have been successful in external acquisitions leveraging our disciplined acquisition approach and have also been successful in integrating Skyfield Group, we have a limited operating history as an integrated group after our acquisition of Skyfield Group, which makes it difficult to evaluate our business and prospects and may increase the risks associated with your investment.

Although we have a long and successful operating track record in providing pet care services, we have a limited history as an integrated group after our acquisition of Skyfield Group in 2019. We have a long history of successful acquisitions and post-acquisition integration and have been successful in integrating Skyfield Group as well. Our total revenue grew from RMB3,008.3 million in 2020 to RMB4,783.7 million (US$672.5 million) in 2021, and grew from RMB3,399.7 million in the nine months ended September 30, 2021 to RMB4,315.1 million (US$606.6 million) in the nine months ended September 30, 2022. However, we may fail to continue our growth or maintain our historical growth rate. Any evaluation of our business and predictions about our prospects or viability may not be as accurate as they could be if we had a longer operating history.

We have built and continue to expand an integrated pet care platform with a variety of service and product offerings. Our limited operating history, particularly in light of the rapidly evolving pet care industry in which we operate, the changing regulatory and market environments we encounter, as well as the continuous expansion and evolvement of our business, may make it difficult to evaluate our prospects for future performance. As a result, any assessment of our future performance or viability is subject to significant uncertainty, and your investment in our ADSs is subject to increased risks due to such uncertainty. We will encounter various risks and difficulties in operating and expanding our integrated platform. If we do not address these risks and difficulties successfully, our business will suffer.

We have incurred net losses in the past, and we may not be able to achieve or increase profitability in the future.

We have a history of losses and expect our operating losses to continue in the near-term as we increase investment in our businesses. Our net losses amounted to RMB999.8 million in 2020, RMB1,311.3 million (US$184.3 million) in 2021 and RMB1,109.4 million (US$156.0 million) in the nine months ended September 30, 2022. It is difficult for us to predict our future results of operations. Our net losses may continue or increase, and we

 

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may not be able to achieve or increase profitability in the future. Our revenues may not increase sufficiently to offset the increase in our expenses as we launch or acquire new hospitals, expand our product and service offerings, increase our brand awareness, hire additional personnel, expand our customer base, enhance customer experience, expand overseas and enhance our digitalization. We will continue to invest in sales, marketing and branding efforts, which is expected to cause our sales and marketing expenses to increase continuously and rapidly. We will also continue to invest in improving our technologies and developing additional products and services. If our future growth and operating performance fail to meet investor expectations, or if we have future negative cash flow or losses resulting from our investment to implement our growth strategies, our financial condition and the price of our ADSs could be materially and adversely affected.

Moreover, as a public company, we may incur certain legal, accounting and other expenses that we did not previously incur as a private company. These efforts may be more costly than we expect. We may continue to incur losses in the future and we cannot assure you that we will eventually achieve profitability.

We face various risks with regard to the operation of our pet hospitals.

As of September 30, 2022, we operated 1,942 pet hospitals covering 31 provinces and 114 cities across China, offering the full scope of pet care specialties. We strive to exercise a high level of control and supervision over the operation of every hospital in our network and ensure that every hospital adheres to high professional service standards. Given the large scale of our hospital network and the fact that we operate a small portion of our hospitals with partners with a minority stake in such hospitals, we may not be able to ensure that our hospitals can always provide high-quality services to our customers. Our reputation, business and results of operations may suffer as a result. See “—Misconduct or illegal actions of our third-party suppliers, merchants or other business partners, or deterioration in our relationship with partners, could materially harm our reputation, business, financial condition and results of operations.” In addition, our employees or the employees of our partners may not perform in line with applicable laws and regulations and our internal policies relating to hospital management. We may also be exposed to fraud or other misconduct committed by our employees or the employees of our partners, which could adversely affect our reputation and subject us to financial losses and sanctions imposed by government authorities.

As medical service providers, we are subject to malpractice claims if pets are injured or die as a result of our services. Any such claims may result in liabilities, reputational damage to our business and a material adverse impact on our financial condition and results of operations.

Some of our pet hospitals had temporarily failed to meet the statutory requirement for the minimum number of veterinarians that must remain on site in a pet hospital, due to internal and external mobility of our veterinarians and temporary shortages of skilled veterinarians in certain regions in which we operate. We are taking prompt action to ensure compliance by actively monitoring the mobility rate at each pet hospital and seeking and recruiting skilled veterinarians. However, in the event that we are ordered by the authorities to rectify within a specified time period and we fail to do so, the original license-issuing authorities may withdraw and revoke the License for Animal Diagnosis and Treatment for the related pet hospital. In addition, licensed veterinarians are regulated by the relevant PRC laws and regulations in various aspects. If a licensed veterinarian in our hospital fails to fully comply with the relevant regulatory requirements, such as issuance of unapproved prescriptions or improper use of drugs, the relevant hospital may also subject to administrative penalties due to the misconduct of the licensed veterinarian. We are taking measures to remediate the non-compliance described above and are actively monitoring related legal and regulatory risk exposures.

As we sell pet food, drugs and other supplies in our hospitals, we are also subject to risks related to the safety, quality or efficacy of such products. See “—Animal health products and medications used on animals are subject to safety, quality or efficacy concerns, which may have a material and adverse effect on our reputation, financial condition and results of operations.”

 

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According to the relevant PRC laws and regulations, where a pet hospital concurrently sells pet food, drugs and other supplies, such area and the animal diagnosis and treatment area shall be separately set up. Some of our pet hospitals have not set up the area for sales of pet food, drugs and other supplies separately as required. There is no assurance that these hospitals will cure such defects successfully or all of our pet hospitals will be in full compliance with such legal requirements, which may subject us to rectification in a prescribed period, penalty of fines, suspension of business operation or even withdrawal of the License for Animal Diagnosis and Treatment.

In addition, some local governmental authorities may have further regulatory requirements on pet hospitals. We may not be aware of such local regulatory requirements and potential penalties may be imposed by the relevant government authority. We are in the process of setting up policies and procedures to identify and address the relevant local regulatory requirements on pet hospitals that may have an impact on us.

We are subject to certain risks relating to the warehousing and shipment of our products.

We store our merchandise and supplies in our FDCs and warehouses across China. If any accidents, including fires, or thefts, were to occur, causing damages to our products, FDCs or warehouses or loss of our products, our ability to supply products to our customers on time and our market reputation, financial condition, results of operations or business could be materially and adversely affected. Accidents may also occur during the shipment of our products, including power failures that cause damage to cold-chain-stored products. We often outsource the delivery of our products to our customers to third-party logistics and transportation companies. Relying on these third parties increases the risk that we may fail to deliver finished products on time or fail to maintain the quality of the products during shipment. The efficient operation of our local services and supply chain businesses depends on the timely receipt of products from our FDCs and warehouses. Such logistics services could be suspended, which would interrupt the supply of our products, if unforeseen events occur, such as COVID-19, poor handling of and damage to our products, transportation bottlenecks and/or labor strikes. If our products are not delivered on time or are delivered in a damaged state, our market reputation could be adversely affected, and it could have a material adverse effect on our financial condition, results of operations or business. In addition, warehousing and shipment workers, including those of the third-party service providers, may incur work-related injuries at our warehouses or FDCs or on the shipment route, in which case our warehousing operation and shipment services may be disrupted and we may be liable for additional costs and legal risks.

Failure to maintain the quality and safety of the products we sell and significant merchandise returns or refunds resulted could have a material and adverse effect on our reputation, financial condition and results of operations.

The quality and safety of the products we sell are critical to our supply chain business and local services business. We have implemented stringent measures to monitor the quality of the products we sell, including our private label products and products of third-party brand partners. Yet, due to the scale and rapid growth of our operations and the fact that we do not manufacture the products ourselves, we are not able to fully monitor or control the quality of the products we sell and the quality control measures taken by the upstream suppliers or manufacturers may not be effective. There can be no assurance that there will be no quality issues with the products we sell.

We may be exposed to product recalls and withdrawals and adverse publicity if the products we sell are alleged to be fake or expired, or cause injury or illness or if we violate any governmental regulations. We may also voluntarily recall or withdraw products that we consider below our standards, whether for function, appearance or otherwise. Consumer concerns regarding the safety of the products we sell, whether justified or not, could adversely affect our brand reputation and business. A product recall or withdrawal could result in substantial and unexpected expenditures, destruction of product inventory and lost sales, which could reduce our cash flow and prevent us from achieving profitability. In addition, a product recall or withdrawal may have detrimental effects on our brand reputation, leading to increased scrutiny by regulatory agencies and sharp

 

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decrease in demand for our products, all of which require significant management attention. These could negatively impact our business and, consequently, adversely affect our results of operations and reputation.

We do not carry product liability insurance and may be subject to product liability claims if consumption and use of the products we sell is alleged to cause injury or illness to pets or pet parents. The real or perceived sale of defective pet products by us could result in product liability claims against our brand partners or us, expose us or our brand partners to governmental enforcement action or private litigation, or lead to costly recalls and a loss of consumer confidence, any of which could have an adverse effect on our business, financial condition, and results of operations. While we may attempt to seek compensation from responsible brand partners or manufacturers in the event that we become subject to claims due to their misconduct, such compensation may be limited and if we cannot fully recover our damages from them, we will be required to bear such losses at our own costs. Any material product liability claim, litigation or governmental enforcement action could materially and adversely affect our business, financial condition and results of operations. Even unsuccessful claims could result in the use of funds and managerial efforts in defending them and could negatively impact on our reputation.

In addition, we allow our customers to return certain products and offer refunds, subject to our return and refunds policy. If merchandise returns or refunds are significant or higher than anticipated and forecasted, our business, financial condition, and results of operations could be adversely affected. Furthermore, we revise our policies relating to returns or refunds from time to time, and may do so in the future, which may result in customer dissatisfaction and harm to our reputation or brand, or an increase in the number of product returns or the amount of refunds we make.

Furthermore, we could be adversely affected if customers lose confidence in the safety and quality of vendor-supplied food products. All of our vendors are required to comply with applicable product safety laws, and we are dependent upon them to ensure such compliance. Adverse publicity about these types of concerns, whether valid or not, may discourage customers from buying the products from us, or cause vendor production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims against our vendors or us, expose us or our vendors to governmental enforcement action or private litigation, or lead to costly recalls and a loss of customer confidence, any of which could have an adverse effect on our sales, operations, and financial performance.

Our private label products may not always appeal to our customers, and may compete with our brand partners.

We have launched several private labels, which offer high-value-for-money pet food and products. There is no assurance that our private label product offerings will continue to generate customer interests and cater to their needs. If we are unable to generate sufficient sales of our private label products, we may fail to cover our development, manufacturing and marketing expenses on these products, and our business, results of operations and financial condition may be adversely affected.

Moreover, we are likely to face competition from our brand partners, whose products are part of our offerings as well. Branded products may have an advantage over our private label products primarily due to name recognition, although private label products are typically more competitively priced compared to branded products. In addition, selling private label products may harm our relationship with our brand partners. If we lose our brand partners or if our relationship with our brand partners deteriorate, our business may be adversely affected. See “—We rely on suppliers of pet products in our business. We may be unable to source additional, or strengthen our existing relationships with, suppliers. Our suppliers have limited supply capabilities and may fail to meet our demands. In addition, the loss of any of our key suppliers would negatively impact our business.”

 

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We outsource the manufacturing of our private label products. As a result, we may be subject to additional regulatory requirements, and our business, results of operations, financial conditions and reputation may be affected by issues relating to our manufacturers.

We outsource the manufacturing of our private label products to pet product manufacturers in China. We may be unable to maintain our relationships with our manufacturing partners or identify or enter into relationships with new manufacturing partners to meet the manufacturing and assembly needs of our private label business in a timely manner, or at all. Additionally, manufacturing at our manufacturing partners may be disrupted or delayed for a variety of reasons, including, but not limited to, natural and man-made disasters, information technology system failures, commercial disputes, labor disputes, and environmental and worker health and safety issues. As a result, we may experience shortage in supply and delay in delivery of our private label products, and our business, financial condition, results of operations and reputation may be materially and adversely affected.

Pet product manufacturing are strictly regulated in China. We are not regulated as a pet product manufacturer, but we may be indirectly subject to the relevant PRC laws and regulations as a result of our outsourcing and our cooperation with manufacturing service providers. If any of our private label products is deemed to violate any PRC laws or regulations, we may be liable for outsourcing the manufacturing of such products even if we are not the manufacturer. If any of our manufacturing partners is deemed to violate any PRC laws or regulations, we may be jointly liable due to the products we provide, or we may even have to suspend our private label products sales. In addition, it is uncertain under relevant PRC laws whether we are required to obtain a Production License for Pet Feeds/Additives for outsourcing our private label products, and new laws and regulations may be enforced or there may be different interpretation and implementation of the current laws and regulations from time to time to require additional licenses and permits in this regard, and we cannot assure you that we will be able to obtain such licenses and permits in a timely and cost-effective manner. As a result, our business, reputation, financial performance and prospects could be materially and adversely affected.

Any disruption, malfunction, or increased costs in the operation, expansion or replenishment of our supply chain system would affect our ability to deliver the products we sell to customers or increase our expenses, which could harm our sales and profitability.

Our vendors generally ship merchandise to one or more of our FDCs or warehouses, which receive and allocate merchandise to our locations and local services customers. If any shipped merchandise were to be delayed for any reason, our operations may be significantly disrupted. Any disruption to shipping and transportation channels could cause additional costs incurred in transportation and delivery. We may not be able to pass all or any portion of these higher costs on to our customers or adjust our pricing structure in a timely manner in order to remain competitive, either of which could have a material adverse effect on our results of operations.

If any of our FDCs or warehouses were to shut down due to the impact of COVID-19 or lose significant capacity for any reason, our operations would likely be significantly disrupted. We compete with other retailers for the supply of personnel to staff our FDCs and warehouses, some of whom are larger than us and have access to greater capital resources than we do. If we are unable to successfully recruit and retain personnel to staff our FDCs and warehouses, we may face labor shortages or be forced to increase wages and enhance benefits for such personnel, which may have an adverse effect on our results of operations. In addition, any interruption or malfunction in our FDCs and warehouses, including, but not limited to, the loss of a key vendor that provides transportation of merchandise, or regulatory issues with respect to any of our FDCs or warehouses, could adversely affect our sales and results of operations. An interruption in our inventory supply chain could result in out-of-stock or excess merchandise inventory levels or adversely affect our ability to make timely deliveries to local services customers, and could adversely affect our sales and results of operations.

 

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Our local services business depends in part on third-party platforms, and any disruption in the operation of those platforms and in our relationships with them could negatively affect our business and results of operations.

We partner with major online local services platforms in China for our local services. If those platforms experience disruption or otherwise fail to consistently and adequately support our business, including as a result of errors or failures in their systems or events beyond their control, or if they refuse to provide their platforms on terms acceptable to us or at all and we are not able to find suitable alternatives, our business and results of operations may be adversely affected. In addition, online local services platforms may lack expertise in the pet industry, and may lose appeal to customers who need tailored services and specialized pet products. To the extent that we fail to leverage traffic on these third-party platforms, our revenue may decline and we may experience difficulties in locating customers. At the same time, our cooperation with these third-party platforms may be negatively affected by a number of factors, including but not limited to higher commissions and fees, negative publicity and service outages of these platforms, all of which are beyond our control. In addition, these third-party platforms may deem our business a strong competitor of theirs and terminate their cooperation with us. If our relationships with these third-party platforms deteriorate or are terminated or if we fail to maintain the relationships on commercially viable terms, we may not be able to quickly locate alternative sales channels. Hence, our operations and financial condition will be adversely affected.

We face various risks as a local services provider.

As part of our growth strategy, we seek to further integrate our offline and online operations and have made significant investments to integrate and grow our local services business, such as our collaboration with online local services platforms and our own online platforms with local services. We may require additional capital in the future to sustain or grow our local services business. Business risks related to our local services business include our inability to keep pace with rapid technological change, failure in our security procedures or operational controls, failure or inadequacy in our systems or labor resource levels to effectively process customer orders in a timely manner, disruption in third-party platforms, and relevant government regulation and legal uncertainties. If any of these risks materialize, it could have an adverse effect on our business.

In some circumstances, increased transactions through online platforms may result in reduced customer traffic in our offline channels, particularly as customers take advantage of home delivery services available for online orders when making certain types of purchases. There is a risk that any such reduced customer traffic may reduce the sales of certain products and services in our hospitals and other offline retail outlets. The availability of free shipping of online orders increases our costs and could adversely affect our profitability.

In addition, as other internet retailers have increased market share in recent years, we have faced increased competition, and may continue to face increased competition in the future, from internet retailers who enter the market. Our failure to positively differentiate our product and services offerings or customer experience from these internet retailers could have a material adverse effect on our business, financial condition and results of operations.

We rely on suppliers of pet products in our business. We may be unable to source additional, or strengthen our existing relationships with, suppliers. Our suppliers have limited supply capabilities and may fail to meet our demands. In addition, the loss of any of our key suppliers would negatively impact our business.

In order to attract quality suppliers, we must:

 

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demonstrate our ability to help our suppliers increase their sales;

 

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offer suppliers a high quality, cost-effective fulfillment process; and

 

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continue to provide suppliers a dynamic and real-time view of our demand and inventory needs.

 

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If we are unable to provide our suppliers with a compelling return on investment and an ability to increase their sales, we may be unable to maintain and/or expand our supplier network, which would negatively impact our business.

We purchase significant amounts of products from a number of vendors with limited supply capabilities. There can be no assurance that our current pet product vendors will be able to accommodate our anticipated growth and expansion of our locations and local services business. Potential inability of our existing vendors to provide products or other product supply disruptions that may occur in the future could impair our business, financial condition, and results of operations. To date, vendor-related supply challenges have not had a material effect on our business or our sales and profitability. We do not maintain long-term supply contracts with any of our merchandise vendors. Any vendor could discontinue selling to us at any time. Although we do not materially rely on any particular vendor, the loss of any of our significant vendors of pet products, particularly premium pet products, that we offer could have a negative impact on our business, financial condition, and results of operations.

We continually seek to expand our base of pet product vendors and to identify new pet products. If we are unable to identify or enter into distribution relationships with new vendors or to replace the loss of any of our existing vendors, we may experience a competitive disadvantage, our business may be disrupted, and our results of operations may be adversely affected.

Most of the premium pet product brands that we purchase are not widely carried in supermarkets, warehouse clubs, or mass merchants. If any premium pet product manufacturers were to make premium pet products widely available in supermarkets or through mass merchants, or if the premium brands currently available to supermarkets and mass merchants were to increase their market share at the expense of the premium brands sold only through specialty retailers, our ability to attract and retain customers or our competitive position may suffer. Further, if supermarkets, warehouse clubs, or mass merchants begin offering any of these premium pet product brands at lower prices, our sales and gross margin could be adversely affected.

Several of the pet products brands we currently purchase and offer for sale to our customers are not offered by our closest pet specialty competitor. However, in most cases, we have not entered into formal exclusivity agreements with the vendors for such brands. In the event these vendors choose to enter into distribution arrangements with other specialty pet retailers or other competitors our sales could suffer and our business could be adversely affected.

Our principal vendors currently provide us with certain incentives such as volume purchasing and trade discounts. A reduction or discontinuance of these incentives would increase our costs and could reduce our profitability.

The instructors at our continued veterinary education institutions or programs may cease their relationship with us, which may cause disruptions to our continued veterinary education services and harm to our reputation.

We have engaged a number of professors, lecturers, researchers and other experts in the veterinary field to teach at our continued education institutions and other programs. They may cease their relationship with us for different reasons, such as restrictions imposed by their primary employers. As we rely on these instructors to conduct our continued education services, if a significant number of them cease teaching at our programs and we are unable to find replacements in a timely and cost-effective manner, our continued education services may be disrupted and the reputation of our veterinary universities and programs may suffer as a result.

If we are not able to continue to attract trainees to enroll in our continued veterinary education institutions or other programs, the prospects of our continued veterinary education services will suffer.

The success of our continued veterinary education services depends partly on the number of trainees enrolled in our institutions and other programs. Therefore, our ability to continue to attract trainees is critical to

 

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the continued success and growth of our continued education services. This in turn will depend on several factors, including our ability to develop new courses and enhance existing courses to respond to changes in market trends and trainee demands, expand our geographic footprints, retain qualified instructors, manage our growth while maintaining consistent and high education quality, improve our online programs, and market our courses effectively to a broader base of prospective trainees. Furthermore, our ability to attract trainees also depends on our ability to provide educational content that is perceived as effective and valuable for practical training purposes. If we are unable to continue to attract trainees to enroll in our education programs, the prospects of our continued veterinary education services will suffer.

If we are not able to continually tailor our curriculum to market demand and enhance our courses to adequately and promptly respond to developments in the pet care profession, our continued veterinary education institutions and other programs may become less attractive to trainees.

New trends in the pet care industry and rapid developments in pet care knowledge and technologies may change the type of skills required for professionals in the marketplace. This requires us to continually develop, update and enhance our course materials to adapt to the needs of the pet care profession. We may be unable to update our courses in a timely and cost-effective manner, or at all, to keep pace with changes in market requirements. Any inability to track and respond to these changes in a cost-effective and timely manner or to tailor our courses to the changes would render our courses less attractive to trainees, which may harm our reputation and ability to continue to attract trainees and develop our continued veterinary education services.

Our limited experience and small scale in the third-party diagnosis industry could inhibit our success in this industry.

We have limited experience in the third-party diagnosis industry and we currently operate at a relatively small scale. Although we have seen a relatively high growth in our third-party diagnosis services, established international competitors have significantly more experience and operate on a larger scale than we do. Our limited experience and small scale in this industry could negatively affect our ability to successfully appeal to potential customers in the market, develop expertise and new technologies in the veterinary diagnosis field, attract talents, manage the risks and features of this industry, and compete with the larger and more experienced competitors. There can be no assurance that we will be successful in achieving growth and profitability in the third-party diagnosis services comparable to the results we have achieved in our other business segments such as pet care services.

We face risks related to natural disasters, health epidemics such as the outbreak of COVID-19 and other events beyond our control, which could significantly disrupt our operations.

Our business could be adversely affected by the effects of epidemics, including COVID-19, avian influenza, severe acute respiratory syndrome, (SARS), influenza A (H1N1), Ebola or another epidemic. Any such occurrences could cause severe disruption to our daily operations at our pet hospitals, fulfillment infrastructure, offline stores, and other facilities and functions, and may even require a temporary closure of our facilities or suspension of certain services or operations. In recent years, there have been outbreaks of epidemics in China and globally. For example, in early 2020, in connection with the intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals infected with or suspected of having COVID-19, prohibiting residents from free travel, encouraging employees of enterprises to work remotely from home and cancelling public activities, among others. The COVID-19 pandemic has also resulted in temporary closure of many corporate offices, retail stores, manufacturing facilities and factories across China. At the early stage of the pandemic, we reduced operations in some of our hospitals and other businesses, which affected our revenues at the time. Since late 2021 and throughout 2022, there have been outbreaks of COVID-19 in many parts of China, particularly due to the Delta and Omicron variants. Strict restrictive measures were imposed, which affected our operations. For example, lockdowns imposed in cities across China caused disruptions to the normal operation of our pet hospitals and led to the temporary closures of certain pet hospitals. Our supply chain has also experienced

 

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disruptions. China began to modify its zero-COVID policy in late 2022, and most of the travel restrictions and quarantine requirements were lifted in December 2022. There were significant surges of COVID-19 cases in many cities in China during this time, which disrupted our and our suppliers’ operations and adversely affected our operational and financial performance in the fourth quarter of 2022, especially in December. For example, the number of our total pet hospitals declined from 1,942 as of September 30, 2022 to approximately 1,850 as of December 31, 2022. Mainly due to such impact of COVID-19, we currently estimate that the year-over-year growth of our revenues in 2022 could be below that of the first nine months of 2022 as compared with the first nine months of 2021. Based on our preliminary unaudited management accounts, our estimated total revenues for the eleven months ended November 30, 2022 were between RMB5.2 billion and RMB5.3 billion. We also estimate that the amount of our total revenues for December 2022 could be lower than that for October or November 2022. Because we do not have final results for the fourth quarter of 2022, our actual results when they become available could differ materially from the estimated results discussed herein. In addition, because of the preliminary nature of the information currently available to us regarding the fourth quarter of 2022, we may discover additional developments of which we are currently unaware. For details, please see “Prospectus Summary—Recent Developments.”

There remains uncertainty as to the future impact of the virus, especially in light of this change in policy. Future lockdowns or other restrictive measures that may be imposed, especially those imposed in major cities where we have a significant presence, may have a material impact on our operations and financial condition. The future impact of the pandemic remains highly uncertain and it may continue to adversely affect our revenues for an uncertain period of time. Despite our efforts to manage these matters, their ultimate effects also depend on factors beyond our knowledge or control, including the duration, severity, and recurrence of any outbreak and actions taken to contain its spread and mitigate its public health effects. The pandemic may continue to adversely affect our business, financial position, results of operations, and cash flows, including by resulting in (i) significant volatility in demand for our products and services, (ii) changes in consumer behavior and preferences, (iii) disruptions of our manufacturing and supply chain operations, (iv) disruption of our cost saving programs and restructuring initiatives, (v) limitations on our employees’ ability to work and travel, and (vi) changes to economic or political conditions in markets in which we operate. In addition, the operations of our pet hospitals, stores, FDCs, warehouses and continued veterinary education institutions, among other things, could be in the future, substantially disrupted by governmental policies ordering shutdowns or by the inability of our employees to travel to work. Our expansion plans for pet care services and FDCs and our plan to expand internationally may also be delayed by or become costlier due to the continuing spread of COVID-19. Such disruptions and delays or increased costs in our expansion may negatively impact our financial performance and slow our future growth. The uncertainty around the duration of business disruptions and the extent of the spread of the virus in China and to other areas of the world will likely continue to adversely impact the national or global economy and negatively impact consumer spending. Any of these outcomes could have a material adverse impact on our business, financial condition, results of operations, and ability to execute and capitalize on our strategies. The full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, any long-term health impacts on any partners who have been infected with COVID-19, its impact on capital and financial markets, and any new information that may emerge concerning the severity of the virus and its spread to other regions, as well as the actions taken to contain it, among others.

In addition, public health issues such as H1N1 flu, avian flu, or another epidemic, and natural disasters such as hurricanes, tornadoes, floods, earthquakes, and other adverse weather and climate conditions, and events such as local protests, war or civil unrest in a country in which our vendors are located, terrorist or military activities disrupting transportation, communication, or utility systems, or cyberattacks against or other disruptions to the operation of banks with which we hold accounts, whether occurring in China or abroad, could disrupt our operations or the operations of one or more of our vendors, or could severely damage or destroy one or more of our hospitals or FDCs located in the affected areas. For example, day-to-day operations, particularly our ability to receive products from our vendors or transport products to our FDCs, could be adversely affected, or we could be required to close hospitals or FDCs in the affected areas or in areas served by the affected FDC. These factors

 

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could also cause consumer confidence and spending to decrease or result in increased volatility in China and global financial markets and economy. These or other occurrences could significantly impact our operating results and financial performance.

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

We intend to hire additional qualified employees to support our business operations and planned expansion. In the meantime, we may lose our existing employees for various reasons. Our future success depends, to a significant extent, on our ability to recruit, train and retain qualified personnel, particularly technical, marketing and other operational personnel with experience in the pet care industry. Our experienced mid-level managers are instrumental in implementing our business strategies, executing our business plans and supporting our business operations and growth. The effective operation of our managerial and operating systems, customer service center and other back office functions also depends on the hard work and quality performance of our management and employees. Since our industry is characterized by high demand and intense competition for talents and labor, we can provide no assurance that we will be able to attract or retain qualified staff or other highly skilled employees that we will need to achieve our strategic objectives. Labor costs in China have increased with China’s economic development, particularly in the large cities where we have business operations. As we have a large offline network of pet hospitals, FDCs and warehouses, we are more vulnerable to labor costs increases than that of many of our competitors, which may put us at a competitive disadvantage. If the compensation package offered by us is not competitive in the market, we may not be able to provide sufficient incentives to or maintain stable and dedicated operational staffs and other labor support. Any failure to address these risks and uncertainties could materially and adversely affect our results of operations and financial performance. In addition, our ability to train and integrate new employees into our operations may also be limited and may not meet the demand for our business growth on a timely fashion, or at all, and rapid expansion may impair our ability to maintain our corporate culture.

We may experience difficulties recruiting and retaining skilled veterinarians due to shortages that could disrupt our business.

The successful growth of our pet care services business depends on our ability to recruit and retain skilled veterinarians and other veterinary technical staff. Our continued veterinary education institutions and programs provide a source and training platform for veterinary talents, but we still face competition from other pet care services providers in the labor market for veterinarians. From time to time, we may experience shortages of skilled veterinarians in markets in which we operate our pet care services business, which may require us or our affiliated veterinary practices to increase wages and enhance benefits to recruit and retain enough qualified veterinarians to adequately staff our pet care services operations. If we are unable to recruit and retain qualified veterinarians, or to control our labor costs, our business, financial condition, and results of operations may be adversely affected. If our labor costs increase, we may not be able to raise our rates for our products and services to offset these increased costs. Our failure to recruit and retain qualified veterinarians, or to control our labor costs, could have a material adverse effect on our business, financial position, results of operations, and cash flows.

The wide variety of payment methods that we accept subjects us to third-party payment processing-related and other risks.

We accept a wide variety of payment methods, including bank transfers and online payments through various third-party online payment platforms such as Alipay, Weixin Pay and UnionPay, in order to ensure smooth customer experience. For certain payment methods, we pay varying service fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud, money laundering and other illegal activities in connection with the various payment methods we accept. In addition, some of our customers are not familiar or comfortable with electronic forms of payments. In rare cases, they may

 

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pay us cash while our employees process electronic payments for them, which could subject us to allegations of generating inaccurate sales.

We are also subject to various regulations, rules and requirements, regulatory or otherwise, governing online payment processing and fund transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply with. 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 fund transfers or facilitate other types of online payments, and our business, financial condition and results of operations could suffer as a result.

Misconduct or illegal actions of our third-party suppliers, merchants or other business partners, or deterioration in our relationship with partners, could harm our reputation, business, financial condition and results of operations.

We work with third parties in providing many of our services and products on our platform, such as third-party suppliers, third-party online local services platforms, and third-party logistic service providers. Certain third-party partners operate a small number of our hospitals. We carefully select our third-party suppliers, merchants, service providers and business partners, but we are not able to fully control their actions. If these third parties fail to perform as we expect, experience difficulty meeting our requirements or standards, fail to conduct their business ethically, fail to provide satisfactory services to our customers, receive negative press coverage, violate applicable laws or regulations, breach the agreements with us, or if the agreements we have entered into with the third parties are terminated or not renewed, it could damage our business and reputation. In addition, if such third-party service providers cease operations, temporarily or permanently, face financial distress or other business disruptions, increase their fees, or if our relationships with them deteriorate, we would suffer from increased costs, be involved in legal or administrative proceedings with or against our third-party service providers and experience delays in providing customers with similar services until we find or develop a suitable alternative. Furthermore, if we are unsuccessful in identifying high-quality partners, or establishing cost-effective relationships with them, or effectively managing these relationships, our business and results of operations would be materially and adversely affected.

We may be held liable for third party information or content displayed on, retrieved from or linked to our platforms. The data we collect and use may be inaccurate or incomplete due to errors or on the part of our employees or third-party information providers, or frauds. Our failure to ensure the accuracy and integrity of our data, regardless of its source, could undermine customer trust, result in further administrative penalties and adversely affect our business, financial position and results of operations.

In addition, as we operate a small portion of our hospitals with partners with a minority stake in such hospitals, the interests of such partners may not always align with ours, and they may have different visions, beliefs or strategies for operating the hospitals than ours. As a result, their operational methods and activities may not be in our interest and may conflict with the group standards, strategies and goals. Furthermore, our relationship with those partners may deteriorate and disputes may arise. In such event, the partners may refuse to collaborate with us according to the terms of our partnership and we may lose control over the operation of the relevant hospitals. The services provided in those hospitals may then deviate from our standards and guidelines, which in turn could tarnish our reputation. The partners may also terminate our partnership and even engage in intentional activities to sabotage the operation of our hospitals and our brand name. We may even be involved in legal litigation in relation to such event. Consequently, our reputation, business, financial position and results of operations may be materially and adversely affected.

Consolidation among pet product vendors may decrease our sales and profitability.

Consolidation among animal health products vendors could result in our vendors increasing their market share, which could give them greater pricing power and make it easier for such vendors to sell their products

 

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directly to animal health customers, both of which would decrease our net sales and profitability and increase the competition for our customers. Finally, if our current vendors consolidate, their management teams are more likely to change, which could result in adverse changes in distribution practices.

The surviving companies from consolidation transactions may have high market shares with respect to certain animal health products, and they could use their increased leverage in the channel to negotiate terms with distributors that are worse to the distributor than the terms that we have been able to negotiate with existing suppliers individually while they are competing with each other. There also remains uncertainty related to any changes to the terms that may be included in the vendor contracts we negotiate for the upcoming year as a result of those transactions. There is also a possibility of product disruption as those consolidated companies integrate their operations which could adversely impact our financial results.

Our operations and the pet industry are subject to extensive governmental regulation.

Our operations and the pet industry are subject to various national and local laws and regulations in China and laws and regulations of foreign jurisdictions into which we expand our business. These laws and regulations govern, among other things, our relationships with employees, including overtime, terms and conditions of employment and working conditions; the procurement, distribution, use and storage of foods, drugs, and controlled substances intended for animal use; our businesses that provide pet care services, including animal treatment and diagnosis services; the transportation, handling, display and sale of animals; emissions to air and water and the generation, handling, storage, discharge, transportation, disposal, and remediation of waste and hazardous materials; the processing, storage, distribution, safety, advertising, labeling, promotion, and import or export of our products and services; providing services to our customers; contracted services with various third-party providers; credit card, debit card and mobile payment processing; the handling, security, protection, and use of customer and associate information; pricing; tax; lease of property; use of intangible assets; and the licensing and certification of services. See “Regulation.”

Violations of or liability under applicable laws and regulations may result in administrative, civil or criminal fines, penalties or sanctions against us, revocation or modification of applicable permits, licenses, or authorizations, environmental, health and safety investigations or remedial activities, voluntary or involuntary product recalls, warning or cease and desist orders against operations that are not in compliance, or third-party liability claims against us, among other things. Such laws and regulations generally have become more stringent over time and may become more so in the future, and we may incur, directly or indirectly, material costs to comply with current or future laws and regulations or in any required product recalls. Some of these laws and regulations are subject to varying and uncertain interpretations, application, and enforcement by courts and regulatory authorities with broad discretion, which can mean that our efforts to maintain compliance in all jurisdictions are not always successful. Liabilities under, costs of compliance with, and the impacts on us of any alleged or determined non-compliance with any such laws and regulations could materially and adversely affect our business, reputation, financial condition, and results of operations. In addition, changes in the laws and regulations to which we are subject could impose significant limitations and require changes to our business, which may increase our compliance expenses, make our business costlier and less efficient to conduct, and compromise our growth strategy. Local governments in certain regions in which we operate may impose local regulations or rules that are unfriendly to pets or pet parentship, which would negatively affect our business there. In addition, although we are not legally bound by guidelines or policies made by veterinary and other professional associations, we may voluntarily comply with such guidelines or policies and our operations may be affected by changes in such guidelines or policies. We cannot assure you that the PRC central government, local governments or professional associations will not adopt additional and more stringent laws, regulations, policies, guidelines or other measures in the future, nor can we assure you when and whether the existing laws, regulations, policies, guidelines and other measures will be eased or otherwise changed. Such changes may adversely affect our business and results of operations.

 

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Certain of our products and solutions in relation to online local services and online and offline continued education services may be subject to value-add telecommunications-related regulations, other internet-related regulations or education-related regulations, which are foreign prohibited or restricted areas, and future legislative or regulatory actions could adversely affect our business, results of operations and financial condition.

Our businesses on “Rvet” platform are subject to value-add telecommunications-related regulations and other internet-related regulations and our online and offline continued education services may be subject to education-related regulations and internet-related regulations. Such businesses may be required to apply for and obtain additional licenses or permits for our operations as the interpretation and implementation of current PRC laws and regulations are still evolving, and new laws and regulations may also be promulgated. Additionally, as our online local services on “Rvet” platform and offline and online continued veterinary education services may be deemed to be foreign prohibited or restricted business under the current PRC laws and regulations, we may not be able to obtain the required license or permits at all, or we may need to adjust our current structure to continue operating such business.

We have obtained a Value-added Telecommunications Business Operating License for online data processing and transaction processing services to conduct our online local services business on “Rvet” platform and have filed with provincial education regulatory authority as an Education App for “Zhiyue” platform. We have obtained a Value-added Telecommunications Business Operating License (internet information services) through one of our PRC subsidiaries. We may be required to apply for the Value-added Telecommunications Business Operating License (internet information services) issued by the MIIT for companies with foreign shareholders, to conduct our online local services on “Rvet” platform and online education services on “Zhiyue” platform. Additionally, we may be required to apply for and obtain additional licenses, permits or recordation, given the significant uncertainties of the interpretation and implementation of certain regulatory requirements applicable to our online local services on “Rvet” platform, online continued veterinary education business on “Zhiyue” platform, and offline continued veterinary education business, such as the License for Online Transmission of Audio-Visual Programs, the Internet Culture Operation License, the Online Publishing Service Permit, the Production and Operation of Radio and TV Programs Permit, the Private School Operation Permit.

We cannot assure you that our application will be approved in a timely manner or at all, due to complex procedural requirements and policies, or that if we are required to obtain any of these additional licenses, permits or approvals, or we will be able to do so in a timely manner, if at all, because the approvals of such licenses have significant uncertainties and some of such business are foreign prohibited or restricted business under the current PRC laws and regulations. For example, online transmission of audio-visual programs, internet culture activities, online publishing and production and operation of radio and TV programs are foreign prohibited, and the license for Online Transmission of Audio-Visual Programs will only be granted to a state-owned or state-controlled entity. Any non-compliance may result in fines or other penalties being imposed on us. We may also be ordered to stop operating such business through our PRC subsidiaries for violation of foreign investment regulations and policies, and accordingly, we may need to adjust our current structure. See “Regulation.” There is no assurance that national or local PRC authorities will not adopt different enforcement practice, or any PRC government will not issue more explicit interpretation and rules or promulgate new laws and regulations from time to time to further regulate the education or value-added telecommunications industry or other aspects of internet industry, which may subject us to additional licensing requirements or structure reorganization to continue to operate our business.

We plan to continually enrich the service offerings on our platform though our PRC subsidiaries. However, we cannot assure you that we will be able to obtain the requisite license for providing online pet-related services and education services on a timely basis or at all, or the relevant government authorities will allow us to continually operate such business through our PRC subsidiaries given the foreign investment regulations and policies. Our inability to obtain such license or any delay in obtaining such license could have a material and adverse impact on our business and results of operations. If we are asked to cease or adjust such business for

 

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violation of foreign investment regulations and policies, our business and results of operations could also be materially and adversely impacted.

If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may suffer.

We seek to optimize inventory levels to operate our business successfully. Nonetheless, we are exposed to inventory risks that may adversely affect our operating results as a result of new product launches, vendor reliability, changes in customer preferences or demand, changes in consumer spending patterns with respect to our products, seasonality. We endeavor to accurately predict these trends and avoid over or under stocking products that we sell. Demand for products, however, can change between the time inventory is ordered and the date of sale and we may be unable to accurately forecast such changes. Any of the events above could result in out-of-stock or excess merchandise inventory levels that could harm our sales and the results of operations.

We may be subject to liability for placing advertisements with content that is deemed inappropriate or misleading under PRC laws.

PRC advertising laws, rules and regulations require advertisers, advertising operators and advertising distributors to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in compliance with applicable law. Violation of these laws, rules or regulations may result in penalties, including fines, confiscation of advertising fees and orders to cease dissemination of the advertisements. Additionally, we may be subject to claims by customers misled by information on our mobile apps, website or other portals where we place advertisements. However, we cannot assure you that we will be in full compliance with such advertising laws and regulations and will not be subject to penalties in the future.

Further, as we provide online and offline marketing and information services in relation to veterinary drugs to third-party partners, helping them design and implement effective marketing strategies, to certain extent, we also rely on such partners to comply with the above advertising laws and regulation, such as advertisements of veterinary drugs shall be approved before being placed. If the relevant advertisement fails to fully comply with the relevant advertising rules, we may subject to civil claims, fines and other legal or administrative sanctions even if it is the third-party that causes such failure.

Significant impairment of our goodwill and intangible assets could materially impact our financial position and results of our operations.

Our goodwill and intangible assets primarily arise from our acquisitions. As of September 30, 2022, our goodwill was RMB3,978.9 million (US$559.3 million) and represented 35.7% of our total assets. We are required to review our goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate evidence of impairment. The application of a goodwill impairment test requires significant management judgment. If our estimates and judgment are inaccurate, the fair value determined could be inaccurate and the impairment may not be recognized in a timely manner. If the fair value declines, we may need to recognize goodwill impairment in the future, which could have a material adverse effect on our results of operations. In addition, we perform valuation of each identifiable intangible assets arising from business combination. The intangible assets are expensed or amortized using the straight-line approach over the estimated economic useful lives of the assets. There can be no assurance that we will not be required to record impairments on goodwill or intangible assets in the future or that such impairments will not be material. Any significant impairment losses charged against our goodwill or intangible assets could have a material adverse effect on our business, financial condition and results of operations. In addition, our lack of material tangible assets may expose us to certain risks, including decreased ability to obtain debt financings or hedge against fluctuations in value of our intangible assets.

 

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If our expansion into new geographical areas is not successful, our business and prospects may be materially and adversely affected.

We have a track record of successfully expanding into new geographical areas across China. We cannot assure you, however, that we will be able to maintain this momentum in the future. In particular, we may fail to implement our strategy of expanding overseas. As the conditions of the pet care markets in any new local markets, especially those outside of China, may vary significantly from where we currently operate our platform, expansion into new geographical areas involves new risks and challenges. Our lack of familiarity with these geographical areas may make it more difficult for us to keep pace with the evolving market conditions. In addition, there may be one or more existing market leaders in any geographical area that we decide to expand into. If we fail to cooperate with them, such companies may be able to compete more effectively than us by leveraging their experience in doing business in that market as well as their familiarity with the local customers and suppliers.

Our business generates and processes a large amount of data, and we are required to comply with PRC laws relating to cybersecurity, information security, privacy and data protection. The improper use or disclosure of data could have a material and adverse effect on our business and prospects.

Our business generates and processes a large quantity of data. We face risks inherent in handling and protecting large volume of data. In particular, we face a number of challenges relating to data from transactions and other activities on our platforms, including:

 

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

 

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

 

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

In addition, some of our third-party service providers such as logistics and delivery service providers have access to personal data or other sensitive data of our customers. If the information security efforts of such third-party service providers are compromised, or if they fail to detect and respond to data security breaches, we could be subject to legal or regulatory action, including direct claims by customers or other injured parties, class actions, shareholder derivative suits and governmental action. A data security breach of our third-party service providers may negatively affect our reputation, increase our insurance costs or result in loss of coverage, and we may need to incur additional significant costs to protect against information security breaches.

The PRC regulatory and enforcement regime with regard to data security and data protection is evolving. We may be required by Chinese governmental authorities to share personal information and data that we collect to comply with PRC laws relating to cybersecurity. All these laws and regulations may result in adjustment in our business, approval requirements for certain of our operations or this offering, and additional expenses to us and subject us to negative publicity which could harm our reputation and negatively affect the trading price of the ADSs. There are also uncertainties with respect to how these laws will be implemented in practice. PRC regulators have been increasingly focused on regulation in the areas of data security and data protection. See “Risk Factors—Risks Related to Doing Business in China—Any failure to comply with the various applicable laws and regulations related to data security, cybersecurity and personal information and privacy protection could affect our offshore listing and lead to liabilities, penalties or other regulatory actions, which could have a material and adverse effect on our business, financial condition and results of operations” and “Regulation—Regulations on Cyber Security and Privacy.” Furthermore, on August 20, 2021, the Standing Committee of the National People’s Congress promulgated the Personal Information Protection Law, which became effective on November 1, 2021. The Personal Information Protection Law requires, among others, that the processing of personal information should have a specific and reasonable purpose, and shall be conducted in a way that has the

 

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least impact on personal rights and interests, and should be directly related to the processing purpose, and that collecting personal information shall be limited to the minimum scope for achieving the processing purpose. These laws and regulations are continually evolving and not always clear, and the measures we take to comply with these laws, regulations and industry standards may not always be effective. We cannot assure you that we will comply with such laws and regulations regarding cybersecurity, information security, privacy and data protection in all respects and any failure or perceived failure to comply with these laws, regulations or policy may result in inquiries, penalties and other proceedings or actions against us by governmental authorities, customers or others, such as warnings, fines, making certain required rectification, service suspension or removal of our apps from the relevant app stores and/or other sanctions, as well as negative publicity and damage to our reputation.

Historically, we may not have fully complied with the laws and regulations in relation to data privacy and personal information protection. Although we have adopted policies and measures to comply with the relevant laws and regulations on data privacy and personal information protection and have taken measures to protect the data security and minimize the risk of data loss, we cannot assure you that the measures we have taken are always sufficient and effective. If we are unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.

Restrictions imposed in reaction to outbreaks of animal diseases could have a material adverse effect on our business, financial condition and results of operations.

If animal diseases, such as rabies, toxoplasmosis, brucellosis, Lyme disease, leptospirosis, flea allergic dermatitis, sarcoptic mange, trichomoniasis, mad cow disease, foot-and-mouth disease, or highly pathogenic avian influenza, also known as “bird flu,” impact the availability of certain ingredients our vendors use in products, our vendors may be required to locate alternative sources for those ingredients. Those sources may not be available to sustain our sales volumes, may be costlier, and may affect the quality and efficacy of our products. If outbreaks of such animal diseases, or the regulation or publicity resulting therefrom impacts the cost of certain ingredients we have in our products, or the cost of the alternative ingredients necessary for our products as compared to our current costs, we may be required to increase the selling price of our products to avoid margin deterioration. However, we may not be able to charge higher prices for our products without negatively impacting future sales volumes.

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

We have incurred significant expenses on a variety of different marketing and brand promotion efforts designed to expand our customer base, increase the transaction volume on our platform and enhance our brand recognition. Our brand promotion and marketing activities may not be well received by customers and may not realize the levels of effectiveness that we anticipate. In 2020, 2021 and the nine months ended September 30, 2021 and 2022, the largest component of our sales and marketing expenses was advertising and marketing promotion expenses, which amounted to RMB101.9 million, RMB165.2 million (US$23.2 million), RMB107.4 million and RMB89.5 million (US$12.6 million), respectively. Marketing approaches and tools in the pet care 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 customer preferences. Failure to refine our existing marketing approaches or to introduce new marketing approaches in a cost-effective manner could reduce our market share, cause our net revenues to decline and negatively impact our profitability.

Our success depends on the continuing and collaborative efforts of our management team, and our business may be severely disrupted if we lose their services.

Our success heavily depends upon the continued services of our management. In particular, we rely on the expertise and experience of Mr. Yonghe Peng, our founder, co-chairman of the board of directors and president,

 

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and other executive officers. If one or more of our senior management were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all, and our business, financial condition and results of operations may be materially and adversely affected. If any of our senior management joins a competitor or forms a competing business, we may lose customers, suppliers, know-how and key professionals and staff members. Our senior management has entered into employment agreements and confidentiality and non-competition agreements with us. However, if any dispute arises between our officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all. In addition, we do not have key-man insurance for any of our executive officers or other key personnel. Events or activities attributed to our executive officers or other key personnel, and related publicity, whether or not justified, may affect their ability or willingness to continue to serve our company or dedicate their full time and efforts to our company and negatively affect our brand and reputation, resulting in an adverse effect on our business, operating results and financial condition.

If we fail to adopt new technologies to changing customer requirements or emerging industry standards, our business may be materially and adversely affected.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our mobile apps and websites. The industry we operate in is characterized by rapid technological evolution, changes in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices, such as mobile internet, in a cost-effective and timely way. In recent years, we invested in the development of many new technologies and business initiatives, such as AI and big data. The development of websites, mobile apps and other proprietary technologies entails significant technical and business risks. We cannot assure you that we will be able to successfully develop or effectively use new technologies, recoup the costs of developing new technologies or adapt our websites, mobile apps, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to develop technologies successfully or adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

Any disruption to our technology systems and resulting interruptions in the availability of our website, applications, platform or services could adversely affect our business and results of operations.

The efficient operation of our business is dependent on our information systems. In particular, we rely on our information systems to effectively manage our financial and operational data, to maintain our in-stock positions, and to transact the sale of our products through online or offline channels. The failure of our information systems to perform as designed, loss of data, undetected software or human errors, bugs or vulnerabilities, or any interruption of our information systems for a significant period of time could disrupt our business.

Our operations also depend on our ability to maintain and protect the computer systems we use to manage our purchase orders, inventory levels, websites, mobile applications, accounting functions, and other critical aspects of our business. Our systems are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures, terrorist and cyber-attacks, and similar events. Our disaster recovery planning may not be sufficient to adequately respond to any such events. In addition, we may have inadequate insurance coverage to compensate for any related losses and expenses. Any of these events could damage our reputation, disrupt our business, and be expensive to remedy.

We continue to invest in our information systems and IT infrastructure. Enhancement to or replacement of our major financial or operational information systems could have a significant impact on our ability to conduct

 

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our business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information systems. It may also require us to divest resources to ensure that implementation is successful. We can make no assurances that the costs of investments in our information systems will not exceed estimates, that the systems will be implemented without material disruption, or that the systems will be as beneficial as predicted. If any of these events occur, our results of operations could be adversely affected.

Any breaches to our security measures, including unauthorized access, computer viruses and “hacking” may adversely affect our database and reduce use of our services and damage our reputation and brand names.

The massive data that we have processed and stored make us or third-party service providers who host our servers a target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins, or similar disruptions. We have been subject to an alleged cyber-attack, and we may experience breaches or attempts of breaches to our system or the systems of third-party service providers who host our servers in the future. Breaches to our security measures or the systems of our third-party service providers, including computer viruses and hacking, may result in significant damage to our hardware and software systems and database, disruptions to our business activities, inadvertent disclosure of confidential or sensitive information, interruptions in access to our platform, and other material adverse effects on our operations, during transfer of data or at any time, and result in persons obtaining unauthorized access to our systems and data. Our systems may be subject to infiltration as a result of third-party action, employee error, malfeasance or otherwise. While we have taken steps to protect the confidential information that we have access to, 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 platform could cause confidential customer and investor information to be stolen and used for criminal 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 any third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with customers and investors could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.

We rely on certain key operating metrics to evaluate the performance of our business, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

We regularly review our operating metrics in relation to our customers and transaction volumes to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using our internal data as well as third-party platform’s data, have not been validated by an independent third party, and may not be indicative of our future operation results. Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by other companies due to differences in methodology. If we discover material inaccuracies in the operating metrics we use, or if they are perceived to be inaccurate, our reputation may be harmed and our evaluation methods and results may be impaired, which could negatively affect our business.

Failure to establish, maintain, protect, and enforce our intellectual property and proprietary rights or prevent third parties from making unauthorized use of our technology or our brands could harm our competitive position or require us to incur significant expenses to enforce our rights.

Our trademarks are valuable assets that support our brand and consumers’ perception of our products. We rely on trademark, copyright, trade secret, patent, and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our trademarks, trade names, proprietary information, technologies, and processes. We might not be able to obtain broad protection in the PRC or in other jurisdictions for all of our intellectual property. The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Moreover, the steps we take to protect our intellectual

 

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property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights, and we may be unable to broadly enforce all of our trademarks. Any of our patents, trademarks, or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Our patent and trademark applications may never be granted. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may be unable to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or intellectual property rights. Further, our nondisclosure agreements and confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes and may not provide an adequate remedy in the event of unauthorized disclosure of such information, which could harm our competitive position. In addition, effective intellectual property protection may be unavailable or limited for some of our trademarks and patents in some foreign countries. We might be required to expend significant resources to monitor and protect our intellectual property rights. For example, we may need to engage in litigation or similar activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others. However, we may be unable to discover or determine the extent of any infringement, misappropriation, or other violation of our intellectual property rights and other proprietary rights. Despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights. Any such litigation, whether or not resolved in our favor, could require us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. If we fail to protect our intellectual property, our business, financial condition and results of operations may be materially adversely affected.

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

We have obligations with respect to the non-use and non-disclosure of third-party intellectual property. The steps we take to prevent misappropriation, infringement, or other violation of the intellectual property of others may not be successful. From time to time, third parties have asserted intellectual property infringement claims against us and may continue to do so in the future. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. While we believe that our products and operations do not infringe in any material respect upon proprietary rights of other parties and/or that meritorious defenses would exist with respect to any assertions to the contrary, we may from time to time be found to infringe on the proprietary rights of others.

Any claims that our products, services or marketing materials infringe the proprietary rights of third parties, regardless of their merit or resolution, could be costly, result in injunctions against us or payment of damages by us, and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could, among other things, be required to:

 

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pay substantial damages;

 

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cease the manufacture, use, distribution, or sale of the infringing products, operations, or services;

 

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discontinue the use of the infringing methods or processes;

 

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expend significant resources to develop non-infringing products, operations, or services or re-brand our business and products; and

 

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obtain a license from the third party claiming infringement, which may not be available on commercially reasonable terms, or may not be available at all.

If any of the foregoing occurs, our ability to compete could be affected or our business, financial condition, and results of operations may be materially adversely affected.

 

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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 our ADSs may be materially and adversely affected.

Prior to this offering, we were a private company with limited accounting and financial reporting personnel and other resources with which to address our internal control over financial reporting. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements as of and for the years ended December 31, 2020 and 2021, we and our independent registered public accounting firm identified three material weaknesses in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB, a “material weakness” is a deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified relate to our (i) lack of sufficient accounting and financial reporting personnel with the requisite knowledge, skills and experience in application of U.S. GAAP and SEC reporting requirement, (ii) lack of financial accounting and reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting requirements and (iii) ineffective control environment and monitoring to support the U.S. GAAP and SEC financial reporting process, that have been identified. To remediate the material weaknesses, we have adopted measures to improve our internal control over financial reporting, including, among others: (i) hiring additional qualified accounting and financial reporting personnel with appropriate knowledge, skills and experience in U.S. GAAP accounting and SEC reporting; and (ii) organizing regular training for our accounting staffs, especially training related to U.S. GAAP and SEC reporting requirements. In 2021, we hired two employees dedicated to the preparation of consolidated financial statements and SEC reporting, both of whom have prior work experience in audit firms and the finance departments of public companies. Moreover, in order to enhance the centralized management of the financial records of our group, we established a financial shared service center in Wuhan in 2021 with 35 employees as of September 30, 2022. Together with our Chengdu financial shared service center, as of September 30, 2022, our financial shared service centers had a total of 187 employees. We also set up a financial data center with three employees to integrate the financial information of our group with business operations through a systematic approach. In addition, in March 2022, we hired a new deputy financial director with seven years of prior work experience in the finance departments of multinational enterprises, including over five years of managerial experience, for our Chengdu financial shared service center. Going forward, we plan to continue to enhance the centralized management of our financial records and the quality control of our financial reporting, and provide our accounting and financial reporting staff with extensive training resources. We have been training our accounting and financial reporting staff primarily through on-the-job trainings. In July 2022, we purchased relevant online courses and memberships for these employees to facilitate their training and self-learning. We mandate a minimum of 40 hours of learning of these courses per annum for each of the senior members of our accounting and financial reporting team. As of September 30, 2022, the senior members of our accounting and financial reporting team have completed an aggregate of 150 hours of learning. We plan to organize regular internal training sessions related to U.S. GAAP and SEC reporting. We also plan to adopt additional measures to improve our internal control over financial reporting, including, among others, (i) creating a U.S. GAAP accounting and reporting policies and procedures manual, which will be maintained, reviewed and updated, on a regular basis, to the latest U.S. GAAP accounting standards, (ii) further hiring executive accounting personnel with strong knowledge and experience in U.S. GAAP accounting and SEC reporting as necessary; (iii) establishing “tone at the top” entity level controls, including but not limited to an audit committee with at least one qualified financial expert and an internal audit department, with the oversight of the board of directors with proper composition; and (iv) identify the relevant controls that address the quality of the information generated and used in the performance of key controls supporting the financial statement line items and footnote disclosure. Our internal control team, consisting of nine members as of September 30, 2022, oversees the establishment of the internal control system of our group, the formulation and implementation of internal control process, identification and resolution of key issues and risk management relating to internal control. At the end of 2021, we hired an internal control consulting firm to conduct a comprehensive review and evaluation of our financial management process

 

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in terms of management system, internal control process, operating procedures, information system and others. Based on the review and recommendations of the internal control consultants, we have formulated a detailed optimization plan for our internal control and financial reporting system, and have prepared an initial draft of the U.S. GAAP accounting and reporting policies and procedures manual for internal approval. We plan to adopt such manual and complete the optimization plan by the end of 2022. We also plan to embed internal control responsibility into the fabric of our culture, business, processes, and procedures by implementing a control self-assessment program as part of our ongoing evaluations. We will also establish an audit committee with at least one qualified financial expert immediately upon the effectiveness of our registration statement on Form F-1, of which this prospectus is a part. However, we cannot assure you that these measures may fully address the material weaknesses in our internal control over financial reporting. Although we have been actively taking measures to remediate the material weaknesses identified and have been able to successfully implement certain initiatives, the remediation, especially with respect to the lack of sufficient accounting and financial reporting personnel, has been, and will continue to be, subject to various uncertainties. The recruitment market has been relatively inactive as a result of the ongoing COVID-19 pandemic. In addition, there is an inherent talent pool shortage for personnel with U.S. GAAP accounting and SEC financial reporting knowledge and related prior work experience. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act of 2002 for purposes of identifying and reporting any material weakness in our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional material weaknesses may have been identified.

Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report in our second annual report on Form 20-F after becoming a public company. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated, or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation, testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other or more material weaknesses 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. 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 speaking, 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. We may also be required to restate our financial statements from prior periods.

 

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

We are subject to fluctuations in foreign exchange rates between our reporting currency, Renminbi, and currencies of other countries in which certain of our assets are denominated. Such fluctuations may result in significant increases or decreases in our reported revenue and other results as expressed in Renminbi, and in the reported value of our assets, liabilities and cash flows. In addition, currency fluctuation may adversely affect receivables, payables, debt, firm commitments and forecast transactions denominated in foreign currencies. Fluctuation in exchange rates, depreciation of local currencies, changes in monetary and/or fiscal policy or inflation in the countries in which we operate or sell our products could have a material adverse effect on our business, financial condition and results of operations.

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. 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. Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive into Renminbi to pay our operating expenses, appreciation of Renminbi against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. 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. We expect that we will continue to be exposed to foreign currency exchange risk to the extent that our hedging arrangements do not cover all of our exposure to foreign currency exchange risk. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

Failure to comply with the terms of our indebtedness could have an adverse effect on our cash flow and liquidity.

As of December 31, 2020 and 2021 and September 30, 2022, our short-term bank borrowings were RMB350.0 million, RMB1,392.3 million (US$195.7 million) and RMB1,893.8 million (US$266.2 million), respectively. Our short-term bank borrowings consist of credit loan with a weighted average annual interest rate of 5.03%, 3.78% and 3.96% as of December 31, 2020 and 2021 and September 30, 2022, respectively, and original maturity terms of one year. Under the terms of our indebtedness and under any debt financing arrangement that we may enter into in the future, we are, and may be in the future, subject to covenants that could, among other things, restrict our business and operations. If we breach any of these covenants, our lenders under our future credit facilities will be entitled to accelerate our debt obligations. Any default under our future credit facilities could require that we repay these debts prior to maturity as well as limit our ability to obtain additional financing, which in turn may have a material adverse effect on our cash flow and liquidity.

Our results of operations may be subject to fluctuations due to seasonal or operational reasons.

Our quarterly operating results may fluctuate due to the timing of expenses, hospital or store openings or closures, and other factors.

Our expansion plans, including the timing of new pet hospitals, and related pre-opening costs, the amount of net sales contributed by new hospitals, and the timing of and estimated costs associated with hospital closings or

 

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relocations, if any, may cause our quarterly results of operations to fluctuate. Further, new pet hospitals and service offerings tend to experience higher payroll, advertising and other store-level expenses as a percentage of net sales than more mature hospitals, and such openings also often contribute to lower pet hospital operating margins until those hospitals become established, which may result in quarterly fluctuations in operating results. Quarterly operating results are not necessarily accurate predictors of performance.

Quarterly operating results may also vary depending on a number of factors, many of which are outside our control, including:

 

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holidays;

 

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changes in our pricing policies or those of our competitors;

 

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our sales and channels mix and the relevant gross margins of the products and services sold;

 

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the hiring and retention of key personnel;

 

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wage and cost pressures;

 

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costs related to acquisitions of businesses; and

 

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general economic factors.

We plan to grant options under our share incentive plan, which may result in increased share-based compensation expenses.

We adopted a share incentive plan in June 2021, or the 2021 Plan, for the purpose of granting share-based compensation awards to employees, directors, and consultants to incentivize their performance and align their interests with ours. Under the 2021 Plan, we are authorized to grant options and other types of awards. The maximum number of ordinary shares that may be issued pursuant to all awards under the 2021 Plan is 500 million. See “Management—Share Incentive Plan.” As of December 31, 2022, options to purchase 175,626,852 ordinary shares and RMB30.0 million worth of ordinary shares based on the per share exercise price as specified in the award agreement were outstanding.

We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we plan 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.

Furthermore, perspective candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. Thus, our ability to attract or retain highly skilled employees may be adversely affected by declines in the perceived value of our equity or equity awards. Furthermore, there are no assurances that the number of shares reserved for issuance under our share incentive plans will be sufficient to grant equity awards adequate to recruit new employees and to compensate existing employees.

We have limited insurance coverage, which could expose us to significant costs and business disruption.

We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased insurance covering our inventory and fixed assets such as equipment, furniture and office facilities. We also provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance, maternity insurance and medical insurance for our employees. We do not maintain business interruption insurance, product liability insurance, malpractice liability insurance or key-man life insurance. We consider our insurance coverage to be in line with the industry norm in China. However, 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.

 

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We may, from time to time, be subject to legal proceedings during the course of our business operations.

We may be subject to legal proceedings from time to time in the ordinary course of our business, which could have a material adverse effect on our business, results of operations and financial condition. Claims arising out of actual or alleged violations of law could be asserted against us by consumers and businesses that utilize our services, by competitors, or by governmental entities in civil or criminal investigations and proceedings or by other entities. These claims could be asserted under a variety of laws, including but not limited to consumer finance laws, product liability laws, consumer protection laws, intellectual property laws, advertising laws, unfair competition laws, privacy laws, labor and employment laws, securities laws, real estate laws, tort laws, contract laws, property laws and employee benefit laws. We may also be subject to lawsuits due to actions by our hospital partners, or third-party providers of various services, including construction, logistics and delivery service and certain data services.

For example, we are currently subject to certain investment disputes, labor disputes, tort disputes, contract disputes, anti-competition related disputes, trademark related disputes and other types of disputes in the ordinary course of our business. These cases are still ongoing, but we believe these claims are without merit and we will defend ourselves accordingly. We are unable, however, to predict the outcome of these cases, or reasonably estimate a range of possible loss, if any, given the current status of the proceedings. We do not believe that any of these claims is material to our overall business operations. There is no guarantee that we will be successful in defending ourselves in legal and administrative actions or in asserting our rights under various laws. Even if we are successful in our attempt to defend ourselves in legal and administrative actions or to assert our rights under various laws, enforcing our rights against the various parties involved may be expensive, time-consuming and ultimately futile. These actions could expose us to negative publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including but not limited to suspension or revocation of licenses to conduct business.

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

COVID-19 had a severe and negative impact on the Chinese and the global economy in 2021 and 2022. Due to the impact of COVID-19 and other factors, the world economy has suffered a noticeable slowdown. Whether this will lead to a prolonged downturn in the economy is still unknown. Commercial activities throughout the world could continue to be curtailed with decreased consumer spending, business disruptions, interrupted supply chains and difficulties in travel. Our business has been adversely affected by the outbreak of COVID-19. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted.

Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2021. The conflict in Ukraine and the imposition of broad economic sanctions on Russia could raise energy prices and disrupt global markets. Unrest, terrorist threats and the potential for war may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

 

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The current tensions in international trade and rising political tensions, particularly between the U.S. and China, may adversely impact our business, financial condition, and results of operations.

There have been changes in international trade policies and rising political tensions, particularly between the U.S. and China, but also as a result of the conflict in Ukraine and sanctions on Russia. The U.S. government has made statements and taken certain actions that may lead to potential changes to U.S. and international trade policies towards China. While the “Phase One” agreement was signed between the United States and China on trade matters, it remains unclear what additional actions, if any, will be taken by the U.S. or other governments with respect to international trade, tax policy related to international commerce, or other trade matters. The situation is further complicated by the political tensions between the United States and China that escalated during the COVID-19 pandemic and in the wake of the PRC National People’s Congress’ decision on Hong Kong national security legislation and sanctions and restrictions imposed by the U.S. government on Chinese companies and citizens. Against this backdrop, China has implemented, and may further implement, measures in response to the Chinese trade policies, treaties, tariffs and sanctions and restrictions against Chinese companies initiated by the U.S. government. For example, the MOFCOM published Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures on January 9, 2021, which applies to cases where the extraterritorial application of foreign laws and measures violates international law and basic norms of international relations, and improperly prohibits or restricts PRC citizens, legal persons or other organizations from conducting normal economic, trade and related activities with third countries (regions) and their citizens, legal persons or other organizations. Rising trade and political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between China and other countries, which would have an adverse effect on global economic conditions, the stability of global financial markets, and international trade policies. It could also adversely affect the financial and economic conditions in the jurisdictions in which we operate, as well as our overseas expansion, our financial condition, and results of operations.

Expanding internationally is one of our growth strategies. Any rising trade and political tensions or unfavorable government policies on international trade and Chinese companies could delay our plan to expand internationally, impact our competitive position, or hinder our commercial activities in certain countries. In addition, our results of operations could be adversely affected if any such tensions or unfavorable government trade policies harm the Chinese economy or the global economy in general.

We face certain risks relating to the real properties that we lease.

We lease offices, operational places, warehouses and FDCs from third parties for our operations in China. Any defects in lessors’ title to the leased properties may disrupt our use of our offices, operational places, FDCs or warehouses, which may, in turn, affect our business operations. We had not been provided with certain building ownership certificates or the proofs of having the right to sublease the properties by our lessors. Some of our leased properties are located on collective lands which may not be used for construction or non-agricultural purpose, or on allocated lands which may not be leased for profit purpose without any approval. Further, our use of some of our leased properties is inconsistent with the legally specified use of the properties as provided in their titles. In addition, some of our leased properties had been mortgaged before we leased. There is a risk that the lender may have disputes with regards to the relevant debts mortgaged by the properties or the mortgagee may seek to enforce its security interests under the properties. The landlords may also default under the lease agreements, or choose to unilaterally terminate the lease. As a result, we may need to seek for an alternative lease, and our operation of business may be accordingly affected.

Under PRC law, lease agreements of commodity housing tenancy are required to be registered with the local construction (real estate) departments. As of the date of this prospectus, most of our lease agreements for our leased properties in China have not been registered with the relevant PRC government authorities, which may expose us to potential fines if we fail to remediate after receiving any notice from the relevant PRC government authorities. Failure to complete the lease registration will not affect the legal effectiveness of the lease

 

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agreements according to PRC law, but the real estate administrative authorities may require the parties to the lease agreements to complete lease registration within a prescribed period of time, and the failure to do so may expose us to potential warnings and penalties. As of the date of this prospectus, we have not received any notice, fines or penalties from the relevant authorities. We are taking measures to remediate the non-compliance described above and are actively monitoring related legal and regulatory risk exposures.

Risks Related to Doing Business in China

The PRC government’s significant oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our ADSs.

We conduct our business primarily in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and discretion over the conduct of our business, and may influence or intervene in our operations at any time. The PRC government has recently published new policies that significantly affected certain industries and we cannot rule out the possibility that it will in the future release regulations or policies that directly or indirectly affect our industry or require us to seek additional permission to continue our operations, which could result in a material adverse change in our operation and/or the value of our ADSs. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business. The Chinese government has exerted more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers. Such actions could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our ADSs to significantly decline or be worthless. For more details, see “—The approval or other administration requirements of the China Securities Regulatory Commission, or the CSRC, or other PRC governmental authorities may be required in connection with this offering under PRC law.”

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

A substantial 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 and by continued economic growth in China as a whole. The PRC 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 PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the PRC economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The growth rate of the Chinese economy has gradually slowed since 2010, and the impact of COVID-19 on the global and Chinese economy is likely to be severe. Any adverse changes in economic conditions in China, in the policies of the PRC 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 services and adversely affect our competitive position. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may 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

 

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regulations. In addition, the PRC government has significant authority to exert influence on the ability of a China-based issuer, such as our company, to conduct its business. Any prolonged slowdown in the global and Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

Uncertainties with respect to the PRC legal system could materially and adversely affect us.

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. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Since these laws and regulations are relatively new and may be amended from time to time, and the PRC legal system continues to rapidly evolve, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the laws and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretations of many laws, regulations and rules may not be uniform and enforcement of these laws, regulations and rules involves uncertainties. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. Besides, the PRC is geographically large and divided into various provinces and municipalities and, as such, different laws, rules, regulations and policies may have different and varying applications and interpretations in different parts of the PRC. Legislation or regulations, particularly in local applications, may be enacted without sufficient prior notice or announcement to the public. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us. 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. Agreements that are governed by PRC laws may be more difficult to enforce by legal or arbitral proceedings in the PRC than that in other countries with different legal systems. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

The approval or other administration requirements of the China Securities Regulatory Commission, or the CSRC, or other PRC governmental authorities may be required in connection with this offering under PRC law.

The M&A Rules purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC approval is required, it is uncertain how long it will take for us to obtain such approval, and, even if we obtain such CSRC approval, the approval could be rescinded. Any failure to obtain or a delay in obtaining CSRC approval for this offering may subject us to sanctions imposed by the CSRC and other PRC regulatory authorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.

Our PRC counsel has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval under the M&A Rules for this offering and the listing and trading of the ADSs on the Nasdaq Stock Market because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and (ii) we did not acquire any equity interests or assets of a “PRC domestic company” as such terms are defined under the M&A Rules.

 

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However, our PRC 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 governmental authorities, including the CSRC, would reach the same conclusion as our PRC counsel, and hence, we may face regulatory actions or other sanctions from them.

Furthermore, on July 6, 2021, the PRC government promulgated the July 6 Opinions, which, among other things, called for enhanced administration and supervision of overseas-listed China-based companies, proposed to strengthen the supervision of the overseas issuance and listing of shares by China-based companies and clarified the responsibilities of competent domestic industry regulators and government authorities. On December 28, 2021, the CAC, together with other relevant administrative departments, jointly released the Cybersecurity Review Measures, which took effect on February 15, 2022. Pursuant to the Cybersecurity Review Measures, network platform operators with personal information of over one million users shall apply with the Cybersecurity Review Office for a cybersecurity review before going to list abroad. See “— Any failure to comply with the various applicable laws and regulations related to data security, cybersecurity and personal information and privacy protection could affect our offshore listing and lead to liabilities, penalties or other regulatory actions, which could have a material and adverse effect on our business, financial condition and results of operations.”

On December 24, 2021, the State Council’s Administrative Regulations on Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Public Comments) and the Administrative Measures on Filing of Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Public Comments) were released for public comments by the CSRC, and such public comment period has ended. Pursuant to these drafts, PRC domestic companies that directly or indirectly offer or list their securities in an overseas market, which include (i) any PRC company limited by shares that contemplates an offering or listing of its securities in an overseas market, and (ii) any offshore company that conducts its business operations primarily in China and contemplates to offer or list its securities in an overseas market based on its onshore equities, assets or similar interests, are required to file with the CSRC within three business days after submitting their listing application documents to the relevant regulator in the place of intended listing. The drafts, among others, further stipulate that when determining whether an offering and listing shall be deemed an “indirect overseas offering and listing by a Chinese company,” the principle of “substance over form” shall be followed, and if the issuer meets the following conditions, its offering and listing shall be determined as an “indirect overseas offering and listing by a Chinese company” and is therefore subject to the filing requirement: (1) the revenues, profits, total assets or net assets of the Chinese operating entities in the most recent financial year account for more than 50% of the corresponding data in the issuer’s audited consolidated financial statements for the same period; or (2) the majority of senior management in charge of business operations are Chinese citizens or have domicile in the PRC, and its principal place of business is located in the PRC or main business activities are conducted in the PRC. Failure to complete such filing may subject a PRC domestic company to a warning or a fine between RMB1 million and RMB10 million, in addition to adverse impact on the offering and listing plan. If the circumstances are serious, the PRC domestic company may be ordered to suspend its business or suspend its operation for rectification, or its permits or businesses license may be revoked. However, as of the date of this prospectus, uncertainties exist regarding the final form of these regulations as well as the interpretation and implementation thereof after promulgation and their impact on us. Pursuant to these regulations, a domestic enterprise applying for listing abroad shall, among others, complete record-filing procedures and report relevant information to the securities regulatory authority as required. We plan to comply with the filing procedures of the CSRC with respect to this offering, if and when such procedures are adopted by the CSRC.

 

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Any failure to comply with the various applicable laws and regulations related to data security, cybersecurity and personal information and privacy protection could affect our offshore listing and lead to liabilities, penalties or other regulatory actions, which could have a material and adverse effect on our business, financial condition and results of operations.

The PRC regulatory and enforcement regime with regard to data security and data protection is evolving and may be subject to different interpretations or significant changes. Moreover, different PRC regulatory bodies, including the SCNPC, the Ministry of Industry and Information Technology, or the MIIT, the CAC, the Ministry of Public Security and the State Administration for Market Regulation, or the SAMR, have enforced data privacy and protections laws and regulations with varying standards and applications. See “Regulation—Regulations on Cyber Security and Privacy.” The evolving nature and uncertainty in the interpretation and enforcement of data security and data protection laws increase the risk of incompliance or perceived incompliance with such laws.

On November 14, 2021, the CAC issued the Administrative Regulations of Cyber Data Security (Draft for Comments), or the Draft Cyber Data Security Regulations, which provide that data processors conducting the following activities shall apply for cybersecurity review: (i) merger, reorganization or spin-off of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests affects or may affect national security; (ii) listing abroad of data processors processing over one million users’ personal information; (iii) listing in Hong Kong which affects or may affect national security; (iv) other data processing activities that affect or may affect national security. On December 28, 2021, the CAC, together with other relevant administrative departments, jointly promulgated the Cybersecurity Review Measures which took effect on February 15, 2022. According to the Cybersecurity Review Measures, a critical information infrastructure operator, or CIIO, shall declare any network product or service that affects or may affect national security for a cybersecurity review, and an internet platform operator who possesses personal information of more than one million users shall apply for a cybersecurity review before listing in a foreign country, and the relevant governmental authorities may initiate a cybersecurity review if they consider relevant network products or services affect or data processing activities may affect national security.

As a network platform operator who possesses personal information of more than one million users for purposes of the Cybersecurity Review Measures, we have applied for and completed the applicable cybersecurity review procedures with respect to this offering and our proposed overseas listing pursuant to the Cybersecurity Review Measures. Furthermore, we have not been designated by the relevant PRC authorities as an CIIO, have not been involved in any cybersecurity-related investigation initiated by the CAC or any other PRC authority, and have not received any cybersecurity-related warning or sanction from the PRC government, or any notice from relevant authorities specifying us to file for the cybersecurity review. As the definitions for terms such as internet platform operator and national security are broad, and the government will likely retain significant discretion as to the interpretation and enforcement of the Cybersecurity Review Measures and any implementation rules, we may be subject to related rules. We cannot preclude the possibility that the Cybersecurity Review Measures will subject us to the cybersecurity review by the CAC in relation to our operations or require us to adjust our business practices, in which case our business, financial condition and prospects and the price of our ADSs may be materially and negatively affected. On July 7 2022, the CAC promulgated the Measures for the Security Assessment of Outbound Data Transfer, which became effective on September 1, 2022. The Measures for the Security Assessment of Outbound Data Transfer specified that when data processors engage in outbound data transfer under any of the following circumstances, they shall apply for a security assessment with the CAC in accordance with the relevant national regulations: (i) where a data processor transfers critical information abroad; (ii) where a critical information infrastructure operator or a data processor processing the personal information of more than one million individuals transfers personal information abroad; (iii) where a data processor has transferred personal information of 100,000 individuals or sensitive personal information of 10,000 individuals in total abroad since January 1 of the previous year, and (iv) other circumstances prescribed by the CAC for which declaration for security assessment for outbound data transfers is required.

In the event that we are subject with the cybersecurity review by the CAC in relation to our operations, we may experience disruptions of our business. Such review could also result in negative publicity with respect to

 

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our company and diversion of our managerial and financial resources. Furthermore, if we were found to be in violation of applicable laws and regulations of the PRC during such review, we may be subject to administrative penalties, including fines and service suspension, which could have a material and adverse impact on our business, results of operations and financial condition and the value of our ADSs.

In addition to the Cybersecurity Review Measures, the PRC government has introduced a wide range of laws and regulations on cybersecurity and data security in recent years. For example, the PRC Cyber Security Law came into effect on June 1, 2017 and requires network constructors, network operators, and service providers that provide services via network to perform certain functions related to cyber security protection and the strengthening of network information management through taking technical and other necessary measures to safeguard the operation of networks, responding to network security effectively, preventing illegal and criminal activities, and maintaining the integrity and confidentiality and usability of network data. In addition, the law imposes certain additional requirements on CIIOs, including that during their operations in the PRC, CIIOs should generally store the personal information and important data collected and produced within the territory of PRC and perform certain security obligations. The PRC Data Security Law, on the other hand, was promulgated on June 10, 2021 and took effect in September 2021, and provides for data security and privacy obligations on entities and individuals carrying out data processing activities, including but not limited to the collection, storage, use, processing, transmission, provision, and public disclosure of data. The PRC Data Security Law also requires a national security review procedure for those data activities which may affect national security and imposes export restrictions on certain data and information. Since the PRC Cyber Security Law, the PRC Data Security Law and other applicable laws and rules are newly issued, there exists great uncertainty with respect to their interpretations and implementations. As of the date of this prospectus, we are in compliance with the currently effective and applicable PRC laws on cybersecurity and data security in all material respects and those laws do not have a material adverse impact on our business or offshore listing plan. However, we cannot preclude the possibility that new laws, regulations or rules promulgated in the future will impose additional compliance requirements on us, will subject us to the cybersecurity or national security review in relation to our operations, or will require us to change our business practices or incur additional operating expenses, which may have material and negative impacts on our business, financial condition and prospects and the value of our ADSs.

The PCAOB had historically been unable to inspect our auditor in relation to their audit work.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. The auditor is located in mainland China, a jurisdiction where the PCAOB was historically unable to conduct inspections and investigations completely before 2022. The inability of the PCAOB to conduct inspections of auditors in China in the past has made it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. However, if the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong, and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we and investors in our ADSs would be deprived of the benefits of such PCAOB inspections, which could cause investors and potential investors in the ADSs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

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Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely auditors located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.

Pursuant to the HFCAA, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong and our auditor was subject to that determination. On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms.

Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. In accordance with the HFCAA, our securities would be prohibited from being traded on a national securities exchange or in the over-the-counter trading market in the United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. A prohibition of being able to trade in the United States would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.

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

We are a Cayman Islands holding company and we may rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If any of our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiaries, may pay dividends only out of its respective accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a PRC enterprise is required to set aside at least 10% of its after-tax profits each year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. At its discretion, a PRC enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to a staff welfare and bonus fund. These reserve fund and staff welfare and bonus fund cannot be distributed to us as dividends.

Our PRC subsidiaries generate primarily all of their revenue in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to pay dividends to us.

The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other

 

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kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

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

Governmental control of currency conversion 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 revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries 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.

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 or 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 PRC subsidiaries. We may make loans to our PRC subsidiaries subject to the approval from governmental authorities and limitation of amount, or we may make additional capital contributions to our PRC subsidiaries.

Any loans to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE, and medium or long-term loans by us to our PRC subsidiaries must be recorded and registered with the National Development and Reform Committee, or the NDRC. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).

 

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SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015 which was further amended on December 30, 2019, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China.

On October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment.

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

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

The M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the Ministry of Commerce, or MOFCOM, be notified in advance of any change of control transaction in which a foreign investor acquires control of a PRC domestic enterprise and involves any of the following circumstances: (i) any important industry is concerned; (ii) such transaction involves factors that impact or may impact national economic security; or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. We do not expect that this offering will trigger MOFCOM pre-notification under each of the above-mentioned circumstances or any review by other PRC government

 

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authorities, except as disclosed below in “Risks Related to Doing Business in China—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.” Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of National People’s Congress which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by State Administration for Market Regulation, or the SAMR, the successive authority of MOFCOM, before they can be completed. In addition, PRC national security review rules that became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. The Measures for the Security Review of Foreign Investment promulgated by the National Development and Reform Commission, or the NDRC and the MOFCOM and became effective on January 18, 2021 further requires any foreign investment that has or possibly has an impact on state security be subject to security review. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Litigation and negative publicity surrounding China-based companies listed in the U.S. may result in increased regulatory scrutiny of us and negatively impact the trading price of the ADSs and could have a material adverse effect upon our business, including our results of operations, financial condition, cash flows and prospects.

We believe that litigation and negative publicity surrounding companies with operations in China that are listed in the U.S. have negatively impacted stock prices for such companies. Various equity-based research organizations have published reports on China-based companies after examining, among other things, their corporate governance practices, related party transactions, sales practices and financial statements that have led to special investigations and stock suspensions on national exchanges. Any similar scrutiny of us, regardless of its merit, could result in a diversion of management resources and energy, potential costs to defend ourselves against rumors, decreases and volatility in the ADS trading price, and increased directors and officers insurance premiums and could have a material adverse effect upon our business, including our results of operations, financial condition, cash flows and prospects.

Failure to make adequate contributions to certain employee benefit plans as required by PRC regulations may subject us to penalties.

We are required under PRC law to participate in various government sponsored employee benefit plans, including social security insurance, housing provident funds and other welfare-oriented payments, 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. An employer shall pay employee benefits for its employees in accordance with the rates provided under relevant regulations and shall withhold the social insurance and other employee benefits that should be assumed by the employees. For example, an employer that has not made social insurance contributions at a rate and based on an amount prescribed by the law, or at all, may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% per day, as the case may be. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times of the amount overdue. If there is a failure to pay the full amount of housing provident fund as required, the housing provident fund management center may require payment of the outstanding amount within a prescribed period. If the payment is not made within such time limit, an application may be made to the PRC courts for compulsory enforcement. We have not made adequate employee benefit payments to social security insurance and the housing provident fund based on the required salary basis or make adequate social security insurance and housing fund contributions for our

 

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employees in a manner stipulated by the PRC laws and regulations. In addition, to efficiently administer the contribution of employment benefit plans of our employees in some cities, we engage third-party agents to make the contribution for our employees. If the relevant competent government authority is of the view that we have underpaid social insurance and housing provident fund for our employees or the third-party agency arrangement does not satisfy the requirements under the relevant PRC laws and regulations, we may be required to pay the shortage of our contributions or subject to fines or other legal sanctions. If we are subject to full distribution, late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected. We had accrued our payable for contributions to certain employee benefit plans including social welfare and housing fund for our employees based on their minimum salary base according to the existing PRC laws and regulations for the years ended December 31, 2020 and 2021 and the nine months ended September 30, 2022.

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

Under PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the market supervision administration.

In order to maintain the physical security of our chops and the chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel of each of our PRC subsidiaries. Although we monitor such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiaries, we or our PRC subsidiaries would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.

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

We are a company incorporated under the laws of the Cayman Islands, and a majority of our assets and operations are located in China. In addition, substantially all of our executive officers and directors reside within China and are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors as none of them currently resides in the United States or has substantial assets located in the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

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 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 forms of written arrangement with the United States that provide for the reciprocal recognition and enforcement of foreign

 

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judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts 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 laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

The ability of U.S. authorities to bring actions for violations of U.S. securities law and regulations against us, our directors or executive officers may be limited. Therefore, you may not be afforded the same protection as provided to investors in U.S. domestic companies.

The SEC, the U.S. Department of Justice, or the DOJ, and other U.S. authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons. Due to jurisdictional limitations, matters of comity and various other factors, the SEC, the DOJ and other U.S. authorities may be limited in their ability to pursue bad actors, including in instances of fraud, in emerging markets such as China. We conduct our operations mainly in China and our assets are mainly located in China. In addition, all of our directors and executive officers reside within China. There are significant legal and other obstacles for U.S. authorities to obtain information needed for investigations or litigation against us or our directors or executive officers in case we or any of these individuals engage in fraud or other wrongdoing. In addition, local authorities in China may be constrained in their ability to assist U.S. authorities and overseas investors in connection with legal proceedings. As a result, if we, our directors or executive officers commit any securities law violation, fraud or other financial misconduct, the U.S. authorities may not be able to conduct effective investigations or bring and enforce actions against us, our directors, executive officers or other gatekeepers. Therefore, you may not be able to enjoy the same protection provided by various U.S. authorities as it is provided to investors in U.S. domestic companies.

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

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

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

We have received and continue to receive certain preferential tax treatments and government subsidies from the PRC national government or certain local governments. However, if the national government or local governments change their tax policies, including imposing additional taxes and surcharges, or if we cease to be eligible for any national or local preferential tax treatments, we must pay additional tax or surcharges, which would adversely affect our financial condition and results of operations.

 

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

We are an exempted company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment and the foreign investor qualifies for the benefits of such treaty. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC enterprise. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in August 2015, require non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and file relevant reports and materials with the tax authorities. In addition, the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits, which became effective on January 1, 2020, or the SAT Circular 35, provides that nonresident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, upon self-assessment and confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate. They can then file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In 2020, 2021 and the nine months ended September 30, 2022, we did not record any withholding tax on the retained earnings of our subsidiaries in the PRC as we intended to re-invest all earnings generated from our PRC subsidiaries for the operation and expansion of our business in China, and we intend to continue this practice in the foreseeable future. Should our dividend policy change to allow for offshore distribution of our earnings, we would be subject to a significant withholding tax. We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant tax authority or we will be able to complete the necessary filings with the relevant 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 PRC subsidiaries to our Hong Kong subsidiary.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to change 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 July 2014, the State Administration of Foreign Exchange, or SAFE, promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities and also requires the foreign-invested enterprise that is established through round-trip investment to truthfully disclose its controller(s). SAFE Circular 37 further requires amendment to the SAFE registrations in the event of any changes with respect to the basic information of the offshore special purpose vehicle, such as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore special purpose vehicle, such as increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders or beneficial owners who are PRC residents and may be applicable to any offshore acquisitions that we make in the future. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective since June 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound

 

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foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, should be filed with qualified banks instead of SAFE. The qualified banks examine the applications and accept registrations under the supervision of SAFE.

Certain of the relevant shareholders or beneficial owners who are PRC residents are required to make the relevant foreign exchange registrations under SAFE Circular 37, and such registrations are yet to be completed. Any failure or inability of the relevant shareholders or beneficial owners who are PRC residents to comply with the registration procedures set forth in these regulations, or any failure to disclose or misrepresentation of the controller(s) or ultimate shareholders of the foreign-invested enterprise that is established through round-trip investment, may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities, on the ability of our PRC subsidiaries to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions.

We may not at all times be fully informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request to make or obtain any applicable registrations or continuously comply with all requirements under SAFE Circular 37 or other related rules. 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, SAFE regulations. Failure by our shareholders or beneficial owners to comply with SAFE regulations, or failure by us to conduct or 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, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.

Increases in labor costs and enforcement of stricter labor and individual income tax laws and regulations in China may adversely affect our business and our profitability.

China’s overall economy and the average wage in China have increased in recent years and are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to those who pay for our services, our profitability and results of operations may be materially and adversely affected.

In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law and its implementation rules, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employee’s probation and unilaterally terminating labor contracts. Some of our PRC entities ask their employees to work overtime due to business needs and fail to fully pay overtime payment in accordance with PRC laws, which may subject us to additional damages. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the PRC Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.

In October 2010, the Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, effective on July 1, 2011 and amended on December 29, 2018. On April 3, 1999, the State Council promulgated the Regulations on the Administration of Housing Funds, which was amended on March 24, 2002 and March 24, 2019. Companies registered and operating in China are required under the Social Insurance Law and the Regulations on the Administration of Housing Funds to apply for social insurance

 

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registration and housing fund deposit registration within 30 days of their establishment and to pay for their employees different social insurance including pension insurance, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to the extent required by law. We could be subject to orders by the competent labor authorities for rectification and failure to comply with the orders may further subject us to administrative fines. Further, we are obligated to withhold individual income tax for our employees.

As the interpretation and implementation of labor-related and individual income tax laws and regulations are still evolving, we cannot assure you that our employment practices do not and will not violate labor-related and individual income tax laws and regulations in China, which may subject us to labor disputes or government investigations. We cannot assure you that we have complied or will be able to comply with all labor-related and individual income tax law and regulations including those relating to obligations to make social insurance payments, contribute to the housing provident funds and withhold individual income tax. If we are deemed to have violated relevant labor and individual income tax laws and regulations, we could be required to provide additional compensation to our employees or be imposed penalties and our business, financial condition and results of operations will be adversely affected.

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

Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies before they obtain the incentive shares or exercise the share options. In addition, in February 2012, the 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 the SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. See “Regulation—Regulations on Foreign Exchange—Stock Incentive Plans.” 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 or will be granted incentive shares or options are subject to these regulations. Failure to complete the SAFE registrations may subject us or them to fines and legal sanctions. 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 Foreign Exchange—Stock Incentive Plans.”

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 China is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the SAT issued the Circular of the State Administration of Taxation on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the De Facto Standards of Organizational Management, or 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 SAT Circular 82 may reflect SAT’s

 

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general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in China; and (iv) at least 50% of voting board members or senior executives habitually reside in China.

We believe that we are not a PRC resident enterprise for PRC tax purposes. See “Taxation—PRC Taxation.” 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 (or any of our non-PRC subsidiaries) are a PRC resident enterprise for enterprise income tax purposes, we or such subsidiaries could be subject to PRC tax at a rate of 25% on our worldwide income, which could materially reduce our net income, and we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders (including our ADS holders) that are non-resident enterprises. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within China. 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 10% in the case of non-PRC enterprises or a rate of 20% in the case of non-PRC individuals unless a reduced rate is available under an applicable tax treaty. Any PRC tax liability may be reduced under applicable tax treaties, but it is unclear whether non-PRC shareholders of our company would be able to obtain the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax would reduce the returns on your investment in the ADSs or ordinary shares.

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

In February 2015, the SAT issued The Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only indirect transfers but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides certain criteria on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owns the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a tax rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. However, according to the aforesaid safe harbor rule, the PRC tax would not be applicable to the transfer by any non-resident enterprise of ADSs of the Company acquired and sold on public securities markets.

 

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On October 17, 2017, the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Public Notice 37, which came into effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident enterprise fails to declare its tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay its tax due within required time limits, and the non-resident enterprise shall declare and pay its tax payable within such time limits specified by the tax authority. If the non-resident enterprise voluntarily declares and pays its tax payable before the tax authority orders it to do so, it shall be deemed that such enterprise has paid its tax payable in time.

We face uncertainties on the reporting and consequences of future private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed under SAT Public Notice 7 and SAT Public Notice 37, and may be required to expend valuable resources to comply with them or to establish that we and our non-resident enterprises should not be taxed under these regulations, which may have a material adverse effect on our financial condition and results of operations.

Risks Related to Our ADSs and This Offering

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our shares or ADSs. We have submitted an application to list our ADSs on the Nasdaq Stock Market. Our shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

Negotiations with the underwriters will determine the initial public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

If the indication-of-interest investors are allocated all or a portion of the ADSs which they have indicated an interest in subscribing for, the allocation and subscriptions may reduce the available public float for the ADSs, which may consequently reduce the liquidity of the ADSs relative to what it would have been had these ADSs been subscribed by the public.

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

The trading price of our ADSs can be volatile and fluctuate widely in response to a variety of factors, many of which are beyond our control. In addition, the performance and fluctuation of the market prices of other companies with business operations located mainly in the PRC that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. Some of these companies have experienced significant volatility. The trading performances of these PRC companies’ securities may affect the overall investor sentiment towards other PRC companies listed in the United States and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.

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

 

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regulatory developments affecting us or our industry, customers, suppliers or other business partners;

 

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announcements of studies and reports relating to the quality of our products and services or those of our competitors;

 

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changes in the economic performance or market valuations of our competitors;

 

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actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

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changes in financial estimates by securities research analysts;

 

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conditions in the pet care industry;

 

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announcements by us or our competitors of acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;

 

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additions to or departures of our senior management;

 

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

 

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

 

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

Furthermore, volatility in the trading price of our ADSs may cause dissatisfaction among the direct or indirect beneficial owners in our equity interest who became such owners by receiving direct or indirect beneficial ownership in our equity interest as consideration paid for certain of our acquisitions and who may be unable to liquidate the ordinary shares they own in a timely manner to maximize their profits. They may thus act against our interest, including harming our reputation.

The concentration of our share ownership among executive officers, directors, and principal shareholders and their affiliated entities will likely limit your ability to influence corporate matters and could discourage others from pursuing any change of control transaction that holders of our ordinary shares and ADSs may view as beneficial.

Our executive officers, directors, principal shareholders and their affiliated entities together beneficially own over 60% of our outstanding ordinary shares on an as-converted basis prior to this offering. Upon the completion of this offering and the concurrent conversion of the IPO Conversion Amount of the Nestlé Conversion Note, our executive officers, directors, principal shareholders and their affiliated entities together will beneficially own approximately         % of our total outstanding ordinary shares, assuming the underwriters do not exercise their over-allotment option, or         % of our total outstanding ordinary shares if the underwriters exercise their over-allotment option in full, without taking into account the ADSs that the existing shareholders or their affiliates may purchase in this offering. As a result of the concentration of ownership, these shareholders will have considerable influence over matters such as decisions regarding mergers and consolidations, amendments to our constitutional documents, election of directors and other significant corporate actions. Such shareholders 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 our ordinary shares and ADSs may view as beneficial.

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

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research

 

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coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

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$             per ADS, representing the difference between the initial public offering price of US$             per ADS and our adjusted net tangible book value per ADS as of September 30, 2022, after giving effect to our sale of the ADSs offered in this offering and the conversion of the IPO Conversion Amount of the Nestlé Convertible Note. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of 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.

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

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

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

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

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

 

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Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account of the company, provided that in no circumstances may a dividend be paid out of share premium if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in 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.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have             ordinary shares issued and outstanding, including              ordinary shares represented by ADSs, assuming the underwriters do not exercise their over-allotment option. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the United States Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares issued and outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters of this offering. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.

After completion of this offering, certain holders of our ordinary shares may cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise the same rights as our shareholders.

Holders of ADSs do not have the same rights as our 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. As an ADS holder, you will only be able to exercise the voting rights carried by the underlying ordinary shares which are represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying ordinary shares represented by your ADSs in accordance with your instructions. You will not be able to directly exercise your right to vote with respect to the underlying ordinary shares represented by your ADSs unless you withdraw such ordinary shares, and become the registered holder of such ordinary 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 underlying 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

 

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meeting. In addition, under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying ordinary shares represented by your ADSs and becoming the registered holder of such ordinary 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 cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying 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 ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying 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 requisition a shareholders’ meeting. Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote the underlying ordinary shares represented by your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

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

 

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we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

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we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

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a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

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the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that you cannot prevent the ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for ADS holders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

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

Our post-offering memorandum and articles of association provide that the federal district courts of the United States are the exclusive forum within the United States for the resolution of any complaint asserting a cause of action arising under the Securities Act and the Exchange Act. Our agreement with the depositary bank also provides that the United States District Court for the Southern District of New York (or in the state courts in New York County in New York if either (i) the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, or (ii) the designation of the United States District Court for the Southern District of New York as the exclusive forum for any particular dispute is, or becomes, invalid, illegal or unenforceable) is the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the Exchange Act. However, the enforceability of similar federal court choice of forum provisions has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such lawsuits. If a court were to find the federal choice of forum provision contained in our post-offering memorandum and articles of association or our deposit agreement with the depositary bank to be inapplicable or unenforceable in an action, we may incur additional costs associated

 

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with resolving such action in other jurisdictions. If upheld, the forum selection clause in our post-offering memorandum and articles of association, as well as the forum selection provisions in the deposit agreement, may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary bank, and potentially others in his or her preferred judicial forum, and this limitation may discourage such lawsuits. In addition, the Securities Act provides that both federal and state courts have jurisdiction over suits brought to enforce any duty or liability under the Securities Act or the rules and regulations thereunder. Accepting or consent to this forum selection provision does not constitute a waiver by you of compliance with federal securities laws and the rules and regulations thereunder. You may not waive compliance with federal securities laws and the rules and regulations thereunder. The exclusive forum provision in our post-offering memorandum and articles of association will not operate so as to deprive the courts of the Cayman Islands from having jurisdiction over matters relating to our internal affairs.

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

The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including, without limitation any suit, action, claim or proceeding 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. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waive 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, lead to increased costs to bring a claim, limited access to information and other imbalances of resources between such holder and us, or limit such holder’s ability to bring a claim in a judicial forum that such holder finds favorable. 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 shall relieve us or the depositary from our respective obligations to comply with the Securities Act and the Exchange Act nor serve as a waiver by any holder or beneficial owner of ADSs of compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder.

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

We 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

 

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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 impose or increase fees, charges or expenses (other than stock transfer or other taxes and other governmental charges, transfer or registration fees, a transaction fee per cancellation request (including through SWIFT, telex or facsimile transmission), applicable delivery expenses or other such fees, charges or expenses) or that would otherwise prejudice any substantial existing right of the ADS holders, such amendment will not become effective as to outstanding ADSs until the expiration of 30 days after notice of that amendment has been disseminated to the ADS holders, but no prior consent of the ADS holders is required under the deposit agreement. Furthermore, we may decide to terminate the ADS facility at any time for any reason. For example, terminations may occur when the ADSs are delisted from the stock exchange in the United States on which the ADSs are listed and we do not list the ADSs on another stock exchange in the United States, nor is there a symbol available for over-the-counter trading of the ADSs in the United States. If the ADS facility will terminate, ADS holders will receive at least 90 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 ordinary shares, but will have no right to any compensation whatsoever.

Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.

Under the deposit agreement, any legal suit, action or proceeding against or involving us or the depositary, arising out of or relating in any way to the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted in the United States District Court for the Southern District of New York (or in the state courts in New York County in New York if either (i) the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute or (ii) the designation of the United States District Court for the Southern District of New York as the exclusive forum for any particular dispute is, or becomes, invalid, illegal or unenforceable), and you, as a holder of the ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding. It is possible that a court could find this type of forum selection provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such lawsuits. For risks related to the enforceability of such exclusive forum selection provision, please see “—Forum selection provisions in our post-offering memorandum and articles of association and our deposit agreement with the depositary bank could limit the ability of holders of our ordinary shares, ADSs or other securities to obtain a favorable judicial forum for disputes with us, our directors and officers, the depositary bank, and potentially others.” Accepting or consent to this forum selection provision does not constitute a waiver by you of compliance with federal securities laws and the rules and regulations thereunder. You may not waive compliance with federal securities laws and the rules and regulations thereunder.

The deposit agreement provides that the depositary or an ADS holder may require any claim asserted by it against us arising out of or relating to our ordinary shares, the ADSs or the deposit agreement be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreement, although the arbitration provisions do not preclude you from pursuing any claim, including claims under the Securities Act or the Exchange Act in the United States District Court for the Southern District of New York (or in the state courts in New York County in New York if either (i) the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute or (ii) the designation of the United States District Court for the Southern District of New York as the exclusive forum for any particular dispute is, or becomes, invalid, illegal or unenforceable). The exclusive forum selection provisions in the deposit agreement also do not affect the right of any party to the deposit agreement to elect to submit a claim against us to arbitration, or our duty to submit that claim to arbitration, as provided in the deposit agreement, or the right of any party to an arbitration under the deposit agreement, to commence an action to compel that arbitration, or to enter judgment

 

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upon or to enforce an award by the arbitrators, in any court having jurisdiction over an action of that kind. See “Description of American Depositary Shares” for more information.

You may not receive cash dividends if the depositary decides it is impractical to make them available to you.

The depositary will pay cash distributions on the ADSs only to the extent that we decide to distribute dividends on our ordinary shares or other deposited securities, and we do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. To the extent that there is a distribution, the depositary has agreed to pay you the cash dividends or other distributions it or the custodian receives on our shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

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

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

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

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

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.

 

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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 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.

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 our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

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

We are an exempted company incorporated under the laws of the Cayman Islands. However, we conduct almost all of our operations outside the United States and a majority of our assets are located in China. In addition, substantially all of our executive officers and directors reside within China for a significant portion of the time and are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or our management residing in China in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. In addition, China does not have treaties providing for reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

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 post-offering memorandum and articles of association 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 will adopt the tenth amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering, which we refer to as our post-offering

 

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

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

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

 

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the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

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

 

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

 

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

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

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

As a Cayman Islands company listed on the Nasdaq Stock Market, we are subject to the Nasdaq Stock Market’s corporate governance listing standards. However, Nasdaq Stock Market’s 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’s corporate governance listing standards. If we choose to follow home country practices in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq Stock Market’s corporate governance listing standards applicable to U.S. domestic issuers.

 

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

A non-U.S. corporation, such as our company, will be a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes, for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of its average assets (generally determined on the basis of a quarterly average) during such year produce or are held for the production of passive income. Passive income generally includes dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of property producing such income and net foreign currency gains. For this purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s goodwill and other unbooked intangibles are generally taken into account when determining the value of its assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock.

Based upon our current and projected income and assets, including the expected cash proceeds from this offering, and projections as to the value of our assets, taking into account the projected market value of our ADSs following this offering, we do not expect to be a PFIC for the current taxable year. However, because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and assets, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation—U.S. Federal Income Tax Considerations”) holds our ADSs or ordinary shares, the PFIC tax rules discussed under “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules” will generally apply to such U.S. Holder for such taxable year and, unless the U.S. Holder makes a “mark-to-market” election, will generally apply in future years even if we cease to be a PFIC. See the discussion under “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules” concerning the U.S. federal income tax considerations of an investment in our ADSs or ordinary shares if we are or become a PFIC and the possibility of making such election.

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

As a company with less than US$1.235 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. Therefore, we may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. As a result, if we elect not to comply with such reporting and other requirements, in particular the auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We do not plan to “opt out” of such exemptions afforded to an emerging growth company. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

 

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We will incur increased costs and become subject to additional rules and regulations as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, the Nasdaq Stock Market, impose various requirements on the corporate governance practices of public companies. 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.

As a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs 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 number of additional costs we may incur or the timing of such costs.

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

In addition, as an emerging growth company, we will still incur expenses in relation to management assessment according to requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002. After we are no longer an “emerging growth company,” we expect to incur additional significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.

 

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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:

 

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our goals and strategies;

 

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

 

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the trends in, expected growth and the market size of the pet industry and pet care industry, both in the PRC and globally;

 

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our expectation regarding the prospects of our business model, and demand for and market acceptance of our services;

 

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our expectations regarding the effectiveness of our marketing initiatives and the relationship with our third-party business partners;

 

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competition in our industry;

 

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relevant government policies and regulations relating to our industry;

 

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general economic and business conditions globally and in China; and

 

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assumptions underlying or related to any of the foregoing.

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—Summary of Risk Factors,” “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 pet industry and pet care industry may not grow at the rate projected by market data, or at all. Failure of these markets to grow at the projected rate may have a material and adverse effect on our business and the market price of our ADSs. In addition, the rapidly evolving nature of the pet industry and pet care 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

 

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update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$                 million, or approximately US$                  million if the underwriters exercise their option to purchase additional ADSs in full, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$                  per ADS, which is the mid-point of the price range shown on the cover page of this prospectus. A US$1.00 increase (decrease) in the assumed initial public offering price of US$                  per ADS would increase (decrease) the net proceeds to us from this offering by US$                  , assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deducting estimated underwriting discounts and commissions and 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:

 

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approximately 35% for strengthening our brand, expanding our pet hospital network in China, and further upgrading our pet care services;

 

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approximately 20% for investing in our supply chain service and local services capabilities;

 

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approximately 20% for exploring new initiatives including upstream and downstream business opportunities as well as global expansion, although we have not identified any specific opportunities including mergers and acquisitions at this time;

 

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approximately 15% for research and development to enhance digitalization and technology, especially in smart treatment, online platform and data insight; and

 

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approximately 10% for working capital and other general corporate 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 Our ADSs and This Offering—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.”

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, 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, or 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 or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

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

 

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